Greece’s elections and the future of the Eurozone

=====================================================================

Question 1: Do you agree that a Syriza victory on 25 January would lead to a significant or sustained escalation in spreads for other peripheral Eurozone countries?

=====================================================================

=====================================================================

Question 2: Do you agree that refusal of the core EU countries to a renegotiation of the Greek bailout agreements would carry serious risks for the economic well-being of the Eurozone?

=====================================================================

Summary

If, as seems likely, the Syriza party wins the Greek election on 25 January, what will be the impact on the Eurozone? This column summarises the views of 40 UK-based experts polled by the Centre for Macroeconomics (CFM). A 60% majority of survey respondents do not think that a Syriza victory will cause interest-rate spreads for other countries in the Eurozone periphery to increase significantly or for a sustained period. But opinion is more evenly divided on whether core Eurozone countries and the EU should be open to renegotiating the Greek debt and the conditions of the Greek bailout.

Potential spillovers of a Syriza victory

This month's survey looks at the implications for the rest of the Eurozone of the upcoming Greek elections. On 25 January, Greece will elect a new government. Current opinion polls show a lead for the anti-establishment party Syriza – which is associated with virulent criticism of EU policies towards Greece. One of the main planks of Syriza’s campaign is that existing agreements between Greece and ‘the troika’ (the European Commission, the European Central Bank and the International Monetary Fund) need to be renegotiated, with a view to further write-offs of Greece’s outstanding sovereign debt and a reduction in the scale of fiscal adjustment under the support programmes. 

The first of this month’s survey questions is about the potential spillovers of a possible Syriza victory to other ‘peripheral’ Eurozone members. One line of reasoning is that sovereign interest rate spreads will escalate, not only in Greece but also in some other countries that have experienced severe sovereign debt stress in recent years. This is because financial markets would interpret the failure of Greece to meet its agreed fiscal plans and any further negotiations over a reduction in debt as precedents, which others might be tempted to follow.

The alternative line of reasoning is that financial markets have effectively ‘decoupled’ Greece from the other peripheral countries, and hence little or no contagion is likely.

Q1: Do you agree that a Syriza victory on 25 January would lead to a significant or sustained escalation in spreads for other peripheral Eurozone countries?

|Summary of responses

A majority of respondents disagree with this question: 56% disagree and a further 3% strongly disagree, 18% neither agree nor disagree, and 23% agree or strongly agree – although when weighting by the degree of confidence held by respondents, the balance of the poll becomes slightly less uneven.

When motivating their answers, many of the respondents agree with the thesis that other Eurozone peripheral countries have decoupled from Greece. One reason is that these countries tend to have ‘relatively lower public and foreign debt burdens’ (Jim Malley, University of Glasgow). Another reason is that ‘today, there is very little exposure of banks to Greek debt’ (Costas Milas, University of Liverpool).

Others think that the extent of decoupling varies among peripheral countries. Sir Christopher Pissarides (LSE) thinks that contagion will happen ‘mainly in Spain, because of the close relation between Podemos and Syriza, and the forthcoming election in Spain.’ John Driffill (Birkbeck College, University of London) singles out Cyprus as ‘the only Eurozone member which is likely to suffer a contagious reaction.’

In general, respondents who don’t accept the decoupling argument stress that a Syriza victory is a harbinger of victories by similarly minded parties in other countries.

Respondents who do not think that a Syriza victory would cause problems for other countries in the periphery also note that polls have been predicting such an outcome for many weeks, so that ‘a Syriza victory should already have been priced in by the market’ (Martin Ellison, University of Oxford). According to Wouter den Haan (LSE), this argument is reinforced by the fact that ‘another round of Greek restructuring or even default is likely [even] without a Syriza win.’ Kate Barker (Credit Suisse) takes a similar view.

But Christopher Martin (University of Bath) reminds us that ‘financial markets are not objective and are often irrational.’ Several other respondents highlight the enormous difficulty of predicting financial market responses. Ethan Ilzetzki (LSE), for example, says that ‘forecasting spillovers of sovereign spreads is a nearly impossible task.’

Several respondents highlight the impact that ECB actions will have on the behaviour of spreads in the wake of the election. Gianluca Benigno (LSE) points out that ‘An aggressive QE programme could limit the escalation of spreads.’ Richard Portes (London Business School) opines that ‘new firewalls against contagion are some comfort, and the ECB will have announced some version of QE by then.’

