Greece Will Not Willingly Exit The Eurozone

by: George Liu

Sunday is the day of nationwide Greek parliamentary elections, and as the pivotal day nears, anxiety and tension are starting to build. At stake in the elections is, from the viewpoint of Greeks, the future of the Greek economy. On the other hand, many outside observers paint the election as a pivotal crossroads for the Greek populace to determine their country's future relationship with the Eurozone. Observers point to the possibility of Greece leaving the Eurozone and abandoning the euro in favor of the drachma. Yet, there is no chance of Greece willingly exiting the Eurozone. The main danger stemming from the upcoming election is its potential to set the stage for conflict between the policy of the winning party and the demands of the troika, which is comprised of the European Commission, the International Monetary Fund, and the European Central Bank.

Fears of a Greek exit have materialized into significant capital outflows hitting Greek banks. In fact, Greece's big banks have seen,acccording to Reuters, combined daily deposit outflows of between 500 and 800 million euros over the past few days, outflows which have been gaining pace as the election nears. Meanwhile, smaller and medium sized banks are seeing combined daily deposit outflows at 10-30 million euros. From a broader perspective, nearly one-third of deposits have already left Greek banks over the past three years. The huge withdrawal of funds from Greece's banks is largely a result of fears that, if Greece abandons the euro and reverts to the drachma, there is a possibility of forced conversions of euros in Greek banks to drachmas at substantially devalued levels. In fact, according to the National Bank of Greece (NBG), a return to the drachma would lead to a devaluation of the new currency by up to 65 percent.

Yet, the fears of Greece leaving the Eurozone and abandoning the euro are largely unfounded. For one, many Greeks are cognizant of the ramifications of a Greek exit from the euro. Recent opinion polls show that more than 80 percent of Greeks want to keep the country in the euro. The flames of Greek fear of a Eurozone exit have been fueled in part by the National Bank of Greece's projection that, if Greece were to revert to the drachma, "incomes would shrink by 55 percent, GDP would plunge by 22 percent, and unemployment would rise to 34 percent." Moreover, Alexis Tsipras, the head of the leading party that many consider to be most likely to initiate a Greek withdrawal from the Eurozone, has stated publicly that he will keep Greece in the Eurozone. As the candidate for the SYRIZA party, Tsipras has even gone so far as to publish an article on Financial Times proclaiming "I will keep Greece in the Eurozone."

What we need to fear is a potential renegotiation of the bailout package. The troika has already bailed out Greece twice with loans of at least 100 billion euros each, but has in demanded strict austerity measures that have angered the Greek populace. One of the main promises of Tsipras and the SYRIZA is to call for a renegotiation of the bailout terms with the troika, while Eurozone leaders have all maintained that, for Greece to continue to receive aid, it must adhere to previous bailout agreements and continue to implement painful austerity measures. So if Tsipras is elected, his policies might set the stage for a potential showdown with the troika, one which may lead to brinksmanship and saber-rattling until one group capitulates. Tsipras will be reluctant to back down from his major campaign promise, while the troika may not allow renegotiation, believing that renegotiation could set a precedent for other countries who have also received bailout packages, such as Ireland and Portugal, to demand renegotiation of aid on more favorable terms.

In the very worst scenario, this showdown between Tsipras and the troika will continue without compromise and lead to Greece running out of funds, which would not only be extremely detrimental to world markets, but would also force Greece to abandon the euro out of necessity and revert to the drachma. However, despite the rhetoric, this result of the showdown is unlikely: both sides know very well the repercussions of not compromising and will eventually be forced to find a middle ground. However, the act of prolonging the showdown itself will detrimental to Greece: German newspaper Die Zeit recently reported that Greece may need a third bailout soon, as it is falling behind on key reform measures.

The danger of the upcoming Greek elections lies not within the decision of the Greek populace to either leave or stay in the Eurozone, but within the future policies that will be implemented by the victorious party. If anything, a Greek exit will only happen out of necessity, not out of choice.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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