Is Euro Zone Cohesion at Risk?(Blog7)

The win out of the leftist party Syriza in the Greek election seems to intensify the disturbance of Eurozone’s break up. As described in a Jan, 25 WSJ’s article written by Simon Nixon: “Over the coming weeks, it must strike a deal with a new radical left-wing government in Greece that it will likely find even more unpalatable – or watch Greece leave the eurozone with potentially disastrous consequences for the whole currency bloc.” (http://www.wsj.com/articles/greek-election-tests-eurozone-cohesion-1422222267?tesla=y&mod=WSJ_hp_LEFTTopStories)

However, personally I think the situation is quite clear for Greece. Either quit the euro zone and start a new currency, or reach a compromise in terms of the fiscal austerity plan with ECB, EU and IMF, and keep its membership in the euro zone. ECB president Mario Draghi once said: “a monetary union of 19 sovereign countries can only work if the citizens of each member state believe that they are better off inside the euro zone than out.” It is just like in a game theory, and Greece’s leave is a threat. Whether the threat will works depends on whether it is a credible threat. And whether it could becomes a credible threat depends on who will be hit harder once Greece quit the euro zone.

From Greece’s prospect:

Once leaving the euro zone, it will faces at least following problems:

1.The new government has to issue new currency, which will require a lot of time and effort.

2. Due to Greece’ debt problem, the value of the new currency would be depreciate, which will causes a series consequences such as deposit flight and inflation in domestic, and losing credit for external.

There are also some goodness if Greece leave the euro zone. The first and the most important is that it can get rid of its fiscal austerity plan forced by EU and make its local financial and fiscal policies more flexible.

On the other hand, the advantage of staying in euro is that they can still get aid from its neighbors as well as all the membership advantages such as free trade and no currency exchange fee. While the disadvantages of the staying is that Greece will still have to be under the pressure and restrictions, as well as suffering the gloomy prospective of euro.

From Other EU countries’ prospect:

Though different countries hold different idea, but Greece’s leave is definitely a bed idea. First of all, the value of bond or asset they hold from Greece would shrink dramatically due to the depreciation. They would also lose the benefit of no-barrier Greece market. More importantly, the exit of Greece would lead a chaos on Euro Union which is seen as a backward of the Union.

And I am afraid that the only benefit other EU countries could get from Greece’s exit would be an increase in their “safe-haven asset” or hedge fund.

I could highly simplify the problem into the following game theory table:

Other EU    ,      Greece Stay Quit
Stay     (8,10)    (-1, 1)
Quit Highly impossible Highly impossible

And if Greece is rational enough, it will not take the Quit action since it will hit the Union and itself both though Union would be hit harder. By the way, the number in the above table would change depends on the compromise conditions the Union and Greece reach finally. As well as whether Greece is a crazy man if it want to spare no effort to hurt the Euro Union. But personally I don’t think Greece will take extreme move and leave the Euro zone.

 

Sources:

http://wallstreetcn.com/node/213554

Leave a Reply