Renegotiating Greece’s debt and bailout agreements

The second question in this month’s survey concerns the appropriate response by the EU and the core EU countries to a possible Syriza bid to renegotiate its debt and its bailout agreements. Advocates of the status quo argue that acquiescing to Greek demands would only encourage other peripheral countries to reduce their commitment to agreed fiscal plans. These commentators also think that Greece has a weak hand, as its outside option is unilateral default and likely exit from the Eurozone, both of which would be economically and politically too costly. In any case, they further argue, thanks to ‘decoupling’, the Eurozone can withstand ‘Grexit’.

Advocates of a more flexible position believe that a Syriza victory would give the EU a chance to recognise that Greece cannot possibly repay its debt in its entirety, and that the fiscal programmes may have been too draconian and unrealistic. They also discount the extent of decoupling and hence fear that Grexit would open the way to a wider Eurozone break-up.

Q2: Do you agree that refusal of the core EU countries to a renegotiation of the Greek bailout agreements would carry serious risks for the economic well-being of the Eurozone?

Summary of responses

On this question, there is an almost even split: 50% of respondents agree or strongly agree, while 43% disagree (nobody strongly disagrees). When answers are weighted by confidence, the ‘dovish’ position becomes stronger: 55% versus 35%.

David Cobham (Heriot-Watt University) captures a widely held sentiment among those who agree that ‘whatever the answer to the great puzzle “why is German macroeconomics so different from everyone else’s?”, EU leaders should understand that it is now time for compromises.’ Sir Christopher Pissarides predicts that ‘refusal of the “core” to listen to the “periphery” will sooner or later lead to… disintegration.’

Simon Wren-Lewis (University of Oxford) goes as far as to say that ‘A Syriza victory would be the best thing to happen in the Eurozone for some time,’ as it gives the EU a ‘chance to partly undo [the] mistakes’ it made in 2010-12. There is concern with moral hazard (the argument that other countries will want to renegotiate), but Angus Armstrong (NIESR) concludes that ‘after a certain point the trade-off is likely to show that the cost of the moral hazard is less than the consequences of denying the size of the problem.’

Many highlight the likelihood of Grexit in case of EU intransigence. Interestingly, this is cited both by those who agree and those who disagree. Among the former, Richard Portes thinks that ‘Grexit would be a disaster for Greece as well as a major risk for the continued existence of the Eurozone.’ Patrick Minford (Cardiff University) who also agrees with the question, writes the following: ‘This refusal makes Grexit far more likely. Effectively Greece can leave the euro and stay in the EU; any attempt to force it out of the EU for leaving the euro would create severe division between north and south Europe, since other southern countries may be forced to leave the euro too. The dangers of leaving are greatly exaggerated by euro-zone leaders; the benefits of an economic “reset” and debt write-off are substantial.’

Among those who disagree, the view is that Grexit would be ‘a much better outcome for Greece than continuing with current policies’ (Nicholas Oulton, LSE), and that ‘Greek exit from the Euro Area may strengthen the Area as it would become clear that the fiscal rules are binding’ (Ray Barrell, Brunel University).

On a related note, Jagjit Chadha (University of Kent) worries that ‘the re-opening of the Greek settlement… would threaten an early agreement on euro-wide unconventional [monetary] policy.

Contact us for more information

How the experts responded

Will Syriza victory lead to turmoil in financial markets?

