The Costs of Grexit
From Greece's perspective, leaving the euro would be highly disruptive, which explains why there is very little support for it in the country. But there is very little agreement outside Greece about how a Grexit would affect the rest of the eurozone.
PARIS – Earlier this week, following days of tense discussions, the new government in Athens reached an agreement with its eurozone creditors that includes a package of immediate reforms and a four-month extension of the financial assistance program. But, despite Europe's collective sigh of relief, the compromise does not preclude the need for further tough negotiations on a new financial-assistance program that should be introduced by the end of June.
In any negotiation, a key variable influencing the protagonists' behavior, hence the outcome, is what failure to reach an agreement would cost each of them. In this case, the issue is the cost of Greece's exit (“Grexit") from the eurozone – a prospect that was widely discussed in the media throughout the recent negotiation, with considerable speculation about the stance of the various players, especially the Greek and German governments.
From Greece's perspective, leaving the euro would be highly disruptive, which explains why there is very little support for it in the country. But what about Grexit costs for the rest of the eurozone? Ever since the question was first raised in 2011-2012, there have been two opposing views.