What will be the GrExit price?

After a few days of intense discussions the new Greek government reached an agreement with creditors by the Eurogroup earlier last week, which includes a number of immediate reforms and expansion of the financial aid program for four months. But apart from the collective sigh of relief in Europe because of the compromise, still remains a need to perform additional difficult negotiations for a new utility that must be presented by the end of June. The costs of GrExit price according to different options that would be needed if no agreement is reached, a critical parameter in all negotiations, which affects the behavior of the protagonists and thus the outcome of the negotiations themselves. In this case it comes to the price of the exit of Greece from the Eurozone, so called Grexit – a prospect that is widely discussed in the media during recent negotiations and was associated with significant speculation about the relationship of the various stakeholders, in particular the Greek and the German government, wrote in a commentary for Project Syndicate Jean Pisani-Ferry, professor at the Hertie School of Governance in Berlin, Chief Commissioner for Policy Planning of the Government in Paris and former Director of the Institute “Bruegel” in Brussels.

From the viewpoint of a Greece exit from the euro area will lead to considerable difficulties, which explains why the country this option has very little support among the population. But what about the cost of a Grexit for the rest of the Eurozone? Since this issue was first raised in the period 2011-2012 on the theme, there are two opposing views.

One option is the so-called Domino theory suggests that in this case the markets will immediately ask what should be next. The fate of many other countries will be questioned, as happened during the Asian currency crisis of 1997-98 or the European debt crisis in the period 2010 – 2012 result can be collapse of the Eurozone.

The other point of view – often called theory of ballast assumed that the Eurozone will actually be strengthened by the withdrawal of Greece. Monetary union will get rid of a recurring problem, and the decision of the Eurozone to allow Greece to leave or to force it to do so, it would be beneficial for credibility. No country, least so say the proponents of this theory would not dare already to blackmail their partners. In 2012, the domino theory seemed realistic enough to make creditor countries to renounce the possibility of Grexit. After all summer, German Chancellor Angela Merkel thinking and weighing the possibilities she traveled to Athens and expressed their “hopes and wishes” for Athens to remain in the Eurozone.

Today the situation is different. Market tensions decreased, Ireland and Portugal are no longer dependent on utilities, euro area financial system is reinforced by the decision to establish a banking union, and there are tools for crisis management. The probability of a Grexit cause chain reaction today is significantly less. From all this it does not follow that the release of the Athens area will not pose any danger. There are three reasons why a possible Grexit could affect still significantly negative impact on the European Monetary Union.

First one leaving the Union of Greece would invalidate the tacit assumption that participation in the euro area is irrevocable. It is true that history teaches us that there is no irrevocable commitments. Jens Nordvig from investment bank Nomura Securities says that since the beginning of the nineteenth century had collapsed 67 monetary unions. Each exit from the euro area will increase the perception of the likelihood of other countries may follow suit sooner or later.

Second one leaving Athens will force water to the mill of those who actually adopt the euro only as exaggerated agreement to maintain a fixed exchange rate, not a real currency. Confidence in the dollar due to the fact that there is no difference between a dollar in the bank in Boston and one dollar in a bank in San Francisco. But since the crisis in 2010-2012, this principle applies not quite have the euro.

Financial fragmentation has diminished, but not disappeared, and that means a loan for a small or medium enterprise in Austria shall not be remunerated in the same way that bears interest loan for the same kind of company across the border with Italy. Critics have specialized in this situation associated risk in the context of a possible collapse of the Eurozone.

Given the initiatives that have been undertaken in recent years, the current situation does not endorse the end of the euro area. However, it would be a mistake to assume that full confidence is restored. Europe’s citizens would certainly begun to see the euro with new eyes after leaving (or exclusion) of a Eurozone country. The question of where the property one euro will become increasingly relevant. Local and foreign investors will scrutinize whether the value of their investment will be affected by the eventual collapse of the monetary union. Governments will be more suspicious of the risks that potentially expose them to their partners. Doubt can not be completely replaced and will take the place of faith in the irreversibility of the euro area.

Finally, a possible exit from the Eurozone would force European policymakers to formalize their previously nerazpisani rules for separation. Beyond the general principles of international law – for example, the decision in what currency will be valued assets of a company after the breakup of the Eurozone, at least for now there are no agreed rules. A one Grexit will force the euro zone to establish such rules and therefore it will become clear exactly how much it cost one euro, depending on where and by whom and in what form has it. This will make it not only possible, but also much more specific a possible risk of disintegration of the Eurozone.

All this does not mean that Eurozone members must be prepared to keep Greece in the currency union at any cost. But they also should not have any illusions: a completely carefree Grexit can not exist, says Jean Pisani-Ferry.