The probability of Greece leaving the eurozone has jumped from virtually nothing to at least 20 percent since Syriza’s Jan. 25 election victory, the head of the German ZEW think tank told Reuters.
In an interview for a Reuters summit on the eurozone, ZEW chief Clemens Fuest said the government of Prime Minister Alexis Tsipras risked talking Greece out of the bloc with unrealistic plans, a scenario that no one wanted.
“There is concern in northern Europe about Greece being a bottomless pit, and I think Greece has to come up with a story about why this will not end up in permanent transfers flowing to Greece,” said Fuest, who is also a member of the academic advisory board of the German Finance Ministry.
On the probability before and after the election of Greece leaving the eurozone, he added: “I think it has jumped from close to zero to at least something like 20 percent.”
Promising to end five years of austerity, the new government has floated plans to swap sovereign debt for bonds with interest payments linked to economic growth – an idea that Fuest said could end up with Athens paying more.
“The downturn is hopefully over, so the Greek economy is stabilizing now at a low level,” he said. “What would happen now if we converted existing bonds into GDP-indexed bonds? Greece might end up paying more.”
Greek Finance Minister Yanis Varoufakis meets German Finance Minister Wolfgang Schaeuble on Thursday after holding talks with European Central Bank President Mario Draghi on Wednesday.
Fuest believed Berlin could be open to some flexibility on Greece’s debt once its economy was pushing ahead with reforms and growing again.
“I would say let’s address the growth issue first, let’s get the reforms through. They are necessary to get Greece back on track,” he said.
“If that is done, I think we shouldn’t exclude – and Germany shouldn’t exclude – negotiating the debt question. But the order of things is key, I believe.”
Fuest saw few gains for the wider eurozone from Germany investing more as it has been urged to by eurozone and G20 peers. “I think this is overestimated. The spillovers (to the rest of the eurozone) would be very small.”
Despite a jump in the ZEW’s survey on analyst and investor sentiment to an 11-month high in January, Fuest was concerned about the effect of the low oil price on Russia – an impact he believed would reverberate through eastern Europe and Germany.
“I think it (the low oil price) will have a devastating impact on the Russian economy, and I don’t think it will make eastern Europe a safer place,” he said, adding that the low oil price was now factored into sentiment indicators.
“Because the German economy depends so much on eastern Europe as well, I don’t see it surprising on the upside.”
The German government expects Europe’s largest economy to grow by 1.5 percent in 2015.