Alberto Mingardi  

How electorates react to defaults

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There are basically three reasons European leaders are still desperately trying to avoid Grexit.

First, the fact that a nation leaving the currency union is perceived as a leap into the dark. Many consider probable that higher volatility and insecurity will follow. So, reason one is: avoid financial turmoil.

Second, Grexit would mean Greece also leaving the European Union. This would be a serious blow for the unifying ideology of the European ruling classes, which is: the European Union is our destiny and nothing should be allowed to stop the march towards a single political entity. So, reason two is: avoid the collapse of our ideological world.

Third, Grexit may bring the publics in other countries to increasingly energetic protests against fiscal consolidation measures, thus bringing votes to parties that may displace incumbent ones. Reason three is: avoid a political domino effect.

On this third point, I'd recommend this article by Jeffrey Chwieroth, Cohen R. Simpson, and Andrew Walter on VoxEU. Chwieroth, Simpson and Walter suggest that "a Greek default would be more likely to lower rather than to raise the political incentives for other European governments to default, contrary to the expectations of many commentators and political leaders."

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CATEGORIES: Eurozone crisis

COMMENTS (5 to date)
Thomas writes:

I remain puzzled by why so many people believe that a Grexit is necessary / unavoidable / would solve the problem, while simultaneously seeing no reason to argue for a RustBeltExit (for example) or a RhodExit. And before you answer "Federal bailouts" consider the countries that peg to the dollar - indeed, a dollar peg was part of the formula Brazil used to beat inflation. There's nothing wrong with having a stable currency, and there's a lot to be said for it.

_NL writes:

Is it so clear that Grexit applies to the EU and not just the Eurozone? I thought I saw commentary comparing Brexit from the EU with Grexit from the Eurozone.

Of course, Brexit would probably be followed by some sort of EFTA solution like Norway or Switzerland. So that's just taking a step backward within Europe without exiting the larger superstructure or common market. Even Farage/UKIP, with a reputation staked on UK leaving the EU, supports something like EFTA to retain some access to the Euro market.

Despite the Swiss immigration referendum (...Swexit?), it seems unlikely they'll exit EFTA or abrogate the free movement of workers.

Which I figure is good news. Even the anti-European position ultimately will have to accept some formulation of the common market and the four freedoms. And those are the decent parts of the European project.

Mr. Econotarian writes:

I'm not even sure there can be a Grexit.

How can other countries tell Greece that it can't use the Euro as a currency (see Panama, El Salvador, and Ecuador with the US dollar)?

Why would Greece want to stop using the Euro? Their labor costs have already devalued (didn't help much). A de-Eurozation would only have horrible effects on the banks.

The only reason Greece would want to Drachma-ize is to come up with lots of cash to hand out at the price of massive inflation. But Greece claims it is pretty near having a primary surplus, so why would they stop using the Euro?

Moreover, no one in Europe wants to be the one "who lost Greece," like no US President wanted to "loose Vietnam". This could drag on for a long time, regardless of Greek defaults.

Yes, the next bond issue after gigantic default might be expensive or perhaps not available, but if Greece is close enough to budget balance, maybe it doesn't matter?

(Oh yes, there will be some sucker to buy Greek bonds after the big default, at some price. Maybe they won't default next time?)

Miguel Madeira writes:

This post seems an example of the tendency to talk about "Greece defaulting" and "Greece leaving the euro" as if we aere talking about the same thing.

Tom Davies writes:

Miguel, and also conflating leaving the Euro with leaving the EU.

Does default mean leaving the Euro?
Does leaving the Euro mean leaving the EU?

Surely the answer to the second is no, and I've read plenty of arguments that the answer to the first is also no.

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