‘Grexit’ off the table? Not so fast

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Is "Grexit" really off the table?

The ugly little term is shorthand for "Greek exit" from the euro zone. A year ago, it seemed inevitable. Now almost everyone – euro zone political leaders, economists, executives, central bankers – say it's unthinkable. Greece's second bailout package is in place and the worst is over for the economy. The time, and need, to reprint the old drachma has passed.

Not so fast. While the economic case against Grexit can be made, the political case works for it. Once again, Greece is in the middle of a political crisis that is destabilizing the coalition government of Prime Minister Antonis Samaras. Talk of election is again rife. If the government falls, economic reform and tax collection could easily stall and Germany, the biggest single sovereign sponsor of Greece's, may lose patience.

The risk for Greece is Germany cutting it adrift. That would not necessarily guarantee Greece's exit from the euro zone; it would make it much harder for Greece to stay put. We know already that Germany is massively frustrated by the Greek pain-in-the-euro factor. In an interview carried by the Greek newspaper Kathimerini English on Wednesday, Jean-Claude Juncker, the former chairman of the euro group of finance ministers, said: "When I was here last August, everyone believed Greece might have to exit the euro area. Some member states of the euro area wouldn't have been against this prospect" (It is believed Mr. Juncker resigned because he disagreed with Germany's tough stance on Greece, an allegation he does not deny).

Greece's political crisis was triggered early last week, when Mr. Samaras, with no notice and apparently no consultation with his two coalition partners, pulled the pug on ERT, the national broadcaster, ending the jobs of about 2,700 employees (a new, slimmed down ERT is to replace it, but when this will happen is an open question). The coalition partners, Pasok and Democratic Left, flew into a rage about the brutal austerity move even though all parties had generally agreed that ERT was bloated, corrupt and way too expensive.

Since then, the three coalition parties, led by Mr. Samara's centre-right New Democracy, have been holding talks to repair their rift. As of Thursday, the feeling in the streets of Athens is that the talks could go either way, even though the two smaller coalition partners have low popularity ratings and could not win an election. But the desire to punish Mr. Samaras by forcing an election that could deny him a majority, or result in the election of the popular radical left coalition, Syriza, which almost won the 2012 general election, should not be discounted.

In Canada or the United States or Britain, elections are more or less irrelevant to their government ministries. Taxes still get collected, essential services keep going. Not so in Greece, where ministry work slows down in the highly charged political atmosphere. Tax collection suffers and mass protests, sometimes strikes, can happen. The Greek finance ministry and the Bank of Greece fear that the disruption of an early election, and the possible, even likely, post-election chaos, where warring parties try to form a coalition government, will damage Greece's economic reform program, trigger a slowdown in tax collection and greatly test the patience of Germany and the International Monetary Fund.

Remember, the height of the "Grexit" fears came late last spring, when the May election proved inconclusive, forcing a second election, in June, while bank depositors panicked and started to drain their savings accounts.

Greece does not need political chaos just as its economy appears on the verge of bottoming out and possibly rebounding. Most of the numbers are going in the right direction even though gross domestic product is expected to contract by about 4.7 per cent this year. The rate of quarterly contraction is falling, the trade deficit is coming down and, in the last two quarters, more people have been hired than fired. A political mess could easily wreck this upward moment.

What might Germany react to a Greek political meltdown? German chancellor Angela Merkel is unlikely to say or do anything before the German election in September – the last thing she needs is to open the prospect of Grexit as she is campaigning. But assuming she wins, should might be tempted to create a southern European policy that would, in effect, shift the focus away from sovereign bailouts – the fireman policy – though possibly encourage bank recapitalization through the European Stability Mechanism (ESM) fund. That would leave the struggling countries – Greece, Portugal, Spain, Italy – more or less on their own to seek their own salvation, or not.

Greece will need political stability and a government dedicated to economic reform if it is to survive within the euro zone. As of last week, the prospect of an enduring coalition government led by Mr. Samaras diminished substantially. Greece is playing with fire once again.