The Euro and the Battle of Ideas by unknow

Author:unknow
Language: eng
Format: epub
Tags: Business & Economics, Money & Monetary Policy, Political Science, Public Policy, Economic Policy, Public Finance
ISBN: 9781400883332
Google: Z4j8CwAAQBAJ
Publisher: Princeton University Press
Published: 2016-08-03T22:00:00+00:00

Grexit Threats

The exit considerations added additional drama to the euro crisis, with two episodes taking center stage: the Grexit drama of 2012 and the Graccident fears of 2015.

Financial Contagion Fear during the 2012 Grexit Threat

In the summer of 2012, fears of a Greek exit—quickly dubbed “Grexit”—from the euro area reached new heights. Both France and the ECB saw the near certainty of large contagion spillover effects following an exit: there would be runs on Italian and Spanish banks as depositors feared that their assets would be converted overnight into a new and depreciating currency. The impact would be much worse than that of Deauville. Germans, in contrast, liked to repeat a rather hackneyed German chiasmus: that an end with terror was better than terror without end. These positions illustrate very well the fundamental economic trade-off described above: that of ex post multiple equilibria considerations versus ex ante discipline. Was Greece an infected leg that needed to be cut off to save the patient, or would the operation itself be fatal? Ultimately, the decision as to whether Greece should stay in the euro area was to be made in Berlin.

Initially, the German stance seemed to be very much open to a Grexit. Since early 2012, politicians and even government ministers such as Wolfgang Schäuble had been dropping hints that the crisis could be more easily solved if Greece were to exit. Indeed, German proponents of a Greek exit could draw on remarks coming from the Keynesian camp (especially from various US academics) that a Greek exit could be an attractive instrument to restore competitiveness. By June, according to Reuters, euro-area ministers were told to prepare for contingencies. On June 15, 2012, just before a parliamentary election in which radical opponents of the euro looked as if they might do well, Greeks withdrew over €3 billion from their bank accounts. European Commission and IMF officials worked secretly on a “Plan Z.”237 The Bundesbank stated publicly that a Greek exit would be better than a Greek default: “The challenge this would create for the euro area and Germany would be considerable but manageable. … By contrast, a significant dilution of existing agreements would damage confidence in all euro area agreements and treaties … calling into question the institutional status quo.”238

Over the summer, however, the tide began to turn. Chancellor Merkel had throughout been closely guarded about her own stance, but, over time, it became clearer that, thanks to efforts from Commission officials and market participants, she had been convinced that a Greek exit would be too dangerous. Indeed, as Grexit fears increased, other peripheral spreads started to shoot up, giving credence to the contagion fears. Pressure from the United States also contributed: the Obama administration feared that a new financial crisis would sink its chances of reelection, and so Merkel was pressured to do away with any potential Grexit plans. In fact, at the end of July 2012, US treasury secretary Tim Geithner visited Schäuble at a holiday residence on the North Sea island of Sylt to press the case.

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