Participant Answer Confidence level Comment
Sushil Wadhwani's picture Sushil Wadhwani Wadhwani Asset Management Disagree Confident
Giancarlo Corsetti's picture Giancarlo Corsetti University of Cambridge Neither agree nor disagree Confident
By now, it is well understood that the crisis of the Eurozone is first and foremost a crisis in political cohesion among its state members. There is little trust, and little communication/sharing concerning the root causes of the current stagnation and thus no consensus on the appropriate interventions. With delay in undertaking appropriate measures and lack of action, the Eurozone has managed to engineered its own self-inflicted recession, unfortunately with global repercussions. The election in Greece will have an effect on spread depending on their impact on the current political equilibrium. Independently of Greece, there are many governments who are insisting on the need to sustain demand, with both fiscal and monetary policy. It is in their interest that whatever happens in Greece does not interrupt the ongoing negotiation/dialogue (so far very tenuous). What may threaten financial stability is actually the reaction of the surplus countries, if their leaders read the political outcome of Greece as a leading indicator of political instability in the Eurozone, and become even more pessimistic about its future.
Wouter Den Haan's picture Wouter Den Haan London School of Economics Disagree Not confident at all
The fiscal position in the Euro Area periphery countries is still fragile and quite a few things, including a Syriza victory, could trigger another bout of market pessimism accompanied by increased spreads. Nevertheless, I suspect that a Syriza victory by itself will not have massive consequences because another round of Greek debt restructuring or even default is likely without a Syriza win as well and should have been priced in current spreads already.
David Cobham's picture David Cobham Heriot Watt University Disagree Confident
I think there has been a serious element of decoupling, which would protect other countries' spreads at least in the short term. In addition, the leaders of the EU would have an incentive to treat Greece in a way that validates that decoupling.
Patrick Minford's picture Patrick Minford Cardiff Business School Strongly Agree Very confident
The social problems created by the euro-zone crisis are as intense in these other countries. Grexit would increase the attractiveness of exit by others.
Gianluca Benigno's picture Gianluca Benigno London School of Economics Neither agree nor disagree Confident
There might be contagion coming from the outcome of the Greek election but one aspect to keep into account is what the European Central Bank will do at the meeting of the 22nd of January just before the outcome of the election. An aggressive QE program could limit the escalation in spreads.
Paolo Surico's picture Paolo Surico London Business School Disagree Not confident
Ethan Ilzetzki's picture Ethan Ilzetzki London School of Economics Agree Not confident at all
Forecasting spillovers of sovereign spreads is a nearly impossible task. But this is a significant risk that needs to be considered in contingency planning.
Sir Christopher Pissarides's picture Sir Christopher... London School of Economics Neither agree nor disagree Confident
I expect it to happen mainly in Spain, because of the close relations between Podemos and Syriza and the forthcoming election in Spain. Italy will be unaffected. In other words, I don't think there will be general contagion but I also do not think there will be no response at all
Wendy Carlin's picture Wendy Carlin University College London Neither agree nor disagree Confident
It's possible that a Syriza victory would mark the beginning of a constructive process of debt restructuring not only in Greece but elsewhere in the Eurozone. It is very difficult to predict how this would affect spreads.
Michael McMahon's picture Michael McMahon University of Oxford Agree Confident
It depends on the extent of the majority they obtain, but if they get a good election win I think it will have an effect on other countries spreads. I do not think it would affect peripheral countries equally, but rather would be focused in those peripheral countries where there is growing popularity of anti-Troika/anti-austerity parties. It would also likely mean that markets would react more adversely in these countries to any future political about the popularity of these parties.
Kate Barker's picture Kate Barker British Coal Staff Superannuation Scheme Disagree Confident
Even without a Syriza victory, it seems inevitable that Greece will have to change its position as above. The financial markets ought therefore to reflect this already to a large extent.
Martin Ellison's picture Martin Ellison University of Oxford Disagree Confident
Recent opinion polls have consistently predicted that Syriza will have the largest share of the votes on 25 January, so a Syriza victory should already have been priced in by the market. The more interesting question is whether events subsequent to a Syriza victory may cause an escalation of spreads in other peripheral Eurozone countries. A key question is whether Syriza can form a government alone or in coalition with other parties, or whether there will need to be a second round of elections. If new elections are needed then uncertainty will rise, particularly in light of the four-year bailout plan finishing already at the end of February 2015. Recall that the Greek government’s attempts to raise funding in December 2014 were problematic.
