Greece has plenty to fear from Brexit

Greek Prime Minister Alexis Tsipras was one of many European leaders who reacted with concern last Thursday to the murder of British MP Jo Cox, calling her death “shocking.” Cox was an enthusiastic supporter of the “Remain” campaign ahead of the United Kingdom’s referendum, which takes place Thursday. In the most tragic way, her shooting was a reminder of how interconnected countries have become in the EU, where a dramatic political event in one member-state can produce ripples or even large waves that have an impact in any or all of the other 27 countries that make up the Union.

The latest dramatic developments in the UK have also focused minds on the bearing that a win for the “Leave” campaign will have on the rest of the EU. There is an undoubted nervousness across Europe about the possibility of Thursday's referendum veering in favor of Brexit. Finland’s Finance Minister Alexander Stubb, for instance, sounded the alarm for the eurozone as he warned of possible “economic mayhem.”

One of the reasons for this anxiety is that if the majority of the British people decide their country should leave the EU 43 years after joining, the knock-on economic effect could be damaging. As one of the economically weakest members of the bloc, Greece has much to fear from such a scenario.

International bodies such as the International Monetary Fund and the Organization for Economic Cooperation and Development have estimated that the UK leaving the EU would shave several percentage points off its annual gross domestic product over the coming years. ING Bank estimates that trade with the UK accounts for around 1.5 percent of total employment in the eurozone.

A Leave win might not necessarily lead to Brexit as the British Parliament could still block such an outcome but the likelihood is that it would trigger the beginning of a lengthy process leading to a departure from the EU. These protracted and messy deliberations, including the need for the UK to renegotiate trade agreements with the 60 non-EU economies currently regulated by EU pacts, are expected to exacerbate the negative economic impact.

“These negotiations could drag on for years, leading to a period of heightened uncertainty and risk aversion, which in turn would discourage consumption and investment and roil financial markets,” the IMF said in a report last week.

Performing its own assessment of the economic impact of Brexit, the IMF concludes that the UK’s GDP would fall 1.4 percent of GDP by 2019 under the “limited” scenario, but by 5.6 percent over the same period under the “adverse” scenario.

New York Times columnist and economist Paul Krugman sees a sustained 1.7 percent reduction in real income for the UK if it leaves. Krugman notes, though, that Brexit would be unlikely to trigger a financial crisis. “Britain isn’t Greece: It has its own currency and borrows in that currency, so it’s not at risk of a run that creates monetary chaos,” he wrote in his column on Friday.

However, like other analysts, he believes Brexit would lead to a weaker pound. The Economist Intelligence Unit forecasts the pound would lose up to 15 percent of its value against the dollar in the case of Brexit, which might be good news for British exports but a blow for British tourists and countries exporting to the UK.

Greece ranks as the UK’s 43rd largest export market, accounting for 2.2 billion pounds (2.8 billion euros) in goods and services sold last year. The UK, however, is a much more important export market for Greece. In 2014, it ranked sixth on the list, importing almost 1 billion euros of commodities from Greece.

Of greater significance, though, British tourists are a vital source of income for Greeks. According to the Bank of Greece, last year saw a 14.7 percent increase in arrivals from the UK, while receipts from British visitors rose by 30.5 percent, which was second only to tourists from the US. The central bank says that almost 2.4 million Britons came to Greece last year, bringing in more than 2 billion euros.

“Though the UK would be most affected by an exit, other EU economies would similarly experience reduced gains from trade, less efficient matching of capital and labor, and heightened uncertainty during the transition, to varying degrees depending on existing linkages with the UK,” said the IMF.

It’s clear that in Greece’s case, any deterioration in exports to the UK or the number of visitors coming over would be a substantial blow to its fragile economy. The IMF has made calculations on what Brexit could cost other EU economies and estimates it could shave close to 0.5 percent off Greek GDP under the adverse scenario. The decline in output across the EU is seen at 0.2 to 0.5 percent of GDP, with Malta, Ireland, Cyprus, the Netherlands and Belgium suffering the most.

The Washington-based Fund also points out that countries which are net recipients of funds through the EU’s cohesion policies, such as Greece, would see a decrease in the money that is available if the UK leaves as it is a net contributor to the EU budget, even after its rebate. Britain’s exit would imply a 10 percent reduction in funds available for EU payments, the IMF says.

However, the greater threat from a possible Brexit is likely to lie in the impact this would have on political decisions within the eurozone regarding the level of integration there should be between its members. The European Stability Mechanism approved on Friday the disbursement of the next bailout tranche of 7.5 billion euros for Greece and the European Central Bank is expected to reinstate a waiver this month that allows Greek banks to use government bonds as collateral for cheap borrowing. This could insulate Greece against some immediate shocks but it is only temporary, and rather flimsy, cover. It is even questionable whether Athens would have enough protection from the Brexit spillover on global markets should it soon qualify for the ECB’s quantitative easing program.

“A downside risk is that the UK’s exit from the EU causes a repricing of risk more generally, including in euro area periphery economies,” notes the IMF.

Athens’s main concern should be that a victory for Leave will weaken the eurozone’s resolve to bolster Greece’s position within the single currency, which could require more tools and a greater level of integration than currently exist.

In a recent blog post, ING economist Carsten Brzeski suggested Brexit could be the catalyst for “the long-awaited quantum leap towards a fully integrated monetary union,” but he underlined that it could also have the opposite reaction.

“As a consequence of the euro crisis, an increasing feeling of fatigue with complicated and exhausting European partners and recently unprecedented domestic challenges in the wake of the refugee inflow, the German government could be less willing to make compromises which would reduce its own power in Europe,” he wrote.

Wolfango Piccoli, co-president and director of research at Teneo Intelligence, believes there is going to be little appetite for steps to bring euro area member-states closer together if the UK votes to leave.

“In many ways, Greece depends on greater burden sharing in a closer-integrated eurozone. But this would likely remain off the cards after Brexit,” he told Kathimerini English Edition. He points out that in the past, when referendum results have gone against the EU, they have been repeated and ultimately led to further integration. “But as Brexit would take euroskepticism to the next level, senior decision-makers have made it very clear that more Europe cannot be the political answer.”

The danger for Greece is that this lack of conviction would translate into a shift in policymaking that would make life even tougher for a Greek government trying to ensure that its European lenders are content it is living up to its reform and fiscal commitments, while also attempting to convince them to grant it debt relief.

“The EU is also not likely to respond with a meaningful change towards fiscal expansion in light of the populist challenge,” added Piccoli. “The reason is that euroskeptic movements in individual member-states push the political establishment in opposite directions. Appeasing the Alternative for Germany (AfD) requires insistence on conditionality, the opposite of what would be required to address the strength of left- and right-wing fringes in Greece.”

In the worst-case scenario, the relationship between a struggling Greece and an increasingly volatile eurozone would bring back speculation about whether the country could stand the rigors of remaining in the single currency.

And all this would happen in the wake of British voters shattering the belief (if Leave wins) that the EU only has forward gears.

“More significant, especially in the longer term, is the fact that Brexit would lift the taboo about a country departing the Union, possibly rekindling the prospects of Greece leaving the eurozone,” concluded Piccoli.

The interconnectedness of our societies, economies and political systems means that Greeks will be watching developments in the UK with great interest this week. The flimsy state of the country’s economy means Greece will be hoping the British referendum does not cause a large wave to come crashing down on it.