"Kicking Out Greece Bodes Well for the Euro"

♠ Posted by Emmanuel in , at 1/27/2015 01:30:00 AM
Sorry, Greece, but you're on the way back to drachmas (and the EMU may be glad you're gone).
Sherlock Holmes once said something to the effect that if all other alternatives have been ruled out, then the remaining one, however implausible, must be true. Today, we saw the election of an anti-austerity party in Greece in Syriza. Its leader, Alexis Tsipras, has threatened at various points in his short but eventful political career to upend the status quo by leaving the Eurozone, repudiating Greece's debts, or at least renegotiating the terms of its obligations to the EU and the IMF. Consider:
As for investors. there are two reasons why Syriza's victory is significant. First, and as I've mentioned, its leader Alexis Tsipras has a clear mandate to negotiate an easing of austerity imposed by Brussels and the IMF, and a write-off of at least some of the country's massive public sector debts.
At the moment, he and his colleagues are stressing that they want to negotiate and are sending out emollient signals. But the Germans are saying that the deal done with Greece in the rescue is the deal that holds. So compromise may prove impossible - Greece rudely ripped from or bolting from the eurozone is not an impossibility,
The reaction of markets to Syriza becoming the party in power was a distinct yawn. The euro went nowhere and actually strengthened a touch in the aftermath of the result. The thing is that polls already foretold this outcome well in advance, so no one was surprised. So, one argument is that the Greek revolt was already "priced in" by the euro dropping in value days before as the likely result of the elections became evident. However, a more intriguing one is that, instead of keeping Greece in the Eurozone as a precondition for the single currency's continued viability, it would be better off if Tsipras got his death wish and Greece got kicked out of the EMU:
So why aren't investors in a state of frenzied panic? Why have the euro and stock markets bounced a bit this morning? One slightly implausible explanation is that investors believe the eurozone would actually be stronger without Greece, so long as no other big country followed it out the door. 
Think about it: other countries bailed out like Ireland and Portugal are regaining their footing, leaving Greece in a standout position as an exceptionally troubled economy. (It must be to vote in a bunch of economic extremists, after all.) Might the situations of these other troubled economies be "manageable" in relation to Greece? Instead of Greece dragging everyone down by adjusting monetary policy to the weakest link, why not remove the weakest link from the chain? The assumption, of course, is that the remaining links will not be in similarly dire condition.

There may only be one way to find out if this is true (that market participants actually prefer by now).