Greek Voters Unlikely To Switch Austerity Views

John Peet, Europe editor of The Economist in London, talks to David Greene about European reaction to heightened speculation that Greece may leave the eurozone. Next month, voters are likely to back parties that want to tear up the IMF-EU bailout deal.

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DAVID GREENE, HOST:

All right, to talk more about the likelihood of a Greek exit from the eurozone and what it could mean for Europe, let's bring in another voice. John Peet is the Europe editor at The Economist magazine and he joins us on the line from London.

John, good morning.

JOHN PEET: Good morning.

GREENE: A lot of different points of view in that story. On one hand, some say this is just brinksmanship. On the other, some are saying an 80 to 90 percent chance that Greece could leave the eurozone in early summer. I mean what is your point of view from where you are in London?

PEET: Well, I think that actually precisely reflects what you get when people are playing a game of brinkmanship. Nobody in a leadership position wants to say, Look, Greece is bound to go. Because the minute that is said, Greeks will have a run on banks. The European Central Bank might have to step in to provide more liquidity to the Greek banks, and the thing could become disorderly and messy.

But the fact is that in the election in May, 70 percent of Greeks voted for parties that wanted to tear up the terms of the IMF-European Union bailout deal. They're now having a new election on June the 17th, I don't see any signs that the voters are going to change their minds between now and then.

The Greeks are really fed up with austerity. And I think that they are quite likely to back, again, parties that want to tear up the deal.

GREENE: So it sounds like that the - part of the brinksmanship may be trying to frighten Greek voters and force them to really weigh the consequences here.

PEET: I think the brinkmanship is being played on both sides. Yes, the Europeans and the IMF are telling the Greeks, look, if you again vote the wrong way as it were, you really are going to be out of the euro. And they hope that the Greeks will be frightened by the prospect of being out of the euro.

On the other side, some Greeks are saying, look, we know that if we leave the euro, we're going to cause terrible disruption to the rest of you and indeed to the world economy. So we think that, you know, you should be willing to pay a higher price to keep us in. The trouble with a game of brinkmanship like that, is it can end in tears quite quickly.

GREENE: Let's talk about what the mechanics of an exit from the eurozone could look like. I mean it's - one thing that come up in the piece we just heard is that, you know, runs on banks could make an exit very disorderly. What exactly would take place?

PEET: I think that's exactly right. I mean, we've been through sort of similar experiences in the past, you know, countries left the gold standard in the 1930s. Argentina left its currency board a decade ago. The Russians defaulted and devalued in the '90s. But leaving the single European currency is even more difficult. There is no legal provision for it to happen. The Greeks do not have a stock of drachma bank notes in preparation already.

So it could be unpredictably messy, which isn't to say that it can't happen. What might well, the sort of scenario that you might get played out, is that the Greeks are cut off from European Central Bank funding because they refuse to meet the terms of their bailout.

They then find they can't pay their debts or their public sector wages. They'll have to pay public sector wages, but they'll have to do them using sort of some kind of scrip money, which would start to circulate alongside the remaining euro notes that they've got.

And the precise outcome of that and how a new drachma might be introduced is unpredictable and could do serious damage to the Greek economy.

GREENE: How would you see this reverberating and how far? I mean, I suppose that weaker economies in Europe like Spain, Portugal, might feel the harshest consequences soonest.

PEET: I mean, the problem with the Greek situation and with the Greek exit is precisely this worry about contagion elsewhere. Greece on its own, two percent of eurozone GDP, relatively small economy, quite a closed economy, not a big exporter or importer. You might think, in a way, if that was cut off, it wouldn't have much impact.

But the real worry for European policymakers is that for the past decade they've essentially said, you know, the single currency is permanent; there's no going back. If Greece were somehow or other to be pushed out or to choose to leave, the idea that the single currency is a permanent construct that nobody will ever leave immediately falls by the wayside forever.

And the markets clearly will start testing countries like Portugal, Ireland, and then move on to the bigger counties of Spain and Italy, once Greece goes. So a Greek exit would clearly require much more work by the eurozone countries to make sure that no other country could follow.

GREENE: And of course, we should mention we are already seeing a lot of markets skittish over this possibility. John Peet is the Europe editor for the "The Economist" magazine. Thanks so much for joining us, John.

PEET: Thanks.

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