David Smith's picture David Smith Sunday Times Disagree Confident
We will not know for certain until after the election but so far Greek contagion in bond markets has been limited. This seems different from 2012.
Nicholas Oulton's picture Nicholas Oulton London School of Economics Strongly Agree Extremely confident
The markets are already anticipating a Syriza victory so this has to be bad news for other highly-indebted Eurozone countries. The only counter to this would be massive QE by the ECB focused on Spanish, Portuguese and Italian government debt. But nobody seems to think this is likely because of German and other objections. It is not that governments currently in place in Spain, Portugal and Italy are going to seek debt forgiveness but rather that they will be replaced by other political movements (e.g. Podemos in Spain) who would be so inclined. Or at least that is a risk which markets will take into account.
Alan Sutherland's picture Alan Sutherland University of St. Andrews Agree Confident
John Driffill's picture John Driffill Birkbeck College, University of London Neither agree nor disagree Not confident
It could happen, of course. But it might not. What is meant by a Syriza victory? They seem likely to do well in the polls, but will probably have to form a coalition with other parties, which will limit their freedom of action. Even if they win an outright majority and can form a government alone, they might decide to honour existing commitments in the short run and negotiate with the Troika over a longer period. Even if they decide to press for debt forgiveness or restructuring very quickly, and Greece leaves the Euro, the effect on other countries may be small. Particularly if the ECB can use its OMT programme to stabilise the market for debt of other member states, and use QE to greatly increase liquidity in the Euro zone. The only Euro zone member which is likely to suffer a contagious reaction is Cyprus
Richard Portes's picture Richard Portes London Business School and CEPR Disagree Confident
New firewalls against contagion are some comfort, and ECB will have announced some version of QE by then.
Morten Ravn's picture Morten Ravn University College London Disagree Very confident
I think that there would be an increase in the spreads for other peripheral countries in the SHORT RUN but I do not think they will persist. In the short run, contagion effects are likely to increase spreads. Obviously, if Syriza wins and successfully negotiates a debt write-down, it sets an example for other countries and therefore could lead to a sustained increase in spreads. But I think this is unlikely for many reasons. First, any concessions from the Troika are likely to impose other costs on Greece. Secondly, there is already some decoupling between Greece and other peripheral countries in that their outlook and economic conditions do differ significantly. Only in the unlikely event that the situation is handled in a very bad manner giving financial markets reason to believe that other peripheral countries will receive similar treatments do I see a reason to expect a SUSTAINED escalation in spreads for other peripheral Eurozone countries.
Mike Elsby's picture Mike Elsby University of Edinburgh Disagree Not confident
Angus Armstrong's picture Angus Armstrong National Institute of Economic and Social Research Disagree Confident
The Greek elections must be discounted already.
Jim Malley's picture Jim Malley University of Glasgow Disagree Confident
Fundamentals are clearly worse in Greece. Two economic factors working against the potential spread of significantly higher risk premia to other peripheral Eurozone countries are that these countries currently have relatively lower public and foreign debt burdens. For example, according to the European Commission forecasts for winter 2014, general government debt as a share of GDP was 177, 126.6, 112, and 94.3 percent for Greece, Portugal, Cyprus and Spain respectively. Moreover, in 2014, the current account for all these countries was either in balance or surplus in contrast to Greece's deficit of about 2 percent of GDP despite its big depression and fall in imports. Political fundamentals are also worse in Greece.
Richard Dennis's picture Richard Dennis University of Glasgow Disagree Confident
Simon Wren-Lewis's picture Simon Wren-Lewis University of Oxford Disagree Not confident
If the Eurozone takes a mature view, and agrees to negotiate with Greece, the outcome will be beneficial for both Greece and the Eurozone as a whole. There are no necessary implications for other countries. After all, Greece has had the terms of its debt adjusted before and no changes have been made elsewhere. There are two reasons why I am not confident about this view. First, I am not confident that the Eurozone will be mature about this. It may try to play what is a very weak hand (in contrast Greece has a strong hand) and make all kinds of silly threats, which will only do the Eurozone harm. Second, other countries may be encouraged to seek debt relief. They have every right to do so. Now of course that raises risk premiums, but that is all part of the calculation that each government has to make.
Charles Nolan's picture Charles Nolan University of Glasgow Disagree Confident
Ray Barrell's picture Ray Barrell Brunel University London Disagree Confident
