Brexit Leaves Greece Dangling Precariously

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Nick Malkoutzis via Macropolis | British voters’ decision to head for the European Union’s exit door will test the EU like never before. Brexit has the potential to unleash not just a wave of consequences that will be damaging economically but also centrifugal political forces that will change the state of the Union forever.

Cue the most economically fragile and politically isolated country in the EU: Greece. The victory for Leave in the UK referendum leaves Greece precariously balanced between an EU that may try to bolster its defences through faster and deeper integration, or one where the most divisive nationalist reflexes will be triggered.

One school of thought sees European Union leaders, particularly those representing eurozone countries, seeking ways in which their countries can move closer together and to strengthen the tools that bind them. The other path is for EU politicians to be much more conservative in their approach, concerned that Brexit will strengthen nationalist and populist voices in their country, making any further integration a political no-no.

There are already conflicting views on this. European Council president Donald Tusk has warned against going in chase of some kind of Utopian dream in the EU. In contrast, European Commission president Jean-Claude Juncker and European Parliament chief Martin Schulz have been talking up the idea of an ever-closer union.

The battle to determine the future of the EU will also have a momentous impact on Greece, which is currently gravely exposed to any kind of economic any political shock.

The Greek economy is particularly vulnerable to the economic impact from Brexit. Almost 2.5 million British tourists visited the country last year, contributing around 2 billion euros to the country’s tourism sector, which makes up around a fifth of the Greek economy. A decline in the value of the pound, which was already evident on Friday, could see these numbers drop significantly. Previously, a decline in the number of visitors from Russia was felt by the Greek tourism sector. Brits, though, represent a much bigger percentage of arrivals (10 percent vs around 5 percent) and if they stay away or spend less it will be felt much more deeply.

Given the concerns about a declining pound, it is also worth noting that Greek exports to the UK (its sixth largest export market), which are worth around 1 billion euros a year, could be affected.

Overall, the International Monetary Fund sees the spillover effect from a Brexit on the Greek economy at close to 0.5 percent of GDP under the adverse scenario. For many eurozone economies this may seem like a rounding error but for Greece, which is in line for a 0.3 percent of GDP contraction this year, it could be enough to derail its attempts to meet the fiscal targets in its adjustment programme. In turn, this would trigger the contingent mechanism and force the Greek government to seek new cuts or structural measures to get the programme back on track.

On the political front, the most immediate risk to Greece is from outside its borders. If, as a result of Brexit and the awakening of separatist tendencies, the eurozone is less patient with Athens over the implementation of reforms or shows even less flexibility regarding the issue of debt relief, the Greek government will take a serious hit. It would add to the pressure on Prime Minister Alexis Tsipras, who is hoping to avoid more politically sensitive measures such as further labour market liberalization measures later this year, and for whom a concrete deal on debt restructuring still remains the ultimate prize that would win him time and support domestically.

The result in the UK may embolden some fringe parties in Greece, such as those set up by former SYRIZA officials, to campaign more vociferously for a Greek exit from the euro. Former Energy Minister Panayiotis Lafazanis, who leads Popular Unity, and ex-parliamentary speaker Zoe Konstantopoulou, head of Sailing for Freedom, have already argued in favour of a return to the drachma. They have so far found little sympathy for their cause but in an environment where the ties that bind the EU member states could be unravelling, their message could find relevance.

However, there is no indication that a call for Greece to leave the single currency or the EU will soon be a dominant theme of Greek politics. Although belief in the Union and the euro have taken serious knocks over the past few years, there is still a clear majority in Greece in favour of both. Despite the hard slog of the past few years, most Greeks remain committed to these causes because they fear that being outside of both would be even more painful. The uncertainty created by Brexit is only likely to strengthen these fears.

In the short- to medium-term, Brexit may give Tsipras’s rivals on the radical left a better platform but it is unlikely to result in any major shift in the public mood or the pro-EU approach taken by the governing coalition and mainstream opposition parties.

Instead, the key question will be if this group of politicians has what it takes to steer Greece through the asteroid field created by the cosmic events precipitated by the result in the UK referendum.

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The Corner
The Corner has a team of on-the-ground reporters in capital cities ranging from New York to Beijing. Their stories are edited by the teams at the Spanish magazine Consejeros (for members of companies’ boards of directors) and at the stock market news site Consenso Del Mercado (market consensus). They have worked in economics and communication for over 25 years.