Analysis: ‘Grexit’ Isn’t the Scary Prospect It Once Was

Many of eurozone’s powers-that-be now believe any contagion could be contained

The Wall Street Journal

By MATTHEW DALTON

June 25, 2015 4:03 p.m. ET

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When Greek voters were threatening to reject the country’s bailout program in June 2012 elections, skepticism rose in the German government about whether keeping Greece in the eurozone was worth the trouble—and the money.

So eurozone officials made a trip to Berlin to brief German Chancellor Angela Merkel and Finance Minister Wolfgang Schäuble on a highly sensitive eurozone analysis of the price tag attached to cutting Greece loose from the currency bloc.

The hair-raising finding, delivered in a PowerPoint presentation, was that the cost of a Greek exit was higher by “a big multiple” than the cost of keeping Greece in, said a eurozone official who has seen the analysis. The presentation made Berlin significantly more concerned about Greece leaving the currency bloc, eurozone officials said.

Three years later, the calculations have changed. A Greek exit from the eurozone—dubbed “Grexit”—would be costly and messy, but the eurozone’s powers-that-be now believe the turmoil could be contained to Greece. The mention of Grexit no longer strikes terror into the hearts of finance ministers, who talk openly about it.

“We should do everything we can to keep Greece in the eurozone, but to be honest we cannot do that at all cost,” said Finnish Finance Minister Alexander Stubb at a meeting of eurozone finance ministers in Luxembourg last week.

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Officials are, however, pondering the less-tangible costs of letting Greece go: Would doing so undermine the project of European integration? Could it fuel euroskeptic political forces in countries like the U.K. and the Netherlands? And could it do long-run damage to the currency area?

“They could lose something, this sense of the irreversibility of the euro, and they would never recover it,” said Erik Jones, professor of European studies at the Johns Hopkins School of Advanced International Studies.

As Greece and its creditors have been unable to end a monthslong standoff over the country’s bailout, a sentiment of weariness has been growing in eurozone capitals. Irritation, anger and simple exhaustion have left some officials wondering whether the opportunity costs of devoting all this time to Greece are greater than the actual costs of letting Greece go.

A flicker of hope for a deal after Athens’s compromise proposal at the beginning of this week was quickly extinguished, when Germany, the International Monetary Fund and others said it doesn’t go far enough.

The eurozone has grown more comfortable with Grexit because some of the damage that would result has in fact already happened. Much foreign private capital has fled Greece: bank deposits, interbank loans and loans to Greek corporations from the rest of the eurozone have all fallen sharply over the past three years.

Eurozone governments, through their loans to Athens and via the European Central Bank, have taken on some of the exposure to Greece that was once held by the private sector; some of that exposure has simply disappeared as the Greek economy has shrunk. Economists note that while a Greek default and exit would mean the eurozone wouldn’t get its money back, eurozone governments can better cope with the consequences of a default than banks and companies.

“Is it a systemic event like Lehman Brothers? No,” said Alberto Gallo, head of macro credit research at the Royal Bank of Scotland, referring to the investment bank’s bankruptcy in 2008 that accelerated the financial crisis. “Because there’s very little direct exposure to Greek banks in the end.”

The indirect effects of Grexit are harder to quantify. When eurozone officials presented their terrifying PowerPoint presentation to Ms. Merkel and Mr. Schäuble in 2012, yields on Italian and Spanish government debt were spiking. In the briefings, Jörg Asmussen, then a member of the ECB’s executive board, and Thomas Wieser, the Austrian official who chairs the working group that prepares finance ministers’ meetings, told the German leaders that containing the contagion resulting from Grexit would be a big part of the price tag.

Now calm largely prevails in the markets for Spanish and Italian debt, despite the Greek drama. The eurozone has its bailout fund, the European Stability Mechanism, and, more important, the pledge from ECB President Mario Draghi to do “whatever it takes” to save the euro. Contagion, officials and finance ministers believe, won’t be a big problem.

A more frightening prospect for champions of the euro, paradoxically, is what if Grexit actually works? If Greece leaves, defaults on its debt, and in a year or two is growing strongly again with drachmas in people’s wallets, anti-euro political movements across the currency bloc might gain followers, said Jonathan Loynes, chief European economist at Capital Economics in London.

“Then there’s political pressure in places like Spain to go down the same route,” Mr. Loynes said.

—Gabriele Steinhauser contributed to this article.

Write to Matthew Dalton at Matthew.Dalton@wsj.com