Euro Area government bond spreads reflect exit risk and default risk. It should be possible for the ECB to offer a derivative contract to government bond holders that covers the exit risk but leaves them with the default risk. If it is clear that the ECB will offer this contract to government bond holders, then spreads should not increase in the rest of the Euro Area. A contract of this nature does not involve a bailout, and should be acceptable to European and German courts. However, a Greek default whilst remaining in the Euro Area might increase the perceived probability of defaults elsewhere, and spreads might then rise.
Paul De Grauwe's picture Paul De Grauwe London School of Economics Agree Confident
Sir Charles Bean's picture Sir Charles Bean London School of Economics Disagree Confident
Francesco Caselli's picture Francesco Caselli London School of Economics Agree Confident
Michael Wickens's picture Michael Wickens Cardiff Business School & University of York Disagree Confident
Although there may be some contagion in the short term, it is very unlikely to be sustained in the longer term. Logically an increase in spreads in other countries would only occur if the market expected these countries to default or leave the eurozone. But even the hardest hit of these countries would be unlikely to do so having already weathered the worst of the storm.
Sean Holly's picture Sean Holly Cambridge University Strongly Disagree Very confident
Joseph Pearlman's picture Joseph Pearlman City University London Disagree Not confident
Jonathan Portes's picture Jonathan Portes KIng's College, London Disagree Confident
The reductions in spreads since late 2012 observed in peripheral Eurozone members were not the result of "successful" fiscal consolidations, but the direct consequence of the commitment of the ECB to do "whatever it takes" to preserve the euro. Similarly. as long as the ECB maintains this commitment, there is no reason for spreads to widen again. Certainly, a sensible renegotiation of the misconceived and poorly implemented Greek adjustment programme would not in itself lead a a widening of spreads - any such widening would be the result of renewed mishandling of the situation by eurozone policymakers.
Christopher Martin's picture Christopher Martin University of Bath Disagree Not confident at all
Objectively, there should be little effect. But: - financial markets are not objective and are often irrational. Economics gives a convincing explanation of how financial markets should behave. Unfortunately, they rarely act this way. - the response will reflect politics more than economics. The current volatile is too volatile for anyone to make a confident prediction of how this will go.
Jagjit Chadha's picture Jagjit Chadha National Institute of Economic and Social Research Agree Very confident
A Syriza victory would not only open up wounds between Greece and the Troika that have barely healed from the default of 2012. But also trigger question-marks over the continuation of the Greek membership of the Euro Area and by association the EU. This will lead to a harder examination of the spreads (aka default risks) for other peripheral countries, as well as for Italy. Some form of QE may act to offset the momentum for an escalation in spreads but it will have to be large, clear and actionable.
Silvana Tenreyro's picture Silvana Tenreyro London School of Economics Neither agree nor disagree Confident
A Syriza victory could lead to an increase in spreads in other Eurozone countries. It is not clear whether the potential increases would be significant or sustained---this will depend on the electoral outcomes in the rest of the Eurozone in forthcoming months and Syriza's actions if in power.
Costas Milas's picture Costas Milas University of Liverpool Disagree Confident
Spreads in other peripheral countries were under pressure in 2012 when the exposure of their banks to Greek debt was substantial. Since then, Greek debt has been restructured. Today, there is very little exposure of banks to Greek debt. Hence, a revival of Grexit talk will have much less (if any) impact beyond Greece. Indeed, despite the political uncertainty in Greece, and the prospect of a government led by SYRIZA, spreads in the remaining GIIPS (let alone Eurozone’s core) have hardly moved. What is the implication of all these? A new Greek government (led by SYRIZA) should not try to negotiate with the so-called Troika by playing the card of a Greek-domino effect. Doing so will probably make Greece “sleepwalk” towards Euro exit without a significant contagion effect.
Tony Yates's picture Tony Yates University of Birmingham Agree Confident
I'd forecast an increase in sovereign yields in Portugal and Italy. In Spain, this might happen too. On the one hand, there is more evidence that the Spanish recovery is firmly underway. But on the other, the Syriza of Spain is also riding high in the polls and a Syriza renegotiation could encourage anti-EU sentiment, and renewed attempts at fiscal stimulus in contravention with the stability and growth pact rules. These developments might fuel speculation that Spain would exit.
Marco Bassetto's picture Marco Bassetto University College London Neither agree nor disagree Not confident at all
For now, it looks like this is not the case; even though Syriza is anticipated to do well, spreads of other peripheral countries have not spiked. It could really go either way. This could evolve into a situation where Greece looks very different from other countries, or Greece could become a blueprint for other countries to exit the Euro or to default on their debt.

