Greece toying with ‘chaos’ has Eichengreen urging lesser evil

Greece’s exit from the euro would unleash turmoil whose fallout will far exceed the cost of staying in the currency union, said U.S. economist Barry Eichengreen.

Reintroducing the drachma would solve none of Greece’s problems and instead set the stage for “even more chaos and uncertainty,” Eichengreen, a professor at the University of California, Berkeley, said in an interview in Prague on Friday.

“Staying in the euro zone will be costly and difficult for Greece and for Greece’s partners, but Greece getting out of the euro would be even more costly and difficult,” said Eichengreen, author of “Hall of Mirrors,” a book comparing the crises of the Great Depression and the Great Recession. “Staying in the euro is the lesser of evils under these circumstances.”

Greece, Europe’s most-indebted state, is locked in talks with its creditors over the terms attached to its 240 billion- euro ($274 billion) bailout. Uncertainty over the country’s future in the euro area has triggered a liquidity squeeze, pulling the economy back into a double-dip recession. Prime Minister Alexis Tsipras says he’s not considering leaving the currency bloc and is focused on getting the aid he needs to avoid a default.

“Anything can happen, but my guess would be that it will have debt restructuring, default on its debt — to put it in more provocative terms,” Eichengreen said. “But it will stay in the euro area.”

Riga Summit

Tsipras plans to press fellow European Union leaders to help resolve the deadlock in talks with creditors and will raise the standoff in bailout negotiations on the sidelines of talks to be held May 21-22 in Riga, Latvia, according to a Greek government official.

Greek bonds and stocks fell Friday. The yield on Greek 10- year bonds rose 20.9 basis points to 10.76 percent. That yield climbed as high as 13.93 percent in April, the highest since December 2012, after dropping to as low as 5.52 percent in 2014. The benchmark Athens Stock Exchange General Index fell 2.6 percent.

Eichengreen sees no relief in sight for the uncertainty plaguing the standoff around Greece.

“None of this will be resolved quickly,” he said. “I think that the uncertainty will continue.”

Just as unclear is the potential impact on the currency bloc of the so-called Grexit. While officials insist publicly that the rest of the euro area is protected against the fallout should Greece fail to reach a deal, last month some finance ministers called for contingency plans to be drawn up to bolster their defenses.

Greek Spillover

“The next time there’s a shock of some kind in Europe, people would immediately ask the question of what will Portugal do or Spain,” Eichengreen said. “We have absolutely no idea how a Grexit would impact the markets.”

The European Central Bank’s bond-buying program has had a “visible” impact on the continent’s securities markets and deflation. The quantitative easing is “one of the reasons” for the upswing in the European economy, according to Eichengreen.

The ECB embarked on large-scale asset purchases in March and envisages spending 1.1 trillion euros through September 2016. The euro-area economy grew at 0.4 percent, the fastest pace in almost two years, in the first quarter.

At the same time, the program “gives rise to distortions” and leads to “problems of liquidity,” Eichengreen said.

“The ECB was correct to launch the QE,” he said. “There have been benefits but there’re also problems when you have a cancer patient and administer chemotherapy, you can cure the cancer but create other problems.”


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