The idea of a Greek or Spanish exit from the euro zone, once viewed as an extreme worst-case scenario given credence only by the most bearish, is increasingly becoming part of the mainstream.
While most policymakers, analysts and economists still shudder at the thought of a Greek exit – or Grexit as it has been called – more and more are running through scenarios for this situation. Greece’s elections on June 17 are too close to call, and the election of an could hasten its departure from the single currency.
The immediate concern for the markets is how the euro would be affected in currency markets, and how that would affect the core countries left in the currency.
The euro without peripheral Southern European countries would rise to around 1.50/1.60 against the dollar, according to Neil Dwane, chief investment officer, Europe, at RCM. He argued that Germany would be able to deal with this hike in the value of the currency.
“If they (the Germans) thought we would get that, they would simply rearrange their business on a two year plan to be more competitive, take lower wages for a while. That’s why they don’t see why Spain and Greece can’t get on with it,” he told CNBC’s “Squawk Box Europe.”
The burden of trying to boost markets would probably be taken on by the European Central Bank, which has tried to leave the politicians to it in recent weeks by keeping interest rates on hold and putting off further intervention. The central bank has already pumped more than 1 trillion euros ($1.25 trillion) worth of cheap loans via a long-term refinancing operation into the continent’s banking system.
An exit could also spur euro zone politicians on to take more decisive actions to foster closer ties between the remaining countries, through more fiscal integration or even the much talked-of Eurobonds – debt issued by the euro zone as a whole.
“The immediate fire-fighting in the financial markets would again fall to the ECB. But with the rubicon of exit having been crossed, the euro zone’s political elite would surely have to take stronger action to ensure its survival,” the euro zone & economic strategy team at ING wrote in a research note.
“ is prone to talk of the process of European integration being a marathon: the Greek saga could turn it into a sprint.”
These actions could include further action by euro zone governments to shore up bond markets and banks in the remaining periphery. This could mean greater integration of euro zone banks, via methods such as joint deposit guarantees, supervision and resolution schemes.
“The net result for the euro would be an insulated periphery, and a clear warning to those contemplating following Greece out of the euro zone that it could be potentially damaging,” David Bloom, global head of currency strategy at HSBC and his team wrote in a research note.
For Greece (or any other country which crashed out), the first months outside the euro could be very difficult.
“The initial impact of exit is likely to be very negative as the adjustment process gets underway,” HSBC analysts argued.
Greece is already struggling with recession and high unemployment – more than half its youth of employable age don’t have a job – and removal from the anchor of the single currency could add to its woes.
Some argue that in the medium term, Greece would be helped by currency devaluation, if the cost of its exports and labor also fall. Yet the majority of Greek people want to stay in the currency, according to opinion polls.
Former Greek finance minister Stefanos Manos warned that the country risked “impoverishment” from a euro exit on CNBC Thursday.
Written by Catherine Boyle, CNBC. Twitter: @catboyle01