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Firstly, the core Eurozone countries and the European Central Bank in
particular must decide if they will continue forcing the Greek banking
system.
Leigh: The first priority is for the European Central Bank to decide quickly on
maintaining Emergency Liquidity Assistance (ELA) to the Greek Central Bank.
This may mean raising the ceiling on such assistance. ELA will keep the Greek
banking system afloat while negotiations are held on a new bail-out package.
Provided these negotiations succeed quickly and there is a new agreement in
place involving serious reform commitments by Greece and acceptance of further
debt reduction by the creditors then there is no reason for the Greek banking
system to collapse or for Greece to leave the euro. This would occur only if the
ECB pulled the plug on ELA or if rigidity on either side prevented a new
agreement from being concluded.
Apps: While the referendum has produced a resounding "yes", it's not exactly
clear what the Greeks have voted "yes" to. There's no doubt that it is not in itself
a vote to leave the eurozone. But they can't carry on without external support -the banking system will collapse, everyone will lose their savings and they wind
up crashing out of the currency.
Essentially, Greece has torn up the bailout conditions and wants a better deal.
The rest of the Eurozone now has to decide whether to meet them -- and what
they will do in the meantime while Europe's leaders make up their minds.
If Greece's banks are not supported and no further bailouts negotiated,
Greece will be unable to pay public sector wages later this month
without issuing some kind of IOU or new currency. This might, as some
have long feared, spell the beginning of the end for the euro.
Leigh: If Greece were forced out of the euro this would call into question the
irreversibility of the currency union. It would then appear to be no more than a
system of fixed exchange rates that can be altered whenever a country faces a
severe liquidity crisis. The next time a eurozone country faces such a crisis this
would spark fears that it too might be forced out of the euro. At a time when
Europe is facing so many challenges, the creditors, led by Germany, are likely to
go to considerable lengths to prevent this from happening.
Apps: The Greek crisis has never been just about Greece. It's always been about
giving Greece a tough deal to make sure the other larger fringe Eurozone
economies go through with their reforms. And also about maintaining enough
confidence that the Italian, Spanish and Portuguese banking sectors don't
unravel as well.
If the wheels come off in Greece, the real question is whether it looks so grim
that people start withdrawing their savings from banks in other countries that
you could also imagine leaving the euro on a bad day. That could become a selffulfilling prophecy very quickly.
It's also worth watching the borrowing costs of banks in those countries. They will
probably need additional support from the ECB.
The euro has reached crunch point.
Leigh: If the ECB continues to provide liquidity to the Greek Central Bank and if a
new bail-out agreement is reached, the edifice will not crumble over the summer.
However, there are fundamental deficiencies in the governance of the euro which
threaten its sustainability, in the medium term. Without fiscal transfers--that is,
genuine solidarity among eurozone members--the euro will not last. However,
Germany and other creditor countries are not ready for this. Perhaps the Greek
crisis will finally start to make them face up to realities instead of continuing to
extend and pretend.
Apps: If Greece leaves the single currency, it will be a colossal deal for Greece. If
the entire single currency unravels, it might be the most significant event in
European history since World War II, perhaps even more significant than the fall
of the Berlin Wall and collapse of the Soviet Union.