An exit by Greece would test the eurozone

 If Greece exits the eurozone, there is some question as to whether it could produce its own currency quickly.
If Greece exits the eurozone, there is some question as to whether it could produce its own currency quickly.

PARIS — The leaders of the Group of 8, emphasizing growth as well as fiscal discipline at their meeting on Saturday, made a strong plea for Greece to stay in the eurozone and the European Union.

And no wonder.

Despite efforts at official reassurance, no one really knows the consequences of a Greek exit from the eurozone, or how rapidly big countries like Spain and Italy, and their banks, would feel the effects.


The political and financial costs would represent a fundamental challenge to the EU and its credibility, and the point of no return may be approaching faster than anyone anticipated.

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‘’Anyone who thinks a Greek departure would be cleansing and not cause systemic contagion is deluding themselves,’’ said Simon Tilford, chief economist at the Center for European Reform in London. ‘‘Already we’ve seen a sharp increase in spreads and the beginnings of capital flight in other struggling eurozone economies,’’ with the risk of a full-blown banking crisis in Spain, where 16 banks and four regions have just been downgraded by Moody’s Investor Service.

The stresses on the system are now so great that to contain panic and contagion, while protecting countries too big to bail out, would require political choices and financial commitments that many countries, including Germany, Finland, and the Netherlands, seem unlikely to make — the prime reason they would prefer that Greece remain.

The problems of Greece and Spain are complicated enough, but the pressure on eurozone leaders to resolve the evident contradictions in the common currency and to move faster toward more political and fiscal integration is rising by the day. The election of Francois Hollande, a committed European, as president of France may help push Berlin toward more collective responsibility for the eurozone, but Chancellor Angela Merkel of Germany, with her own domestic political concerns, has rarely been willing to move quickly or boldly. While Greece is only a small part of the eurozone, its exit is likely to be more expensive and complicated than figuring out a way for it to remain. That would be subject, of course, to Greek voters producing a functioning government in new parliamentary elections on June 17.

Merkel is now talking of special stimulus programs for Greece to help ease the pain of austerity, but any new deal with Athens will have to be negotiated with a real government, and there is no guarantee that the next elections will produce a working majority. They might even lead to a governing coalition that is hostile to the loan agreement that Germany has insisted is not open to significant renegotiation.


In the interim, as European officials warn Greek voters about the consequences of an exit, a continuing run on Greek banks — a panic that threatened to spread to Spain last week — could force the European Central Bank to jettison Greece anyway by refusing to replace the euros being moved from the country for lack of proper collateral.

European finance officials are trying to be reassuring about a Greek exit, saying that most Greek debt is now held by nations, and that better firewalls exist to protect the rest of the eurozone, so the impact on the world economy would be manageable. But a Greek departure is likely to be seen as the beginning of the end for the whole eurozone project, a major accomplishment in the postwar construction of a Europe ‘‘whole and at peace.’’

‘‘A Greek exit should be avoided; it will be very disruptive and disorderly, and not just for the Greeks,’’ said Nicolas Veron, an economist at Bruegel, a research and policy institute, in Brussels.

Daniela Schwarzer, an EU expert at the German Institute for International and Security Affairs, said that a Greek default, within the EU or without, would be costly, requiring a write-down of much of the debt held by European states and the European Central Bank, which member states would then have to recapitalize. But that is just the financial expense, which is the least of it.

More important is “to avoid the first example of European Union membership not being forever,’’ Schwarzer said. ‘‘If that taboo is broken, I think there will be considerable contagion,’’ including unsustainable spikes in the bond market; further runs on the banks in Spain, Portugal and Italy; and social and political unrest beyond Greece.


Experts believe that damage could be limited, but only by bold political steps toward more centralization of power in the eurozone that may prove too hard for politicians to take.

A Greek departure would have to be accompanied by ‘‘a package of substantive reforms of how the EU is run, but a move to some measure of debt mutualization, of pan-eurozone bank protection and regulation and a commitment to broaden the mandate of the European Central Bank,’’ Tilford said.

The bank must be able to act as a lender of last resort, as the Federal Reserve does in the United States, to stop ‘‘this poisonous interplay between government debt and the banking sector,’’ he said.

Veron suggested that leaders should simply announce that the European bailout funds would guarantee all national bank deposit insurance plans — that Europe would stand behind all eurozone deposits.

But such changes would mean a major political leap for Merkel and other Northern European leaders and a redrawing of the European Central Bank charter. It would imply that funds from countries with healthy surpluses would flow in some measure to help the weaker ones with deficits.

‘’If Greece goes, there would have to be a clear signal from Germany that it would do everything necessary to keep Spain, and that the ECB will do all it must to help Spanish banks,’’ said Charles Grant, director of the Center for European Reform.