Sunday, February 08, 2015

Is Greenspan right that Greece is doomed to exit the Euro?

I read in this BBC article that former Fed Chairman Greenspan is convinced that grexit is a fait accompli - that Greece is doomed to exit from the Euro:

Said Greenspan, "I believe [Greece] will eventually leave. I don't think it helps them or the rest of the eurozone - it is just a matter of time before everyone recognises that parting is the best strategy. The problem is that there there is no way that I can conceive of the euro of continuing, unless and until all of the members of eurozone become politically integrated - actually even just fiscally integrated won't do it."

So, does that mean that grexit is truly a done deal?

Well, not so fast. You have to pay attention to the context of remarks, not just the literal remarks themselves. In the case of Greenspan, as the article notes, he has never been a fan of the Euro single currency and has always thought it was doomed. So, he's not really saying anything new and specific to the situation in Greece.

My read of his comments is simply that he is lobbying for his own preferred outcome, rather than telling us what is actually likely to happen.

So, is there a real risk of grexit? Yes, absolutely, it could happen.

But is grexit likely to happen? Nope. Why not? Greece is not likely to exit the euro zone simply because that outcome would not be in the best interest of either Greece or the EU.

As far as I am concerned, the fix is in - not so much in terms of the specific details, but in terms of some sort of deal being negotiated, eventually.

So, in short, Greenspan is right in that there is a very real risk of grexit, but he is certainly wrong about grexit being the likely outcome.

That said, the next six months will be quite a circuitous and bumpy ride for all as the negotiations between Greece and the EU take a lot of twists and turns.

So, I am not predicting a specific path through this process, or what the final result will actually look like, but simply that Greece will remain in the EU and remain on the Euro and that some sort of deal is a slam dunk.

If anything, the extreme pressure from the EU gives Tsipras the ammo and leverage he needs to continue reforms within Greece itself. Yes, the Greek voters voted against austerity, but they also voted in favor or eliminating the corruption that landed Greece in this predicament in the first place. Progress with rooting out corruption is in fact the ace card that Tsipras holds that will enable a final deal with the EU.

-- Jack Krupansky


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