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Risk of Greek euro exit has risen but is still small

Wednesday, January 21, 2015

Subject

The prospects for Greek departure from the euro-area.

Significance

Since the political crisis of 2012, when the term 'Grexit' -- Greek exit from the euro -- was coined, the risk of such an eventuality has increased. The Greek economy would suffer enormous damage, while the euro-area would incur significant political and economic blows, including a contraction estimated at 1.5% of euro-area GDP, at the very least -- greater than the current contribution of the Greek economy. For Greece, a 20% contraction and a 50% erosion of average per capita income in euro terms are forecast. The new currency would be unlikely to promote exports, because of the high cost of imported machinery and intermediate goods, and the tourism industry would also be exposed to high inputs.

Impacts

  • Grexit would profoundly alter the economic and political profile of Greece, isolating it and shutting out external investment.
  • Grexit would highlight persistent structural problems of Europe's monetary union, throwing doubt on its long-term soundness and viability.
  • Membership reversibility implicitly reintroduces the notion of currency risk for the euro-area's most vulnerable peripheral countries.
  • It would also destabilise such neighbours as Albania, Romania, Bulgaria and Serbia, where Greek banks have significant presence.
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