UBS: There Are 2 Clear Alternatives For Europe On The Greece Problem

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Elections in Europe have shown that voters are angry about austerity and unemployment, and are punishing incumbents at the ballots.But UBS economist Larry Hatheway says that this discontent has not offered a viable alternative for dealing with Europe’s economic and financial crisis.

Hatheway says for now Europe’s biggest concern should be Greece and there are two clear paths that Greece can take. One would lead to fragmentation and the other a degree of political change that is nearly impossible to imagine.

The first is a Greek exit but this would hardly improve the nation’s competitiveness and could have “calamitous financial and economic consequences” for Greece and the eurozone:

“A Greek exit could also put the rest of the eurozone at considerable risk. Residents of other countries, such as Portugal, Spain, Italy or Ireland, might well conclude that the probability of leaving the eurozone had increased, prompting them to move deposits out of their banks. The resulting bank runs could prove impossible to manage, resulting in a rapid and significant deterioration of financial and economic conditions across the eurozone.”

The second alternative would be for Greece’s creditors to acknowledge how difficult their policies are for country and provide Athens with some debt relief and support via fiscal transfers.

“Those policies would not change the inevitable decline in Greek living standards from today’s unsustainable levels. But they would cushion the blow, making it politically possible for Greece to remain a member of the Eurozone (and the EU). In this second scenario, Greece would essentially become a ward of the Eurozone. The price would undoubtedly be some loss of sovereignty and an economy in long-term decline accompanied by a shrinking population as many of Greece’s more ambitious and talented residents leave to seek better futures elsewhere.”

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