| The Greek Crisis - Leaving the Euro in an Orderly Way? |
The Greek election on the 17th of June is crucial not only for Greece but for the Euro and Euroland itself. The European Financial Stability Facility (EFSF) will be providing Greece with 145 bn Euros by 2014 and the IMF will provide Greece with 28 bn Euros by 2016. Greece needs to redeem bonds held by the ECB as well. If Greece rejects austerity there is a danger that the existing creditors will loose patience and the Greek Central Bank would find it impossible to support its own commercial banks and its banking system would be in peril. This would stop spending and economic activity within the country. European countries,firms and private individuals would face losses on the loans they made to Greece. Economists at Barclay's capital have calculated that the Greek government owes Euro institutions and governments around 290bn Euros or around 3% of Europe wide GDP. At the end of 2011 Greek households and companies owed international banks around 54bn Euros.
What if the Greek Government were to exit the Euro in an orderly way or in a chaotic way? Mark Cliffe an economist at ING bank has done some work on this. For the Euro area, a chaotic exit would cost nearly 9% of Euro GDP in the first year whilst an orderly Greek exit in the first year would cost nearer 2% of Euro GDP. In the second year of a Greek exit from the Euro these costs would be roughly half of what they were in the first year. The effects on the UK of a Greek exit from the Euro are not covered by the report but as well over half of the UK's trade is with the EU27, a very crude estimate of this would be that a chaotic Greek exit from the Euro could cost the UK 4.5% of its GDP in the first year whilst an orderly Greek exit from the Euro would cost the UK nearly 1% of its GDP in the first year.The second year Greek exit costs for the UK would be roughly half of what they would be for Euroland as a whole.Ironically Mark Cliffe predicts that an orderly Greek exit would increase Greek GDP by nearly 1% in the second year.
If Greece has to leave the Euro, then we need to ensure that such a move is properly planned for and delivered in an orderly manner both to minimise any economic impacts on Greece and on Europe as a whole.
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