Greece: Voting Itself Out Of The Eurozone?

Hoping for an orderly structured default

By Marco Vicenzino

The Greek election exposed an inherent contradiction. When polled, most Greeks favor remaining in the Eurozone. Yet the election results amounted to a clear rejection of austerity and the means necessary for remaining part of monetary union. Furthermore, the convoluted result and ensuing ambiguity on the next government’s composition, and viability, increases the risk of another election.

This political uncertainly increases the potential for Greece’s Eurozone exit and threatens the next tranche of international financial assistance due in June. The probability of renegotiating its terms remains low. In particular, Germany will not agree to concessions anytime soon. At most, rhetorical amendments may be introduced but fundamentally the plan’s core will not change.

Furthermore, Greece is unlikely to be salvaged by the Socialist victory in France or increasing prevalence of the pro-growth argument over austerity in the broader Eurozone debate. International markets may provide France with a brief respite for policy clarifications but not Greece. They will not stand by for another series of unpredictable cliff-hanging parliamentary votes whenever a new government is formed.

The reality is that Greece was largely written off some time ago and its Eurozone exit is not unexpected at some future point. Economically, Greece is unable to proceed under its current rescue framework. Preparations for activating a firewall around Greece to prevent contagion have been in the making.

Unless an effective coalition can surprisingly emerge soon, Greece’s best, and perhaps only, option is agreeing to an orderly structured default. A soft landing is preferable to a sudden drop provoking a panic to volatile global markets. It may alleviate some skepticism and provide basic clarity for a realistic, long-term road map to recovery.

Under the primary guidance of the IMF, Greece will have more breathing room. There will be less stringency on austerity and more scope for growth measures – reversing Greece’s rapid decline. Since 2008 the Greek economy has contracted by 17 per cent and unemployment has doubled to 21 per cent. Statistically, the situation will worsen before improving. It has not yet hit rock bottom. Exactly when is debatable due to conflicting variables and circumstances. However, the social, cultural and psychological dislocation will increase.

While the IMF’s is better equipped to address grave crises such as Greece, Eurozone officials must focus resources on other urgent matters, particularly Spain. Pursuing this course remains in the best collective interest. Failure to do so is only delaying the inevitable. Greece’s election only reinforced this reality.