A young European voice on Grexit: too high a bill and too big a deal!

Written by Camilla Crovella, member of the Eustory Alumni Network and Spotlight Europe The European reality has always been crossed by threats of division and secessionisms due to its cultural and political diversity which constitutes both its weak point but also the basis for building its strength. One of these aspects, which has remained a latent possibility in the last years, is now becoming more concrete; it has been nicknamed as Grexit, the hypothetical Greek withdrawal from the Eurozone. In February, the new Tsipras government reached an agreement with the Eurozone creditor countries, including a package of immediate reforms and an extension of four months of the financial assistance program. Even though Europe could feel relieved at that moment, the compromise calls for tough negotiations on a new financial assistance program to be introduced by the end of June. In any negotiation the fundamental element that influences the behavior of the players and then the final result, as Jean Pisani-Ferri, French economist, public policy expert and French government Commissioner General for Policy Planning recently observed, is the cost that the impossibility to find a further agreement would bring to the protagonists themselves. To understand more deeply the phenomenon, it is important to focus on two key points: The actual legal provisions it could base its ruts on and the economic consequences of its realization. Concerning the first aspect, under the Treaty on European Union, the fundamental document of institutional regulation of the EU, it is written that ”Any Member State may decide to withdraw from the Union in accordance with its own constitutional requirements” (Art. 50), but no provision appears to establish either the opposite process, an exclusion carried out by all the components against one Member State, or the revocability of the Euro – membership. André Sapir, think tank Bruegel’s Senior Fellow, Professor of Economics at the Université Libre de Bruxelles (ULB) and former economic adviser to the president of the European Commission, confirmed this. In an interview that recently appeared in several European daily newspapers, such as the Italian Il Sole 24 Ore, he affirmed that Grexit is just an exercise of «Phanta-politics». He also underlined that the other Member States would not accept to lose a Mediterranean politically and economically strategic point, such as Greece. But what would be the bill generated by a possible Greek withdrawal from the Eurozone, in economic terms? Since the question started to become more serious (2012), two different theories have been developed on the topic. The first one, known as the domino theory, states that a possible Greek withdrawal would lead markets to wonder which country could leave the Eurozone next. The fate of the other countries would then be questioned, similarly to what happened during the sovereign debt crisis in Europe in 2010-2012. The consequence could be an implosion of the Eurozone. Instead, according to the other vision, the theory of ballast, the Eurozone would actually be strengthened by Grexit. The monetary union would finally manage to erase a constant problem. Additionally, a decision to let Greece leave the Eurozone, or push it to do so, would increase the credibility of its rules. In 2012, the former one seemed sufficiently realistic to push the creditor countries to put the option of a Greek exclusion aside. The German Chancellor, Angela Merkel, decided to officially visit Athens where she expressed her “hope and desire” that Greece would keep up being a Member.