So Greece finds itself in the last chance saloon — again.
As the hours tick down to the latest deadline for Athens to repay outstanding debts to its creditors, the issues of Greek default, Greek exit from the euro and, even, Greek exit from the EU itself once more command the attention of politicians and pundits.
The first thing that should be said is that Greek default does not imply Greek exit from the EU or even from the euro. There are simply no legal provisions governing the expulsion of a state from the single currency, and thus no clear mechanism by which this could be achieved even if Athens fails to satisfy its creditors.
Economically, there are those who argue that a reversion to the drachma would be a rational strategy for the Greeks themselves to adopt in the event of a default. Readopting a national currency would allow the government to keep paying its employees while offering the potential for exporters to benefit from a preferential exchange rate.
Doomsayers, on the other hand, point to the catastrophic impact that default had on the Argentinian economy and mutter darkly about the possible risks to European banks exposed to Greek debt.
Complete meltdown
Above and beyond the economics of the Greek crisis, however, what is clear is that the political implications of a default and possible euro exit would be huge and largely negative.
Within Greece, a complete economic meltdown would lead to a bitter political battle as the new elections that would certainly result spawned bitter fights between the left and the right.
Whilst specialists on Greek politics seem to dismiss the possibility of another army coup in that country a la 1967, an election held at a time of severe economic dislocation and uncertainly about the country’s future would certainly benefit extremist parties. At best, one could imagine the steady of drain of the country’s most talented individuals to continue. At worst, a descent into extremist-dominated ungovernability.
Nor would the political ramifications be confined to Greece itself. Governments in the other countries on the receiving end of EU-mandated austerity having been closely following events there. Debt relief offered to Athens might inflame their own opponents of austerity. Should Greece exit the euro and perform relatively well, such pressures would increase. A Greek meltdown, if it was not effectively contained, could conceivably harm them too, if markets decided, once the euro exit was clearly an option, to target other weak economies.
Grexit and Brexit
A third area where Grexit would have implications is the ongoing talks between David Cameron’s British Government and other EU leaders about the former’s desire to “renegotiate” its relationship with the Union.
Some in the UK feel that a Greek default and euro exit would strengthen Cameron’s hand, making his partners desperate to avoid any further disruption to their cherished integration “project.” Yet this seems somewhat fanciful.
Grexit would herald a long and potentially ugly process of adjustment within the eurozone as officials rush to ensure legal provisions catch up with economic events on the ground. Thereafter, the priority of eurozone members would be to insulate the single currency against future harmful fractures. More than ever, Cameron’s demands for a special deal with come to seem like a distraction from the real priorities of the union.
And this without taking into account the wider context. One of the reasons why German Chancellor Merkel has been less hawkish in her pronouncements on Greece than her Finance Secretary, Wolfgang Schauble, is that she is only too aware of the wider geopolitical implications of a Grexit.
As the EU’s southern neighborhood implodes, chronic instability in a member state so close to North Africa hardly bodes well in terms of the stability of the region. Nor would a Greek government struggling to finance itself be best placed to help in the increasingly intense struggle southern member states are fighting to control the flow of migrants from North Africa.
Foreign policy
Perhaps more unsettlingly, economic turmoil in Greece would have potentially damaging effects on that state’s foreign policy priorities.
Whilst EU and even euro membership command the support of a majority of the Greek people, some kind of forced exit from the eurozone, with the consequent economic problems and feelings of humiliation this would engender, could alter those sentiments rapidly.
It is no surprise, then, that even the U.S. administration is now admitting its concern lest Athens turn towards Moscow for support in the event of a Grexit.
The recent visit by Prime Minister Alexis Tsipras to St Petersburgh underlined the close links between the two states. And whilst Russia is in no position to bail out the Greek economy, an increasingly anti-western Greece run by a party stuffed with pro-Russian Marxists would hardly be reassuring for EU states anxious to maintain a united front on Russian sanctions.
Above and beyond the economic implications of a Grexit and consequent economic crisis, then, such a scenario raises the possibility of a number of potentially harmful political outcomes both within Greece and further afield.
This, as much as the desire to keep an economy that amounts to about 2% of the eurozone, helps explain the desperation amongst Europe’s leaders to avoid such an outcome.
