As early as two months from now, history might repeat itself in the eurozone.
After months of wrangling, Greek Prime Minister Alexis Tsipras has finally agreed to creditors’ demands for more austerity in exchange for a third Greek bailout. Still, the battered country has a number of political hurdles to clear in the coming days and weeks before it can secure a new bailout this fall. And the specter of a Greek exit from the euozone—a Grexit—is still here.
Read: Greece will need more debt relief than previosuly expected: IMF
Despite his anti-austerity promises, Tsipras has agreed to more belt tightening, including sales tax increases and pension benefit cuts. Before a third bailout program of 85 billion euros can start this fall, the Greek parliament has to approve portions of the new austerity package by July 15. More of the measures need to be passed a week from that date.
The big test
Whether the Greek parliament will vote “yes” amid growing domestic frustration with austerity is a big if. “This is going to be the big test,” says Azad Zangana, London-based senior European economist and strategist at Schroders. “If they can vote for these changes, then we’re more likely to see the Europeans also back [the deal] in the long term.”
The sustainability of the current Greek coalition is also at risk, so a political reshuffle is likely, says Nicolas Véron, a senior fellow at Bruegel, a Brussels think tank, and a visiting fellow at the Peterson Institute for International Economics in Washington, D.C.
This isn’t necessarily bad news. “A broader coalition might be better able to implement the measures than the current coalition,” says Véron.
Read: Greece needs to tackle its pension problems
Indeed, experts note, it was the arrival of the current government—with its efforts to undo all the creditor-mandated reforms Greece had undertaken—that stifled the country’s budding growth towards the end of last year.
“Some of the most recent difficulties the Greeks have been undergoing have been very much self-inflicted by a left-leaning and very inexperienced Greek political party,” says Heather Arnold, director of research, portfolio manager and research analyst at Templeton Global Equity Group.
The other uncertainty is whether the parliaments of certain European creditors, such as Finland, Slovakia and Austria, will approve the new bailout. Some may vote against the deal.
However, the EU can use extraordinary measures and push through a vote with an 85% majority, Zangana explains. “But of course, if the Germans vote against it, then it’s pretty much game over.” The vote in Germany, Greece’s biggest creditor, is scheduled for Friday, July 17.
Grexit fears
If the deal proceeds, the possibility of a Grexit will be put on the back burner, but not for long.
“We’re highly likely to have the same conversation in September. If they implement just these measures, that gets them through August,” explains Zangana. “And then in August, we’re going to have a rerun of the negotiations for the third bailout. Presumably, there will be a whole host of new measures they’ll have to agree on. And if at that point there isn’t a broad consensus, then again there will be talk of a Grexit.”
Read: Greece requests new bailout
A Grexit would have catastrophic consequences for Greece. “[It] would be cut off from international financial markets, with disastrous repercussions for Greek banks and companies, while capital flight and emigration would become endemic, and the temptation to maintain public spending through hyper-inflationary monetary expansion would be hard to resist,” Fabian Zuleeg, chief executive at the European Policy Centre in Brussels, and Janis Emmanouilidis, director of studies at the centre, said in a recent note.
While a Grexit is expected to have disastrous political repercussions across the EU—such as increased skepticism towards further integration within the bloc—experts say the economic impact wouldn’t be too catastrophic.
If it were to happen now, a Grexit would wipe out about 0.2 percentage points from eurozone GDP, says Zangana. And while it’s expected to cause some short-term market volatility, the rest of the eurozone wouldn’t suffer as much as it would have during the initial stages of the financial crisis, when the region’s banks were less capitalized and they hadn’t taken any steps towards a banking union, he adds.
But Véron is less optimistic. “The continued risk of a Grexit prevents the completion of a banking union; it prevents investments into the repair and strengthening of the banking sector and therefore keeps putting a drag on eurozone growth.”
As long as the probability of a Grexit remains significant, it will prevent investment in European banks, which will continue to suffer from lack of sufficient integration despite the progress made towards a banking union, Véron explains.