To understand the impact of a potential Greek exit from the euro zone,imagine an operating theatre inside a betting shop. As surgeons prepare to amputate a gangrened foot to prevent infection spreading to healthier parts of the body,gamblers on the sidelines lay bets on which limb will be next for the chop.
Talk of a possible Greek exit has already sapped investors confidence in the 17-nation single currency area and contributed to higher borrowing costs for Spain and Italy. It is making a planned return to market funding next year harder for Ireland and Portugal,which are implementing tough bailout programmes. Some European politicians and central bankers clearly see jettisoning a delinquent member as a salutary lesson to others not to abuse club privileges.
Other policymakers and market participants fear that pushing Greece towards the exit would start a chain reaction,materialising huge costs for investors and taxpayers and perhaps triggering a break-up of the euro.
German Chancellor Angela Merkel,Europes most powerful political leader,has appeared to be on both sides of the argument at different times.
She said last November that ensuring the stability of the euro was a bigger priority than guaranteeing Greeces continued membership. But she has also said a Greek exit would cause a disastrous domino effect,scaring investors away from Europe.
Greece has slid further off course from its fiscal and economic reform targets and the European Central Bank stopped accepting Athens bonds as collateral for lending to Greek banks. Pundits are now vying to forecast which country may have an interest in leaving first EU paymaster Germany or Greece,creditors states or debtors. US economist Nouriel Roubini,a regular doomsayer on Europe,has suggested that Finland,a triple-A rated fiscally prudent northern state,might be first out the door due to anxiety about ever growing liabilities for euro zone weaklings.
Regardless of their accuracy,such prophecies highlight how European governments and lawmakers are coming to see membership of the euro area as a zero-sum game,in which each state feels like a victim of its partners actions and decisions. Foreign exchange strategists at Bank of America Merrill Lynch enlisted game theory to analyse which euro zone country might see an economic interest in jumping ship. Put simply,game theory states that players may not trust each other enough to cooperate or may see greater gains for themselves in non-cooperation,even though the outcome would be better for all players if they did cooperate.
Hence,while Germany and Greece would both stand to gain if Greece carried out austerity programme and German accepted common euro zone bonds,neither is likely to choose that because each would be better off without making a sacrifice.