Consequences of refusal to renegotiate

Participant Answer Confidence level Comment
Sushil Wadhwani's picture Sushil Wadhwani Wadhwani Asset Management Agree Confident
The reason that peripheral yield spreads are unlikely to rise significantly on a Syriza victory is that markets expect a deal between Syriza and the EU. Of course, if Grexit does occur,this is likely to have significant effects. One should not underestimate the role of "known unknowns" and "unknown unknowns" in any evaluation of the likely risks associated with "Grexit".
Giancarlo Corsetti's picture Giancarlo Corsetti University of Cambridge Agree Confident
Wouter Den Haan's picture Wouter Den Haan London School of Economics Disagree Not confident
It is not unthinkable that a refusal to renegotiate Greek debt will lead to a sequence of disastrous consequences, for example, with Greece leaving the Euro Area followed by a financial market panic. However, my hunch is that such a bad outcome is not the most likely outcome, because the Greek economy is now more decoupled from the rest of the Euro Area.
David Cobham's picture David Cobham Heriot Watt University Strongly Agree Very confident
Whatever the answer to the great puzzle, 'why is German macroeconomics so different from everyone else's?', EU leaders should understand that it is now time for compromises and actions that strengthen the political and economic prospects of the eurozone: renegotiation of debt which might otherwise be repudiated in its entirety, and infrastructure spending as a way to get round the excessive fiscal constraints they have imposed.
Patrick Minford's picture Patrick Minford Cardiff Business School Strongly Agree Very confident
This refusal makes Grexit far more likely. Effectively Greece can leave the euro and stay in the EU; any attempt to force it out of the EU for leaving the euro would create severe division between north and south Europe, since other southern countries may be forced to leave the euro too. The dangers of leaving are greatly exaggerated by euro-zone leaders; the benefits of an economic 'reset' and debt write-off are substantial.
Gianluca Benigno's picture Gianluca Benigno London School of Economics Agree Confident
Given the trajectory of Greek public debt, renegotiation of the bailout agreement seems to me a sensible option. The risk is to underestimate the financial consequences for the Euro of a unilateral decision of a country to exit the system. While the cost of this decision are higher from a Greek perspective, financial linkages among Eurozone countries could amplify its effect and lead to financial turmoil.
Paolo Surico's picture Paolo Surico London Business School Disagree Confident
Ethan Ilzetzki's picture Ethan Ilzetzki London School of Economics Agree Confident
Core EU countries should preempt a Syriza victory and offer to renegotiate Greek sovereign debt regardless of the outcome of the election. Exceeding 150% of GDP, Greek debt is not sustainable, but at this point the vast majority of this debt is owed to the EU (almost 100% of GDP owed to EFSF or in bilateral loans). Greece's debt burden is therefore a core-EU decision variable. These loan facilities have prolonged the maturity of Greek sovereign debt, but more can be done to lower the current debt burden of the Greek government. These could be tied to further measures to build Greece's tax collection abilities. The fallout from a Greek default or exit from the Eurozone is uncertain, but does entail some large tail risks. The costs of lowering Greek debt burden are small in comparison.
Sir Christopher Pissarides's picture Sir Christopher... London School of Economics Agree Very confident
Any inflexible attitude from lenders to borrowers in the Eurozone would carry serious risks for the economic well-being of the Eurozone. If the Eurozone is to prosper it requires compromise and mutual respect between countries with different interests. Refusal of the "core" to listen to the "periphery" will sooner or later lead to its disintegration
Wendy Carlin's picture Wendy Carlin University College London Agree Confident
Given that Greece is now running a primary surplus, a constructive process of debt restructuring is the best option not only for Greece but for the Eurozone.
Michael McMahon's picture Michael McMahon University of Oxford Neither agree nor disagree Confident
I think the refusal to renegotiate the bailout programme would increase the chances that the Greek seek some form of exit from the Eurozone; even if they never go through with it, the threat will be disruptive. But equally agreeing to renegotiate may encourage other countries to take more hard line positions with Brussels on the area. This could also be damaging to already difficult European policymaker.
Kate Barker's picture Kate Barker British Coal Staff Superannuation Scheme Strongly Agree Very confident
Martin Ellison's picture Martin Ellison University of Oxford Agree Not confident
The risk that Greece could become “Europe’s Lehman” has diminished as the majority of Greek debt is now held in the public sector. This has removed some of the risks associated with a Grexit. However, a hard line stance by core EU countries on renegotiation of the Greek bailout agreements could well be counterproductive. Syriza has toned down its rhetoric in recent statements, a movement that it would be wise to encourage by reciprocal responses from the core EU countries. Ultimately, it would be good to work towards mechanisms whereby countries could leave the Eurozone if economic fundamentals dictate that leaving would be in everyone’s interest.
David Smith's picture David Smith Sunday Times Disagree Confident
Rightly or wrongly, moral hazard concerns will prevent too many concessions to the new Greek government, though it could be argued - with other peripheral economies now doing better - that it is more of a special case now than in 2012.
Nicholas Oulton's picture Nicholas Oulton London School of Economics Disagree Confident
