Date: Friday 22 Jun 2012
Citigroup chief economist Willem Buiter has fired off another shot today in the intellectual battle over Greece. In an op-ed piece in the Financial Times the expert claims that despite the recent formation of a new coalition government “we consider it highly unlikely that Greece will comply sufficiently with even ‘lite’ fiscal austerity conditionality, let alone with structural reform conditionality, including privatisation targets, which are unlikely to be relaxed.” He also notes that political opposition to austerity measures and reforms is “stronger (…) than ever before”.
In his opinion, the “troika” (European Commission, European Central Bank and International Monetary Fund) might allow a Greek failure in September’s program evaluation, but it is unlikely they will tolerate it yet again in December. “Grexit (term for Greece’s exit from the euro) may well be triggered by a troika review declaring Greece willfully non-compliant with the conditionality of its programme, stopping the disbursements to the Greek sovereign,” Buiter writes.
Thus, the Citigroup economist remains convinced that the country will default and the Eurozone emergency financing will be suspended. “At that point Greece exits the euro area, following the imposition of capital controls, foreign exchange controls, restrictions on deposit withdrawals and a temporary suspension of the Schengen agreement,” he says.
Under that scenario, Buiter believes that it is “highly unlikely the core Eurozone would be willing to take on significant exposures to Spain and Italy”. Fear of contagion would effectively put the breaks on any aid to these last two countries. It is for this reason that Buiter argues for a banking union that could limit the risk of a run on banks.
“A road map to banking union will likely be announced at the EU summit on June 28-29. It had better be a credible path. In any case, implementation is the hard part, and time is of the essence,” he says.
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