EU planning for worst-case scenario in case of Greek eurozone exit

By Luke Baker, Reuters

BRUSSELS – European finance officials have discussed as a worst-case scenario limiting the size of withdrawals from ATM machines, imposing border checks and introducing capital controls in at least Greece should Athens decide to leave the euro.

EU officials have told Reuters the ideas are part of a range of contingency plans. They emphasized that the discussions were merely about being prepared for any eventuality rather than planning for something they expect to happen — no one Reuters has spoken to expects Greece to leave the single currency area.

Belgium’s finance minister, Steve Vanackere, said at the end of May that it was a basic function of each eurozone member state to be prepared for problems. These discussions appear to be in that vein.s

But with increased political uncertainty in Greece following the inconclusive election on May 6 and ahead of a second election on June 17, there is now an increased need to have contingencies in place, the EU sources said.

The discussions have taken place in conference calls over the past six weeks, as concerns have grown that a radical-left coalition, SYRIZA, may win the second election, increasing the risk that Greece could renege on its EU/IMF bailout and therefore move closer to abandoning the currency.

No decisions have been taken on the calls, but members of the Eurogroup Working Group, which consists of eurozone deputy finance ministers and heads of treasury departments, have discussed the options in some detail, the sources said.

As well as limiting cash withdrawals and imposing capital controls, they have discussed the possibility of suspending the Schengen agreement, which allows for visa-free travel among 26 countries, including most of the European Union.

“Contingency planning is underway for a scenario under which Greece leaves,” one of the sources, who has been involved in the conference calls, said. “Limited cash withdrawals from ATMs and limited movement of capital have been considered and analyzed.”

Another source confirmed the discussions, including that the suspension of Schengen was among the options raised.

“These are not political discussions, these are discussions among finance experts who need to be prepared for any eventuality,” the second source said. “It is sensible planning, that is all, planning for the worst-case scenario.”

The first official said it was still being examined whether there was a legal basis for such extreme measures.

“The Bank of Greece is not aware of any such plans,” a central bank spokesman in Athens told Reuters when asked about the sources’ comments.

The vast majority of Greeks — some surveys have indicated 75 to 80% — like the euro and want to retain the currency, something Greek politicians are aware of and which may dissuade them from pushing the country too close to the brink.

However, SYRIZA is expected to win or come a strong second on June 17. Alexis Tsipras, the party’s 37-year-old leader, has said he plans to tear up or heavily renegotiate the 130-billion-euro bailout agreed with the EU and IMF. The EU and IMF have said they are not prepared to renegotiate.

If those differences cannot be resolved, the threat of the country leaving or being forced out of the euro will remain, and hence the need for contingencies to be in place.

Switzerland said last month it was considering introducing capital controls if the euro falls apart.
In a conference call on May 21, the Eurogroup Working Group told eurozone member states that they should each have a plan in place if Greece were to leave the currency.

Belgium’s Vanackere said two days after that call that it was a basic function of each euro zone member state to be prepared for any eventuality.

“All the contingency plans (for Greece) come back to the same thing: to be responsible as a government is to foresee even what you hope to avoid,” he told reporters.

“We must insist on efforts to avoid an exit scenario but that doesn’t mean we are not preparing for eventualities.”

Three Months to Save the Euro: George Soros

By Catherine Boyle / CNBC

Euro-zone governments have around three months to ensure the survival of the single currency, billionaire investor George Soros said in a speech on Saturday.

“We are at an inflection point. After the expiration of the three months’ window, the markets will continue to demand more but the authorities will not be able to meet their demands,” he warned in a speech at the Festival of Economics in Trento, Italy. (Read the text of his speech.) 

The European Union is “like a bubble” – not a financial bubble but a political bubble -- that could pop as a result of the euro -zone crisis, Soros said.

“In the boom phase, the EU was what the psychoanalyst David Tuckett calls a ‘fantastic object’ – unreal but immensely attractive,” he said.

“In retrospect, it is now clear that the main source of trouble is that the member states of the euro have surrendered to the European Central Bank (ECB)  their rights to create fiat money. They did not realize what that entails – and neither did the European authorities,” he said.

The euro zone needs a European deposit insurance scheme for banks, Soros said, as well as direct financing by the European Stability Mechanism (ESM) for banks, which “must go hand-in-hand with euro-zone-wide supervision and regulation.”

The “blockage” at the moment is coming from the Bundesbank and the German government, he said. German Chancellor Angela Merkel has been cautious about increasing Germany’s support for the rest of the euro zone.

Soros believes Germany will eventually do what it takes to keep the euro zone going because of the large losses German banks would suffer if it broke up and the damage to exports which could be caused by a return to the Deutschmark, which would likely be substantially stronger than the euro.
“A German empire with the periphery as the hinterland,” could be the result of the current predicament, he warned.

The ECB has been instrumental throughout the crisis and its liquidity injection via a long-term refinancing operation helped boost European markets earlier this year, giving policy makers some much-needed breathing space.

Soros said that too much blame had been placed on peripheral euro-zone countries such as heavily indebted Greece and Spain, and that creditors like Germany had to share responsibility.

“The “center” is responsible for designing a flawed system, enacting flawed treaties, pursuing flawed policies and always doing too little too late.

“In the 1980s, Latin America suffered a lost decade -- a similar fate now awaits Europe,” he said. “That is the responsibility that Germany and the other creditor countries need to acknowledge.”
Soros argued that the focus on austerity instead of growth had been a mistake by the European authorities.

“The authorities didn’t understand the nature of the euro crisis; they thought it was a fiscal problem, while it is more of a banking problem and a problem of competitiveness. And they applied the wrong remedy: You cannot reduce the debt burden by shrinking the economy -- only by growing your way out of it,” he said.

“The crisis is still growing because of a failure to understand the dynamics of social change; policy measures that could have worked at one point in time were no longer sufficient by the time they were applied,” he said.

These views are echoed by well-known economists including Paul Krugman. An increasing number of politicians in the euro zone are also arguing for less austerity and more promotion of growth. The debate has come to prominence during both the Greek election campaign and the Irish referendum on the EU fiscal pact for euro-zone-wide austerity measures.