No. The outcome would be better for Greece and the Eurozone. If the rest of the Eurozone forces Greece into exiting the euro this would likely be a much better outcome for Greece than continuing with current policies. Any attempt by the Eurozone (i.e. Germany) to punish Greece for such a choice (e.g. by forcing Greece out of the EU) should be strongly resisted by the UK. There would certainly be contagion from Greece but this would also be a good thing since either it would force debt restructuring and debt guarantees (Eurobonds) or it would lead to other countries exiting too. It is generally agreed that Greece can’t pay. A Syriza government will be committed to a “won’t pay” position which after all only acknowledges reality. So the rest of the Eurozone would be well-advised to seek a reasonable settlement with the Greeks which would have many precedents in sovereign debt crises. If to the contrary the rest of the Eurozone seeks to hold Greece to existing accords then the logic of the Syriza position is Grexit followed by default (“debt restructuring”). This would be a much better outcome for Greece than continuing with current policies which threaten a generation of slump and unemployment. It is time to acknowledge that the euro has been a disastrous economic experiment. So it needs to be either drastically reformed or abolished. It is well known that its founders wanted to push ahead with monetary union as a lever to bring about political union. But the latter has not happened, at least in the form which is currently needed, debt forgiveness and guarantees. So the Eurozone has a choice, either move towards debt forgiveness and Eurobonds or break up. Failure to make this choice will lead to political parties fundamentally hostile to the market economy attaining power.
Alan Sutherland's picture Alan Sutherland University of St. Andrews Agree Confident
John Driffill's picture John Driffill Birkbeck College, University of London Agree Not confident
Refusal to renegotiate may endanger the survival of the Euro zone in its present form, as it may lead to a Greek exit and maybe more exits in coming months and years. Current Euro zone member states that stay with the Euro will be only a little worse off, if at all. Leavers may suffer disruption -- even chaos -- for a while, but prosper in the longer run. But there seems to be a strong desire to keep the Euro zone intact, on the part of Draghi, Merkel, and others. So I would expect them to fight off calls for renegotiation as long as possible, but eventually find some way of lowering the burden. The more vigorously the ECB can carry out QE, the quicker Euro zone inflation can be raised to 2% and preferably more, the better the chance that inflation and real growth will nibble away at public debt and lessen these problems.
Morten Ravn's picture Morten Ravn University College London Neither agree nor disagree Very confident
I think this question can only be answered by being more specific and by conditioning on events. If Greece says "renegotiation or we leave the Euro", refusal may indeed produce further uncertainties in the Eurozone in particular in the event that Greece manages to use the exchange rate to stabilize the economy. I see this as unlikely though - at least for the foreseeable future - as a euro exit would probably generate a Greek banking crisis. In this case, a Greek exit may discipline other Eurozone countries. On the other hand, if an adjustment of the Greek agreement can prevent the Greek crisis from escalating, then refusal to reconsider it would carry risks. So I think one needs to look at the particulars of the discussion as it progresses to make a firm evaluation of risks.
Richard Portes's picture Richard Portes London Business School and CEPR Strongly Agree Very confident
The charade has run much too long already. Greek debt was unsustainable in spring 2010, the bailout just added more, the leadup to default brought a huge transfer of private creditors' holdings into the official sector, so the big haircuts in the restructuring of spring 2012 still left a clearly unsustainable debt burden. 'Extend and pretend', even with lower interest rates, is not a serious long-term policy and leaves Greece with a continuing debt overhang that deters investment and hinders growth. So renegotiation and debt forgiveness along Paris Club lines is necessary. Greece is small, to be sure, so continuing depression there has only minor repercussions, but it keeps very much alive the risk of Grexit. And Grexit would be a disaster for Greece as well as a major risk for the continued existence of the eurozone - and hence for its 'economic well-being'.
Mike Elsby's picture Mike Elsby University of Edinburgh Disagree Not confident
Angus Armstrong's picture Angus Armstrong National Institute of Economic and Social Research Agree Confident
I do not beleive Greece can meet all of its commitments. Therefore, a refusal to re-negotiate will increase the size of the problem and the risk of real political unrest. I think a fair assessment of the other countries is possible and whether or not they can adjust. Of course there is moral hazard all over this. However, after a certain point the trade-off is likely to show that the cost of the moral hazard is less than the consequences of denying the size of the problem.
Jim Malley's picture Jim Malley University of Glasgow Disagree Confident
Without a doubt the short-term risks for economic prosperity in the Eurozone would increase in the face of a Greek default and exit from the Euro. However, relative to 2010, the degree of systemic risk associated with this scenario has been substantially reduced since most of this debt is no longer held by private banks. It has been “absorbed” by the ECB and other EU funds. Moreover, a number of support mechanisms have been put in place with the aim of preserving financial stability.
Richard Dennis's picture Richard Dennis University of Glasgow Disagree Confident
Simon Wren-Lewis's picture Simon Wren-Lewis University of Oxford Strongly Agree Extremely confident
