Greece on the brink of eurozone exit

The relationship between Greece and the eurozone has hit a new low.

Greece is in turmoil — its people irate and its economy buckling under austerity. Eurozone powers, meanwhile, have lost patience with its failed economic reforms.

Severing monetary ties between the two was once written off as mutually disastrous and highly unlikely. Consensus held that indefinitely bailing out Greece would be preferable to an eviction.

It’s time to revisit that assumption, some influential politicians are now saying, adding to a growing refrain.

“There is a distinct chance that Greece is ultimately going to have to leave the eurozone,” said Craig Alexander, chief economist at Toronto-Dominion Bank. “The global financial system should be able to cope with that.”

The campaign to improve Greece’s fiscal situation and reduce its debt has had little success.

Its economy shrank by an annualized rate of 7% in the fourth quarter of 2011, the country’s statistics service said on Tuesday.

The day before, the Greek parliament approved another round of austerity to secure another bailout from the European Union and the International Monetary Fund.

The forces of austerity and recession have become locked in a perpetuating cycle, Mr. Alexander said.

Greece is a prime example of a country forced to “pursue austerity too quickly,” he said.

This week’s €3.3-billion in wage, pension and job cuts, however, failed to satisfy eurozone leaders, who insist the Greeks identify another €325-million in budget cuts to close the 2012 fiscal gap.

“Furthermore, I did not yet receive the required political assurances from the leaders of the Greek coalition parties on the implementation of the program,” said Eurogroup President Jean-Claude Juncker Tuesday after cancelling a meeting of the region’s finance ministers.

The IMF and EU want Greece to provide a full accounting of its budget reforms before approving a second bailout of €130-billion, as well as a €100-billion writedown of Greek debt.

The latest austerity vote, however, was more than enough to set off the Greek people.

“The social explosion will come one way or another, there is nothing they can do about it any more,” said trade union leader Ilias Iliopoulos after violence spread across Athens.


Now in its fifth year of recession, Greece’s unemployment rate hit 21% in November, while half of young Greeks are jobless.

Businesses close down daily across the country, some drugs are in short supply and some civil servants have seen their salaries halved.

The country’s recession could become one of the most severe of modern times, said Uri Dadush, an economist with the Carnegie Endowment in Washington.

“On the current path – which is not sustainable in my view – we may very well see Greek GDP go down 25-30%, which would be historically unprecedented. It’s a disastrous crisis for them,” said Mr. Dadush, a former senior World Bank official.

All to little effect. Greece has irritated its financiers by delaying implementation of austerity commitments. Meanwhile, they have to relieve their fiscal pressures.

“It’s a fine line to walk between a survivable economic environment and the austerity that’s so desperately needed to pull Greece back onside,” said Eric Lascelles, chief economist at RBC Global Asset Management. “But tragically, I don’t think there’s much option here. You could completely wipe out Greek debt and the government would still be spending way more than it’s taking in.”

That intractable fiscal problem has some questioning whether Greece is destined for bankruptcy and an exit from the euro.

“It might be something which would allow Greece also to get a new start … to create an economy that can create jobs,” Luxembourg Finance Minister Luc Frieden said on Monday in Washington.

While not the preferred scenario, the impact on the eurozone would be “less important than a year ago,” he said.

German Finance Minister Wolfgang Schaeuble shared that sentiment, telling Germany’s public broadcaster on Monday: “We are better prepared than we were two years ago.”

And while there may ultimately be some benefit to Greece of defaulting, leaving the currency bloc and devaluing its currency, the upfront cost would be very steep — one that Greek politicians have refused to contemplate.

“A disorderly default would set the country on a disastrous adventure,” Greek Prime Minister Lucas Papademos told parliament this week. “It would create conditions of uncontrolled economic chaos and social explosion.”

Financial Post