20 October 2012, 10:31

Greek crisis recipe: A trigger for domino effect?

Greek crisis recipe: A trigger for domino effect?
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Janis A. Emmanouilidis, a senior policy analyst at the European Policy Center, talks about potential risks of Greece's exit from the Eurozone

We have seen over the last couple of weeks that there is a strong determination in the German Government and Germany to do whatever is needed to keep the country within the Eurozone provided that the country i.e. Greece will be able to fulfill the obligations which have been agreed between the Greek Government and the troika. But it seems that the German Government is more committed than in the past to do whatever is needed to avoid the exit of Greece from the Eurozone.

Are they concerned about the so called domino effect?

Well, there are obvious risks which would be linked to a potential exit of one country and in this case Greece from the Eurozone that would worsen the situation in other member states, that could lead other members of the Eurozone to the same path. So, one wants to avoid entering this path of countries exiting the Eurozone and it seems that one is ready to do that at a lot of costs because the risks of that happening would go much beyond Greece and thus become much more costly than only the Greek component of a potential exit or restructuring.

And what kind of risks exactly are we talking about?

Well, there are obviously financial and economic risks if Greece would exit the Eurozone and other countries might follow. That would have enormous direct financial cost for banks, financial institutions which have invested in the bonds of these sovereign countries. But it would also have political effects because if we would have a move towards disintegration of the Eurozone, that would obviously have an effect which goes beyond the common currency affecting also the EU as such.

But if I’m not mistaken most of the Greek politicians are unwilling to exit from the Eurozone. And then, why would other countries want to follow if Greece leaves the Eurozone?

Well, as you said correctly the Greek political elite and also the majority of Greek citizens want the country to remain within the Eurozone. But on the other hand we’ve seen that over the last 5-6 years the country is in a deep recession and we see that the attempts to exit the crisis have put enormous pressure on the citizens and their daily lives. So, if the situation worsens we can’t exclude that a majority at some stage might think that sticking to the Greek crisis recipe may not be the right way. If that’s the case – that could have also a negative effect on the other member states triggering not only economic and fiscal but also political negative domino effect.

When we are talking about the Greek recipe, if I’m not mistaken it all comes down to austerity measures.

It is a mixture. Obviously they need to cut down the huge deficit which the country had found itself in in 2009-2010. And a lot has been achieved since then and the country is even to having a primary surplus in the upcoming period. So, there is a strong emphasis of cutting down expenditures but at the same time the things which have been agreed between the Greek Government and its European supporters and also the IMF and the troika – the things which have been agreed among them include a lot of structural reforms. So, we are talking about both – major structural reforms and cutting down expenditures and in this case that also leads to austerity.

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