It would be a disaster. The Eurozone (and the IMF) made a number of serious mistakes during the 2010-12 crisis. Now is their chance to partly undo those mistakes. A Syriza victory would be the best thing to happen in the Eurozone for some time.
Charles Nolan's picture Charles Nolan University of Glasgow Disagree Confident
John VanReenen's picture John VanReenen London School of Economics Disagree Confident
Greece simply cannot get out of it's crisis simply though the levels of austerity currently demanded. Some renegotiation will simply be a recognition of reality. There is already too much emphasis on consolidation in the Eurozone when what is needed is a combined fiscal and monetary reflation (alongside structural reform).
Ray Barrell's picture Ray Barrell Brunel University London Disagree Not confident
It should be possible to isolate the Greek problem, and the ECB should be able to take precautions to cover exit risk for other government bond holders. Greek exit from the Euro Area may strengthen the Area as it would become clear that the fiscal rules are binding. Conceding to the Greeks over debt forgiveness may encourage other countries to play the same strategy, and this would weaken the Euro Area.However, it would be better for the Greeks if they stayed in, and some concessions (short of debt restructuring) should be considered. It may be possible to slow the austerity programme noticeably in response to clear and binding commitments to move the Greek economy toward a more competitive market based model. There are also asset sale options and wealth tax possibilities that can be explored to reduce the debt burden.
Paul De Grauwe's picture Paul De Grauwe London School of Economics Strongly Agree Very confident
Sir Charles Bean's picture Sir Charles Bean London School of Economics Disagree Not confident
Francesco Caselli's picture Francesco Caselli London School of Economics Agree Not confident
Michael Wickens's picture Michael Wickens Cardiff Business School & University of York Disagree Confident
Germany clearly thinks that the economic well-being of the eurozone is in allowing countries to continue to run large fiscal deficits. This must be correct in the long term. In the short term the danger has been that holders of Greek debt would suffer large losses. This has changed as there has been sufficient time for holders of Greek debt to rebalance portfolios should they have wished to do so. Consequently, Greece can be allowed by the eurozone to do what is best for Greece.
Sean Holly's picture Sean Holly Cambridge University Disagree Confident
Joseph Pearlman's picture Joseph Pearlman City University London Disagree Confident
Jonathan Portes's picture Jonathan Portes KIng's College, London Strongly Agree Very confident
The real danger to the economic and political wellbeing (and indeed existence) of the eurozone is continuation of current misguided fiscal and monetary policies; that is, imposing aggressive fiscal consolidation on deeply depressed economies at the same time as allowing inflation to remain persistently far below target and close to zero. Refusal to negotiate seriously with Syriza won't directly make matters much worse, but would be a signal that the people who got us into this current mess - policymakers in Brussels and Berlin - still don't understand just how much damage they have done and are doing. Similarly, renegotiating the Greek programme with Syriza won't in itself boost the eurozone economy much, and won't avoid the need for a new Greek government to undertake serious, genuine reform, but would be a belated signal that finally a more sensible, pragmatic approach is being adopted by eurozone policymakers.
Christopher Martin's picture Christopher Martin University of Bath Disagree Not confident
Greece required a bit of austerity and a lot of structural reform. It got far too much austerity and too little genuine reform.There should be a general relaxation of austerity in the Eurozone, so increased government expenditure can be used to give a badly needed boost to aggregate demand. An economic boost to the Eurozone would help Greece more than renegotiation of the bailouts.
Jagjit Chadha's picture Jagjit Chadha National Institute of Economic and Social Research Disagree Very confident
I suspect that unwinding agreements may run more of a risk in unwinding the Euro Area than allowing re-negotiation. The urgent need is for the ECB to work out how to implement a credible QE programme that will support EZ bond prices and perhaps engineer a further depreciation in the Euro. The re-opening of the the Greek settlement and with it a signal for other agreements to be revamped would threaten an early agreement on Euro Wide unconventional policy.
Silvana Tenreyro's picture Silvana Tenreyro London School of Economics Strongly Agree Very confident
Costas Milas's picture Costas Milas University of Liverpool Disagree Confident
I am confident to some extent. Whatever academics or policy-makers say, it is difficult to evaluate the potential risks of a fallout between Greece and Eurozone's core. This is because, if a Grexit takes place, and if Greece, in sharp contrast to expectations, does better (in the medium term) outside the Euro, others might be tempted to follow. This will definitely undermine irreversibly the whole Euro project.
Marco Bassetto's picture Marco Bassetto University College London Neither agree nor disagree Extremely confident
Both courses of actions (agreeing or refusing to renegotiate) carry serious economic risks. In offering better terms to Syriza than were offered to other Greek parties, Europe would encourage the growth of parties similar to Syriza across Europe. Whether this is desirable is an eminently political decision.
Tony Yates's picture Tony Yates University of Birmingham Agree Confident
Yes. Though there are risks to renegotiating too. That could escalate the fiscal conflct between Spain, Italy and North Europe. There are good outcomes: that such pressure leads to the view that overall in Europe there should be strong fiscal stimulus in the short term. But there are bad outcomes too.