Europe Weighs Exit Scenario Officials Prepare for a Possible Euro Split, but Stress They Want Athens to Stay

By BRIAN BLACKSTONE, MATINA STEVIS and STEPHEN FIDLER

FRANKFURT—Europe has begun to prepare for Greece's possible exit from the euro zone ahead of a crucial round of elections in the country next month, which are fast becoming a referendum on its membership in the common currency.
Euro-zone officials have started emergency planning to contain the fallout from a Greek exit from the currency bloc, officials said Friday. That includes the preparation of emergency scenarios by staff at the European Commission, the European Central Bank and in national finance ministries, the officials said.

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The euro zone's financial "firewall" may need to be boosted to reassure markets that neither Spain nor Italy would be allowed to default on their debt during any market panic that might follow an eventual Greek exit, they said. The bloc's bailout fund has unused lending capacity of €500 billion ($635 billion), only enough to finance Spain and Italy, widely seen as the next two dominoes that could fall in the euro-zone crisis, for a few months. European Union Trade Commissioner Karel De Gucht caused a stir Friday when he told a Belgian newspaper that the commission and ECB were "working on emergency scenarios if Greece does not make it."
It was the first admission by a senior commission official that the EU has contingency plans in place. Germany's finance ministry further stoked speculation of such preparations. Asked whether the ministry was drafting emergency measures, a spokeswoman cited comments by Finance Minister Wolfgang Schäuble, saying: "Our citizens expect us to be prepared for every eventuality."
Emergency planning for a Greek euro-zone exit was discussed at the weekly meeting of the 27 European commissioners, said a senior EU official. The flight of deposits from the Greek banking system threatens to accelerate the timetable on which the country could be thrust from the euro zone, said one official involved in

Euro exit could benefit Germany says Hans-Werner Sinn Influential economist says ‘Germany can exist without the euro’

Economist Hans-Werner Sinn said Germany should help struggling countries leave the euro

Derek Scally

Germany would have nothing to fear and much to gain from exiting the euro area, according to influential economist Hans-Werner Sinn.

That claim by the outspoken Prof Sinn, head of Munich’s Ifo institute, is likely to put wind in the sails of Germany’s burgeoning anti-euro political party, Alternative for Germany (AfD).

“Naturally Germany can exist without the euro. The exit horror stories painted are all overblown,” Prof Sinn told Die Welt yesterday.

“In particular, it’s not true that the export industry would collapse.”

The economics professor said it was important to challenge mainstream thinking in Germany that, cut loose from the euro, a new deutschmark would rapidly increase in value, prompting a drop in sales of more expensive German products and a rapid economic slowdown in Europe’s largest economy.

“A bit of an increase in (currency) value would do Germany good because the cheap imports would more than balance up the worse export business,” he said.

The Munich economics professor suggested the Bundesbank might mimic the Swiss central bank, which intervened on currency markets to ease exchange rate pressures by swapping foreign sovereign bonds for Swiss francs.

But anyone who thought Germany’s most outspoken economist was, with his remarks, joining the ranks of

Would A Greek Exit Really Be Manageable?

 by Karl Whelan,Jean-Claude Juncker, Luxembourg prime minster and head of the Eurogroup of finance ministers has said that he believes that a Greek exit from the euro would be “manageable”  Partially based on my recent experience of Ireland’s banking crisis, which was “manageable” until suddenly it wasn’t, I don’t take much reassurance from politicians using this phrase.
In many ways, this was a fairly typical intervention from Juncker, who has a touch of foot-in-mouth disease.  His comments appear to have begun as a dismissal of German politicians saying they are not worried about Greek exit with Juncker pointing out “it would be better if more people in Europe kept their mouth closed more often”.  Indeed. But then this particular piece of reassurance comes from the man who, when caught lying last year about an emergency finance ministers meeting on Greece, responded “When it becomes serious, you have to lie.”

So what’s the case for a Greek exit being manageable? One could argue that the euro existed for a time without Greece and functioned fine, that allowing Greece to join was a mistake, and thus that a euro without Greece would be more stable.  While some of the countries that would remain in the euro also have severe debt problems, you could argue that they were not as intractable as Greece’s.
Finally, you could argue that the Eurosystem would provide full support to the governments and banks in the

For Wrong-Headed Reasons, E.U. Leaders Are Leaning Toward A Greek Exit (Ελληνική Μετάφραση)

Karl Whelan
 It is becoming increasingly clear that Europe’s leaders are now planning for a Greek exit from the
euro.  The current policy approach towards Greece appears to be based on three ideas
First is the idea that Greece’s politicians continually fail to deliver progress (the “false Greek promises” referred to here).

   

 

Second, is the idea that European taxpayers cannot be expected to keep funding huge deficits that allow the Greek government to continue with reckless spending  (“Germany has reached the limits of what it can bear” and further assistance for Greece is “like pouring water into the desert”).
Third is the idea that a Greek exit will be manageable.  Indeed many believe a Greek exit will be necessary for the euro to survive, with Bavarian finance minister Markus Söder saying out loud what many believe, that Greece “must become an example demonstrating that this euro zone also has teeth.”
For all their popularity, each of these ideas is incorrect and the policy they are leading towards risks an economic disaster.
Take the first, widely-held, idea that Greek politicians have failed to make progress. Here is the IMF’s latest report on Greece. Check out Table A1 on page 93.  Greece’s primary deficit—the gap between non-interest spending and revenues—fell from 10.6 percent of GDP in 2009 to 2.4 percent in 2011, a decline of 8.2