Has a Greek exit from the euro zone become inevitable—even desirable? Some European leaders appeared ready to let Greece walk after an anti-austerity backlash in May 6 elections left the country without a government. “The future of Greece in the euro zone now lies in Greece’s hands,” German Foreign Minister Guido Westerwelle said in a speech to the lower house of parliament in Berlin on May 11. “Solidarity is not a one-way street.”
Put another way, the issue is whether Europe should keep putting money into a project that has not succeeded, and that the supposed beneficiary may not even want. Greece has repeatedly failed to meet fiscal and economic-reform targets it promised in exchange for hundreds of billions in bailouts from its European neighbors over the past two years. Polls show that some 70 percent of Greeks want to keep the euro. Yet the polls also show rising support for the anti-austerity Syriza Party, which favors scrapping what it terms “barbaric” bailout agreements. Syriza placed second in the May 6 vote and could become the biggest vote-getter in new elections now planned for June.
Renegotiating the bailout accords to give Greece more breathing room is possible, but “would not set a good example” for governments in Spain, Italy, and elsewhere that are struggling to enforce unpopular austerity measures, Willem Buiter, an economist for Citigroup Global Markets in London, wrote in a recent research note. He puts the odds of Greece leaving the euro at better than 50 percent, mirroring the results of a Bloomberg News poll of investors and analysts, released May 11, that found 57 percent predicting an exit before year’s end.
And yet, odds are that Greece will get another reprieve. “We wouldn’t close ourselves off to a debate over extending the deadlines” for attaining budget targets, Luxembourg Prime Minister Jean-Claude Juncker said on May 14, after euro-area finance ministers met to discuss the situation.
Greece’s neighbors have reasons to be lenient. For one thing, the country is almost out of money. Athens said on May 15 that it had only $1.9 billion cash on hand. If the bailout tap is turned off, the government could be forced as early as mid-summer to turn back to the drachma—devalued by at least 40 percent against the euro, most economists reckon—in order to keep the country functioning.
That, in turn, would trigger an uncontrolled default on euro-denominated debt. It’s a scenario no one wants, including the European institutions and International Monetary Fund that have extended tens of billions in loans to Greece. The European Central Bank, as well as foreign creditors of Greek companies, banks, and households, also would be big losers.
Greece’s foreign liabilities total 422 billion euros, more than the gross domestic product of Switzerland. “There’s lots of money on the table that could be lost,” says Marchel Alexandrovich, European financial economist at Jefferies International in London. “The risks are huge.”
What’s more, a Greek default would almost certainly shake investor confidence in other struggling European economies. That increases the likelihood that Europe would have to pony up still more bailout money—to Spain, for example.
European political sentiment also is shifting toward a softer policy as governments across the region face growing public unrest over austerity programs. Francois Hollande, the Socialist sworn in as France’s new president on May 15, ran on an anti-austerity, pro-growth platform. Hollande’s first official dinner, on the evening of his inauguration, was with Chancellor Angela Merkel, and the Greeks are clearly hoping that he’ll tone down her insistence on budget discipline. Hollande “is on the European south’s side,” says Constantinos Michalos, president of the Athens Chamber of Commerce and Industry. “You cannot keep on milking a cow without feeding it.”
