Financial markets once again were waiting with bated breath for news about Greece this week as the clock ticked down to more deadlines to determine Greece’s future either within or outside of the euro.
This saga has become a familiar one over the past few years, but this time there was a much greater sense that the brinkmanship would ultimately fail, making a Greek exit a reality.
With no formal mechanism to allow a country to leave the euro, the danger was that the situation could turn chaotic. Even now, after another eleventh-hour deal this weekend, the risks have not gone away and the likelihood is that they will remain elevated for a number of months, if not years, to come.
Greece might appear to have achieved four months of breathing space before it has to deal with financing issues again, but it now has to come up with a list of reforms that will show its creditors that it is serious about meeting its debt obligations.
This will not be easy and will likely run into obstacles and opposition in the coming days and weeks.
The proposed reforms will probably have to be vetted and approved by institutions, possibly including some national parliaments, all carrying the potential for the deal to unravel. It may not be long before there is a sense of déjà vu.
Markets have appeared to become somewhat inured to the likelihood of a Greek exit in recent days, however, reassured by the fact that financial exposures to Greece have been reduced and even ring fenced in the past few years. Any contagion to other peripheral countries should be limited.
European banks have reduced their exposure to Greece recently, and it now amounts to just 0.3 per cent of their total assets. This optimism is probably misplaced, however, even though steps have also been taken to create a banking union and a stronger stabilisation mechanism that should also help to defuse any tensions that might arise, especially in the bond markets.
The main problems arising from the possibility of a Greek exit were always less likely to be about the immediate reactions of financial markets, however, and more to do with the political and social consequences that would play out over a period of time.
Questions would be raised about who else might be tempted by the prospect of life outside the single currency, and more importantly voters in euro zone countries might also be tempted to push for such an outcome.
After Friday’s agreement, the impression that Greece has wrought concessions from the euro zone – and a relaxation of strict austerity terms – might also encourage others, such as Spain’s Podemos party, to push for similar treatment, threatening political upheaval in the euro zone’s fourth-biggest economy later this year when elections are held.
Moreover, this thought process may not just be confined to the likes of Spain, but could also be entertained by two of the EU’s founders, Italy and France, where anti-EU sentiment is gaining ground.
Should the euro begin to unravel, or even fray at the edges, there is no definitive answer to where it might end. The debate about the euro’s existential threats, which has never completely gone away, would return with enormous consequences for the governance of Europe.
Greek politicians have been keen to push this argument in their negotiations with the euro zone, with the finance minister, Yanis Varoufakis, saying recently that “the euro is fragile. It is like a house of cards. If you pull away the Greek card, they all come down”.
But it is not only a house of cards that affects just the euro zone.
The US economist Barry Eichengreen has neatly likened the potential consequences of a Greek exit to “Lehman Brothers squared”.
It is probably no coincidence that the United States has also been prominent in recent days pressuring euro-zone leaders to reach a negotiated settlement that keeps Greece in the single currency, fearing a myriad of potential consequences should it leave – not only economic ones, but also social, geopolitical and strategic. Such chaos may have just about been avoided for now, but it is far too soon to say that the risks have completely gone away.
Tim Fox is the head of research and the chief economist at Emirates NBD.
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