Greece is staring into the abyss. Today, according to its finance minister Yanis Varoufakis, it’s defaulting on its debt repayment to the IMF and letting its bailout from Europe expire. But does that necessarily mean the next step is the dreaded Grexit?
Not automatically. Technically, Greece has already violated the terms of the European Monetary Union (EMU) and the fundamental principles of the EU itself by imposing capital controls, but the European Commission has said this is justified in the current emergency.
Besides, there isn’t actually a mechanism to force Greece out. The European Central Bank (ECB) issued a paper in 2009 saying that ‘a member state’s expulsion from the EU or EMU would be legally next to impossible’.
The question, then, is could Greece choose to remain in the Euro if it defaulted?
On the surface, the answer appears to be no. Like all economies, Greece depends on its banks, and they depend on the fundamental support of its central bank. As a Eurozone country, however, Greece’s financial system ultimately depends on the ECB, but it’s very hard to imagine the ECB lending further money to Greece’s banks if the country just walked away from its debt.
Without that support – and crucially the guarantee of that support in the future - the banks would inevitably collapse when they reopened. Staying under those circumstances would be unthinkable.
But then there’s a default and there’s a default. Just because Greece is skipping its payments to the IMF, doesn’t mean it’s going the whole hog with all its creditors. Yes, even a partial default will ruin its already battered reputation on the financial markets, but in theory if it pays the ECB its dues (€6.7bn or £4.8bn) over the summer, the central bank could continue to prop up its financial system.
In the end it all comes back to political will. Greece could default and still survive in the Euro if the ECB and Eurogroup are willing to do what it takes to make that happen, but it’s hard to imagine they will be willing without a yes vote in the Greek referendum on the bailout next week.
Though Greek finance minister Yanis Varoufakis denies this, both the French president Francois Hollande and European Commission president Jean-Claude Juncker have, directly or indirectly, described the referendum as a vote on Euro membership.
‘You shouldn’t commit suicide because you’re afraid of dying’, Juncker said, in a not-particularly tactful metaphor given the surge in Greeks taking their own lives over the last few years.
Keeping Greece in the Euro now will require European countries to fork out even more cash to underwrite the country’s banks. If the Greeks vote yes and the Syriza government falls, it’s conceivable that European leaders will dig deep to keep Greece in.
If, however, Greece rejects the bailout at the polls and defaults, it’s almost impossible to imagine the political will in Europe to send even more money to a country that’s already walked out on its obligations. Without their political and financial support, Greece would be mad to remain in the Euro, and would be far better off defaulting on all its debts and starting again.
The Greek people have an awfully big decision ahead of them. If you're interested, Paddy Power is offering 7/4 odds on the Greeks rejecting the bailout at the polls. The odds on it leaving the Eurozone are 2/1, while the bookies are giving 5/1 odds on the Euro itself ceasing to exist by 2020. Not something that will go down well in Brussels.