Recent turmoil makes Greece increasingly likely to leave euro behind

OTTAWA, May 30, 2012 /CNW/ - Greece's departure from the eurozone is now the most likely of three unappealing options facing the European Union, The Conference Board of Canada concludes in a briefing for its International Trade and Investment Centre.

"There is no easy end-game for the euro. Greece currently has a choice of being shot or being hung. But all three options come with a cost and there is no solution available in which no one suffers," said Glen Hodgson, Senior Vice-President and Chief Economist.

A Greek exit would be messy for both Greece and the rest of the EU since there is no defined mechanism for leaving the eurozone. Yet it is now more likely than the other options - either the status quo or splitting the euro into two currencies. Recent election results in Greece and elsewhere in Europe have shaken support for the status quo approach, in which the healthier EU members support their heavily-indebted neighbours in exchange for severe fiscal restraint in those countries. The outcome in the debtor nations has been a shrinking economy, massive unemployment, falling real wages and benefit, public service reductions and eroding public optimism.

Option One - More of the same
Eurozone leaders have made financial, political and emotional commitments to support the euro, despite the public backlash against the austerity measures. The eurozone leadership has shown that they see a common currency as critical to the integration of Europe. Changing course now would be difficult. Nevertheless, the Conference Board estimates that there is less than a 50 per cent likelihood that the status quo will be the endgame for the euro.

Option Two - Greece Leaves the Euro
This option would be much more painful for Greece than the status quo, and it might also make an impression on other heavily-indebted EU countries to maintain austerity programs for fear of the alternative. Nevertheless, this option has a probability of 50 per cent - and rising - because of the public reaction to ongoing austerity measures.

Option Three - Splitting the Euro
Germany (and other strong economies such as the Netherlands, Finland, or Austria) could leave the euro to its weaker neighbours and create their own currency. However, the Conference Board estimates that the likelihood of this option being adopted is less than five per cent. In theory, it is the most attractive economically. In practice, it is unlikely to find political support - even in Germany. Under a new currency, German exports to its neighbours would immediately become more expensive and the integration of Europe itself would be called into question.

The Endgame for the Euro: Three Unattractive Options is published for the International Trade and Investment Centre (ITIC) It is publicly available at www.e-library.ca. ITIC helps Canadian leaders better understand what global economic dynamics could mean for public policies and business strategies.

The implications of the ongoing turmoil in Europe for Canada include reduced consumer and business confidence, a disruption in financial markets and international trade, and slower overall global economic growth.

"Although Canada's economy has fared relatively well amid this turmoil, it has not been immune. Canada cannot resolve this problem for Europe, but it needs to lend its voice to a more enduring solution and buffer its economy against ongoing and unpredictable shocks," said Hodgson.

"Just as importantly, it is not a time to turn inward. Both the EU and Canadian economies would benefit from increased access to each other's markets, so Canada should press on with its free-trade negotiations with Europe."

Brent Dowdall, Media Relations, Tel.: [phone] ext.  448
Françoise Makanda, Media Relations, Tel.: [phone], ext. 389
E-mail: corpco[email protected]