What’s all this about Grexit anyway? Well, if Greece left the eurozone, then it would give up the Euro as its currency and re-introduce its own currency, the drachma. That would be, like, super-freaky disruptive[a] to the Greek economy for quite some time, but it would return monetary sovereignty to Athens, and that might eventually allow the Greeks to dig their way out of horrible circumstances in which they find themselves. How horrible? The Greek unemployment rate is about 25%[b], and Greek GDP fell from $354 billion in 2008 to $235 billion in 2014[c], and it’s in recession once again[d], so growing out of this mess doesn’t seem to be on the menu.
These numbers are in line with what happened in the United States during the Great Depression[e]. So that’s really, really, really bad. And the people who are responsible should probably be made into σουβλάκι, but that’s not my topic here.
So where to begin with the likelihood of Grexit before 2017? Tough question. It’s natural to look for a something like a base rate, but the prospects of Grexit seem more-or-less unprecedented under the current circumstances in modern Europe[f]. The current GJ consensus is 0.04, and has barely moved since September 14[g]. I suppose that’s as good a touchstone as any.
Now, there appear to be only 2 reasons that Grexit would be announced. First, Greece decides to leave the eurozone. Second, the rest of the EU comes to whatever kind of consensus it needs to in order to eject Greece. How likely is either event?
There are certainly plenty of economic reasons for Greece to take seriously the possibility of leaving the eurozone. I mentioned some of its macroeconomic woes above. 3 bailouts have not solved Greece’s problems[h]. Greece’s national debt is at about 175% of its current GDP[i], which is a crazy large number. History’s largest debt restructuring hasn’t worked[j]. In light of all of this, The Guardian reports:
Businessmen and bankers in private concede that as the economy disintegrates the possibility of a parallel currency is now openly being discussed. “The probability of Grexit is still there,” added Hardouvelis.[k]
In order to get more debt relief from the IMF, Greece would need to tighten its belt to the point at which it’s likely to crack it’s ribs. In particular,Greece would need to engage in further austerity measures to the tune of 4.5% of its current GDP. How much is that?
This translates to about 8 billion euros in austerity measures, something that would create an upheaval in Greek society.[l]
Unsurprisingly, the measures needed to meet IMF goals are, in technical terms, super-duper unpopular among the Greek citizenry[m]. The only other possibility that I can see is a bailout extension from Greece’s European partners. But even if there was an appetite for this sort of thing among EU decision makers, I’m not sure it would be politically possible[n]. It’s no wonder that the Greeks are talking up Grexit once again. They’ve just about run out of other options. How soon could this come to a boil?
Greece has a 28 billion-euro loan program with the IMF that expires in March, but the Washington-based fund hasn’t released any funds from the program since June 2014.
So pretty soon, I guess. I think a 0.30 probability is reasonable for a Greek led withdrawal from the EU in 2016. This is by no means a sure thing. Consider the fact that Greek bond prices are currently much lower than they were at the hight of Grexit talk last summer[p].
And I’m probably failing to site a lot of contrary evidence, but it’s Sunday, and I’m lazy, so sue me.
What about an EU ejection of Greece? It’s not up for discussion, says one source[q]. Well, one thing’s for sure, EU elites are not discussing this in public (at least as far as I can tell). I’m sure there are a lot of folks in Brussels and elsewhere who would love to see both Greece’s financial problems and its proximity to refugees and migrants from Syria, Iraq, and elsewhere removed with the single stroke of a pen. The EU has just put about $3 billion into staunching the flow of desperate people from more troubled parts of the world[r], about a million of whom arrived in Greece last year[s].
But I have my doubts about whether the EU will act directly to eject Greece. It seems more likely that it will continue to treat Greece like an employee that it wants gone but can’t manage to fire: Give him bad hours, make his life hell, and he’ll leave on his own. For now, I’d rate the probability that the EU will eject Greece this year at 0.02.
So that leave’s us with a 0.32 probability that Greece will leave the eurozone in 2016. That’s a long way from GJ consensus! Where’d I go wrong?