An existential threat to EU

Greece's future in the single currency Euro zone hangs in balance following a hardened stance of the newly elected government of Greece against the extension of the 240 billion euro ($272.4 billion) bailout. The Leftist Prime Minister Alexis Tsipras and Finance Minister Finance Minister Yanis Varoufakis have even vowed to reverse austerity policies and end cooperation with EU/IMF inspectors. Accordingly, Varoufakis is refusing to toe the line of EU leaders at the ongoing talks at Brussels. Portugal and Spain are jittery as echoes of the Leftist protests against austerity in Greece threaten to engulf their countries too, should Greece ultimately decide to exit the European Monetary Union and later the EU itself. Reuters reported that on Monday the talks, which had been expected to last late into the night, broke up in less than four hours - less even than a previous meeting last Wednesday after which EU officials voiced concern and astonishment at the Greeks' lack of preparation. The euro dropped nearly a U.S. cent on word of stalemate, though edge back to $1.1350, about 0.5 percent down on the day.

The European lenders are now crossing their fingers, having served an ultimatum on Greece to agree by Friday to the bailout programme which is to expire at the end of the month, raising the risk that the country could default on loan repayments and become the first member of the euro currency union to leave. An emergency meeting of the same group of finance ministers from the 19-country currency union also ended in failure last week.

The EU leaders are surprised by the Greek intransigence, given that its banks were losing deposits at the rate of 2 billion euros ($2.27 billion) a week. If that pace continued for the next 14 weeks, the banks would not have enough reserves on hand to issue new loans, according to New York Times.

Greece is meanwhile throwing subtle hints that it could turn to Russia or China for help if its talks on debt relief and a rollback of austerity measures break down. Now, the US as well as the EU are worried over the fallout of any breakdown in the discussions.

What would happen should Greece finally decide to quit the EU? According to a BBC report, the previous Greek Prime Minister, Antonis Samaras, had warned that living standards could fall by 80% within a few weeks of exit. Unable to borrow from anyone (not even other European governments), the Greek government would simply run out of euros.

The government would not be able to repay its debts, which now amount to a total of about €320bn (£237bn), most of it owed to European governments and agencies and the IMF.

The government would have to impose a freeze on withdrawals and on people taking money out of the country. This could lead to queues of ordinary Greeks trying to empty their bank accounts before they get converted into a new currency worth substantially less than the previous one.

In the longer run, Greece economy should benefit from having a much more competitive exchange rate. But the devaluation would not solve underlying problems in the economy, including poor tax collection and a struggle to control government spending. There is also a real possibility of a surge in inflation, warns the BBC report.

The EU leaders may relent and agree to debt burden cuts and relax the austerity programme, as the cost of Greece exit will be very heavy. The Economist observes that, “The economy has come out of its tailspin and although Greece is heavily indebted to its official lenders, the terms are extraordinarily lenient. What this suggests is that the pressures within Greece to avoid a confrontation, either by Syriza doing less well than expected at the polls, or through a more emollient stance by Mr Tsipras if he does win power, may just be sufficient to avoid a Grexit.”