Greek exit could blow the euro edifice apart

The challenge for Ireland to emerge from the very deep hole in which it has found itself since 2007 was always going to be extremely difficult.

The big hope was that a relatively strong external recovery would help lift the export sector and this in turn would eventually feed through to employment creation and domestic demand.

Unfortunately, anything that could go wrong in our most important export markets — particularly the EU market — has gone wrong. Earlier this week, there was a sense of relief in some quarters that the eurozone economy avoided going into technical recession in the first quarter of this year.

Policy makers should not take any comfort from this. The reality is that growth in the eurozone is deeply depressed and burgeoning unemployment and worsening fiscal situations are threatening in a very real way the survival of the euro in its current form.

The frightening extent of the property-related losses in the Spanish banks is starting to become apparent and it does not look promising. Greece, of course, is turning into a total nightmare

Despite the bailout and the recent restructuring of some debt, the Greek economic and fiscal situation is getting seriously worse and extremely worrying. Recent political developments are obviously seriously compounding Greece’s difficulties, but they are really just a symptom of the deep economic, fiscal and unemployment crisis the country finds itself mired in.

It is clear that austerity is not working. It is just compounding an already awful economic backdrop. Regardless of who forms the next Greek government, it does seem pretty obvious that the current path of austerity will create a very dangerous economic, social and political background.

The best option for Greece would appear to be a euro exit and a default on foreign debt. This would, of course, create serious difficulties for the country, as its credit worthiness would be destroyed and its currency- induced improvement in competitiveness would most probably be inflated away very quickly. However, this would probably still be a better option than the current austerity path. It is hard to see how the country could remain in the euro if it defaults and turns its back on the austerity pledges underlying its bailout.

From a European leadership perspective this represents a potential nightmare. Some in Germany believe that Greece could exit a system — into which it should never have been allowed in the first place — without affecting the rest of the system. It is not at all clear how this could be achieved.

A full Greek default could cause serious difficulties for many European banks, and the ECB would have to stand ready to do whatever is necessary to recapitalise those banks.

However, the real problem is that a number of other eurozone countries are also in serious difficulty and it is not at all clear how the contagion created by a Greek exit from the system could actually be contained. A serious firewall will have to be built around Greece to avoid a contagion affect that could easily blow the whole edifice apart.

It appears that the future of the whole euro project is now teetering on the brink and it could go either way.

The notion that the creation of a hard euro containing the core eurozone economies, of which Ireland is not one, and a soft euro containing the rest is fanciful. If the euro breaks up, there would no advantage for ‘softer’ states in forming a ‘soft’ euro. They would be better off allowing their currencies fall sharply in value.

Whatever happens, it is not going to be painless or easy for the whole of Europe, but very strong political decisions and leadership will be required to keep the euro in tact. This all creates a very difficult backdrop for Ireland and voting no in the current circumstances would appear suicidal.


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