FEPS Fresh Thinking

It seems that there is now consensus that it will be nearly impossible to lead the EU out of the crisis without any further growth stimulating measures. It also seems that the Spanish government’s acceptance of an initiative to ask the European Union to launch the rescue mechanism in order to address the needs of the Spanish banking and financial sector has gone down well in the financial markets.

But it is not at all acceptable that we, as Europeans, should accept instructions and bets from the US concerning a potential Greek Euro zone exit. In the last week the main rating agencies, some of the top US economists like Kenneth Rogoff, mainstream newspapers like the New York Times, and in particular hedge funds manager George Soros have been arguing that they are certain Greece will exit the Euro Zone within the next 3 months!

A Greek exit would be an economic and political catastrophe for Europe with irreversible damage not only for the Euro but also for Europe’s place in the world. It is easy to argue now that it would be better for Greece to leave. But would it be acceptable for Europe that the Euro area will suffer after a Greek exit? Mark Cliffe, an economist at ING, a Dutch bank, estimates that following an orderly and well-managed Greek exit—one with very limited contagion and some continuing support to Greece from the Euro zone and IMF—the Euro area would suffer an extra GDP loss of 1.6% in the first year. The question is if a Greek exit could really be contained at its borders?

The result could affect the reputation of European economies, leading to less confidence and lower investment. Switching from one currency to another is a more than a significant step. Euro savings and mortgages need to be converted. A question will arise concerning exchange rates in Europe, with consequences, notably, on wages in Greece. Finally, overnight, the foreign Euro liabilities of Greece’s government, banks, and companies would surge. If Greece leaves the Euro, capital controls would be necessary because the Drachma would immediately fall against the Euro, possibly losing 50% or more of its value.

A total disintegration of the Euro zone would be the most catastrophic scenario for core Europe since the beginning of European integration. In such a case even Germany would not be spared, incurring a GDP loss of 8.2% as its exporters contended with the strength of a reborn D-mark.

The former foreign minister of Germany, Joschka Fischer, published an insightful article last week accusing the German Chancellor not doing the utmost to rescue the Euro.

The gambling bets of American hedge funds mangers should be combated. The casino can no longer play a game so devastating for the citizens as that which prevailed before the crisis in 2008. There are proposals on the table such as tapping new resource with the financial transaction tax, enhancing the role of the European Investment bank , bringing down the cost of servicing debt with a truly European debt redemption fund. These are some of the serious proposals that can help to reshape European Economic governance and decision-making. Hazardous betting is dangerous and threatens European democracy and legitimacy.

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