Greek elections on Sunday could bring urgency to a debate that has been largely academic: whether the euro zone can withstand the departure of one of its members.
With a good chance that the elections will produce either a political stalemate or a populist left-wing government in Athens, even people who say they do not believe Greece will drop out of the common currency are preparing for that possibility.
Because there has been time to prepare, some economists say, Greece’s departure from the euro will not be as much of a shock as the collapse of Lehman Brothers in 2008, which provoked a global financial crisis. Nor is it likely to be as abrupt. Even if a new Greek government eventually decided it could no longer stay in the euro union, no one expects an immediate, hasty exit.
Lehman was a surprise. But Typhoon Greece has been swirling offshore for months if not years, giving investors, governments and euro zone citizens plenty of time to batten their financial hatches.
They have drained money from Greece and put it into assets considered safe, like German or Swedish bonds. Foreign businesses with operations in Greece have been demanding payment up front from local customers, lest they later have to accept devalued drachmas. Some, like the French bank Crédit Agricole, are putting their Greek operations under quarantine to keep any infection from spreading.
Policy makers have been busy, too, though they are reluctant to say so. The European Commission acknowledged this week that it had been looking at whether it would be legal to allow restrictions on the movement of capital within the euro zone. The European Central Bank is reinspecting its tool kit, which could include lowering its benchmark interest rate or giving banks another shot of cheap, long-term loans.
But, in fact, there are limits to how much European officials can actually do, because of the same structural limitations to the euro currency union that have let the Greece problem fester so long in the first place.
“The consequences are incalculable — nobody can pretend to know what would happen,” said Holger Schmieding, chief economist of Berenberg Bank in London. But he added, “Policy makers are very aware this is a high-risk event and are thinking through possibilities, which they didn’t do before Lehman.”
Are the preparations adequate?
Views on that issue have become increasingly polarized. Some economists and policy makers say that the departure of Greece would be a shock to the world economy, but survivable, and maybe even not that big a deal.
“I do believe it would be tolerable for the remaining member states,” said Ferdinand Fichtner, head of forecasting at the German Institute for Economic Research in Berlin, which advises the German government. But Mr. Fichtner, speaking to reporters in Berlin, quickly added, “It should be the last option.”
In the opposite camp is the E.C.B., which has warned that the shock could indeed rival Lehman’s collapse. There are simply too many unknowns to quantify, Vítor Constâncio, the vice president of the central bank, said this week.
“Any assessment would be virtually impossible to do,” he said.
Jean-Paul Chifflet, the chief executive of Crédit Agricole, said at the annual shareholders’ meeting in May that he was “looking at all potential options when it comes to Greece.” On Thursday, the French bank’s Emporiki Bank subsidiary in Athens announced that it was transferring control of units in Albania, Bulgaria and Romania to the Crédit Agricole parent company in what was evidently a move to shield those assets from whatever might ensue in Greece.
Mr. Schmieding of Berenberg Bank, who admits to “a naïve belief that Europe always rises to the challenge,” argues that the threat posed by unruly Greek politics has already prodded euro zone leaders to extraordinary action, and that they would do even more if Greece went overboard.
He cited the urgency with which euro zone finance ministers cobbled together a plan to bail out Spanish banks last week, a scramble that “only makes sense in the context of the Greek election,” Mr. Schmieding said.
The E.C.B. might also play a role if the elections Sunday do not produce a government committed to sticking to the austerity and policy overhauls that Greece agreed to in return for international aid.
The central bank still has room to lower the benchmark interest rate from 1 percent, and could give banks another round of the low-interest, long-term loans it began dispensing late last year when the euro crisis was also spiking. That temporarily cooled the fever.
In an extreme case, if contagion gripped Spain and Italy, the central bank might even be willing to buy government bonds wholesale. That would replicate the quantitative easing deployed by the Federal Reserve in the United States to pump more money into the financial system.
Jens Weidmann, the president of the Bundesbank, Germany’s central bank, warned on Thursday not to expect too much from the E.C.B., where he is a member of the governing council. “In my opinion, we have reached the limit of our mandate,” Mr. Weidmann said in Mannheim, Germany, according to Reuters.
But analysts say other governing council members of the E.C.B. would probably overrule Mr. Weidmann and stretch the bank’s mandate if needed to keep the euro zone together.
Still, big gaps remain in the crisis response capabilities — which is why events in Greece and Spain this spring have galvanized most European leaders to seek longer-term solutions to the currency union’s acknowledged shortcomings. The euro zone, for instance, lacks a Europe-wide deposit insurance fund, which would be a crucial tool if an emergency in Greece provoked bank runs in other countries.
Corporate money has largely fled Greece and has been flowing out of Spain. Without a European equivalent to the Federal Deposit Insurance Corporation in the United States, it is unclear how authorities on the Continent would reassure ordinary depositors that their money was safe enough to prevent a rush for the exits.
“That could be the danger,” said Peter Westaway, chief economist for Europe at Vanguard Asset Management in London. “If it gets out of control so quickly, how do you stop that?”
Many companies have been preparing for a European shock at least since the end of last year. Those with activities in Greece have been examining not just financial risks but also operational issues like how to ensure they still have electricity in a crisis, or what currency might be used for transactions, said Mark Gregory, a partner in London at Ernst & Young, which has advised its clients on how to deal with a Greek emergency and the larger economic effects.
Severed from the euro zone, would businesses in Greece have to use a neutral currency like dollars? “We’ve been looking at Argentina as a case study,” Mr. Gregory said.
For most clients, the issue is not so much what would happen in Greece but what might happen to the broader European economy, Mr. Gregory said. The earthquake and the tsunami in Japan last year taught companies how vulnerable the global supply chain can be to disruption. So, for example, companies are thinking about whether they would provide financing to a supplier who could not produce a part for lack of bank credit.
Surprisingly, Mr. Gregory said, Ernst & Young clients seem to be somewhat more hopeful about the outcome in Greece in recent weeks because of what they perceive as a more energetic response by policy makers.
“It feels like there is a real attempt to work through the problems in the euro zone,” Mr. Gregory said, but he added, “It is a volatile mood.”
Government officials have become increasingly open about contingency planning, even as they insist that they will do everything to keep Greece in the euro.
The European Commission conceded Tuesday that it had researched the legality of capital controls, which would be necessary to limit the amount of money Greeks could ship abroad if the country reintroduced its own currency.
Capital controls are illegal in the European Union because they conflict with the principle of a single market. But they would be possible under the union’s treaties in cases of “public order and public security,” the commission said.
Olivier Bailly, a commission spokesman, denied that the body had drawn up concrete plans for capital controls and reiterated its desire for Greece to remain in the euro zone.
“Some people are working on scenarios,” Mr. Bailly said. “Our role is to say what is possible under E.U. law. We are not scriptwriters for disaster films.”
All in all, Mr. Gregory of Ernst & Young said, the impact of a Greek exit would probably be less than it might have been a year ago because companies had already sharply reduced their financial exposure and made contingency plans. Still, no one knows for sure how bad it would be.
“You can plan for some of the risks,” he said, “but some are unknown.”
Stephen Castle contributed reporting from London and David Jolly from Paris.