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What “Grexit” Has Shown Us

Via LinkedIn : Linguistic fact: belabor a story or saying enough and it will soon take on a mind of its own.

Thanks to the world’s non-stop focus on the potential of a Greek exit from the European Monetary Union, we’ve all been lucky enough to add a new word to our vocabulary. After the recent election of Alexis Tsipras and the Syriza party into power in Greece, the fret around a “Grexit” from the euro is at an all time fever pitch. While all eyes remain on Tsipras and his threats to leave the EMU, the fundamental issue with the Union has once again been thrust into the spotlight. The problem with the EU is, and has always been, the separation of economic and political union.

To be clear, immediate financial loss occurring from a Grexit would be underwhelming. Euro-bearing countries’ direct exposure to Greece is only about 3.5% of the euro-area’s GDP. In addition, the major banks of Europe have diminished their exposure after cutting positions in Greek bonds and other investments. To get a sense of how little EU banks have to worry about, understand that Credit Agricole has the largest exposure at just 3.5 billion euros in what are mostly corporate loans. Even in the case where a small percentage of exposed assets are recovered, the effect on the EMU would certainly be manageable.

As many analysts have come to conclude, the largest threat that comes from a Grexit is the potential for political contagion. A recessionary atmosphere opened the door for anti-EU parties to rally political popularity on the backs of promising less fiscal austerity and greater economic independence. This is in fact what afforded Syriza its current position. Whether it’s Podemos in Spain, National Front in France, or the Danish People’s Party in Denmark, the fear is that once a precedent is set with Greece, exit-fever could spread.

These economic issues have forced nationalistic tendencies of member states to boil to the surface in the form of protest and political action. It is no secret that anti-immigrant movements have historically had a serious presence throughout Europe. The spread of religious fundamentalism has only increased migration into the continent and, in doing so, stirred anti-immigration popularity. An opportunity to exit the Union and close borders is undoubtedly tempting for those promulgating this sentiment.

Ever since the creation of the Euro, skeptics have eluded to the issue of a non-marriage between Europe’s political and economic institutions. Diversity of culture, history, and economy makes it difficult to create unified economic policy without a centralized political influence backing it. Germany cannot speak for Europe without being questioned by its neighbors to the south.

Recent negotiations and new signs of economic growth have greatly diminished the threat of contagion. Many of the debtor members have gone through massive austerity and built their structural reforms. They see the light at the end of the tunnel and will be less willing to turn their backs on the opportunity to come out the other end. A sudden Grexit would not be immediately followed by banking crisis or economic collapse. It will instead be trailed by enormous speculation, stirring, and worry of what international markets fear most: that Greece is the first domino in a line that ends with EU dismantling.

The geopolitical economy is full of alphabet soup and submissions to Merriam-Webster. Let’s hope that “Grexit” joins the company of jargon that was easily forgotten.

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