'Grexit' and the future of Europe

When no lesser person than the Governor of the Bank of England issues a warning that Europe is "tearing itself apart", sensible people, politicians included, need to sit up and take notice. And they are, as influential figures in the United Kingdom and elsewhere begin to prepare contingency measures against the eventuality that has put the entire Continent on edge: the exit of Greece from the euro zone.

So commonly is this now being talked about - almost, in fact, as if it were unavoidable - that a term has been coined to describe it: "Grexit". In recent days, speculation of an impending withdrawal, or perhaps more likely expulsion, has been fuelled by heavy withdrawal of euros from Greek banks and flight of these funds from the country. It is as if some in Greece have decided that the Grexit is a foregone conclusion.

It is not, at least not yet. It is true that at the recent elections anti-austerity parties in Greece made huge gains over the two main parties, the socialist Pasok party, and the centre-right New Democracy party, both of which have consistently supported the austerity measures necessary for the country to remain in the euro zone.

But the gains were not so conclusive - despite surges in popularity in the margins both Left and Right - that any other faction was able to form a government. Thus the party will again go the polls on June 17 in what effectively will be a referendum on the country's future in Europe. The far-Left remains ahead in the polls, notwithstanding a degree of contradictory impulses.

Many Greeks wish to stay within the euro zone, but equally are determined punitive measures must be relaxed. What accommodations it can make with itself in this respect will not be known until after the elections. What accommodations the rest of Europe is prepared to make with it is another matter and may be known even sooner.

For those who still see a future for Greece in Europe, the victory of socialist and pro-growth French President Francois Hollande over Nicolas Sarkozy has been a boon.

His talks this week with German Chancellor Angela Merkel seem to have prised open a sliver of possibility that Germany might soften on agreed measures.

And it is anticipated that at this weekend's G8 world leaders' meeting in the United States, President Barack Obama will use whatever leverage he has to encourage this further, arguing for at least a modicum of economic stimulus to counter the climate of austerity which, it is generally agreed, has done nothing to promote growth in Europe.

The United Kingdom finds itself desperately attempting to avoid a double-dip recession, growth is minuscule elsewhere, and yesterday it was revealed Spain had officially entered recession again, amid rumours of a run on one of its major banks. Should Grexit occur, there are those who say the demise of the entire union would not be far behind - such would be the collapse in confidence of the markets, the chaos in the European banks, and the scramble to protect national self-interest.

The stakes are high not just for Europe but potentially for the entire global financial system. The US presidential election will be largely fought on economic issues and a collapse in Europe in the next months, with inevitably knock-on effects for the US, could not be worse timing for Mr Obama - which is why he will want to be at his persuasive best this weekend, arguing, as will UK Prime Minister David Cameron, for further supporting weaker European economies.

If all this seems much removed from this hemisphere, New Zealanders should not imagine this country will be unaffected by the crisis unfolding in Europe. Tightening money supplies appear already to be dampening global commodity demand, evident in the downgrade this week of Fonterra's forecast prices for milk solids.

Europe is an important market not only for the US but for China, too, and should the worst happen, both these countries' economic performances will be hit - with potentially severe ramifications for our own exporters.

Buckle up. Whether Grexit occurs or not, there is severe turbulence ahead.

 

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