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Euro Crisis: three scenarios « Previous | |Next »
November 3, 2011

As Greece fights over how to put the Eurozone bail-out to a referendum, the nation is slowly accepting that it is broke; that it is only keeping the lights on with regular injections of cash from its wealthier European neighbours, principally Germany and France; and that the Papandreou government is on the point of collapse.

RowsonMGreecedemocracy.jpg Martin Rowson

A paper published by the UK based National Institute of Economic and Social Research's National Institute Economic Review, no. 218, October 2011 explored three alternative scenarios with respect to the euro crisis.

- under scenario 1 "muddling through", risk premia remain elevated for a further year. This has a negative effect on growth, not just in Greece and other peripheral eurozone countries, but elsewhere. Recession becomes a near certainty in Italy and Spain, while the probability of a recession in the UK rises to about 70%.

- under scenario 2 "default contagion", default on Greece raises the probability of default in Portugal and (possibly) Ireland and Italy. Such a cascade of defaults would make a more generalised banking crisis likely ; in order to avert such a damaging outcome, the ECB might need to commit to acting as lender of last resort for vulnerable governments

- under scenario 3, Greece exits the euro. In such circumstances, devaluation is certain, and explicit default is also likely. This would lead to lower interest payments on government debt, and lower asset prices could also result in capital inflows. Under such a benign scenario, output would rise, perhaps quite sharply, much as it did in similar circumstances in Argentina in 2001-02. On the other hand, there are very large downside risks (in particular, the difficulties of full currency redenomination, and the possibility of forced EU exit) that were not present for Argentina.

The Organisation for Economic Co-operation and Development and the International Monetary Fund have now being forced to model what would happen in the event of a disorderly Greek exit from the euro, with the inevitable knock-on effects that would have. The question becomes how will the Greek default be handled?

The EU is preparing for the possibility of Greece leaving the euro and looking at ways ensuring that this could be done without harm to the region. Greece leaving the euro is now being openly discussed.

| Posted by Gary Sauer-Thompson at 9:14 PM | | Comments (4)


Current developments look rather like a coup in Greece, with outside support in effect from Germany and France:

If Greece leaves the euro it raises the possibility of other countries leaving too either soon or in the future. Which in turn raises questions of its future.
So I would add another scenario 4 The end of the euro.

Historical echoes; do the Greeks owe the Germans or do the Germans really owe the Greeks?

"the Papandreou government is on the point of collapse"

The Papandreous government survived the no confidence motion. It appears that George Papandreou will now step aside and that Evangelos Venizelos, the Finance Minister, will become the leader of a national unity or coalition government.