Monday, February 1, 2016

The Grexit that Could Actually Happen

by Jacob Funk Kirkegaard

Peterson Institute for International Economics

February 1, 2016

For years the euro area has labored to successfully prevent a financial exit by Greece from the common currency, a fear commonly known as “Grexit.” Following the September 2015 elections, Greece now has a parliament that is overwhelmingly pro-euro and in compliance with the program imposed by the European Commission, the European Central Bank, and the International Monetary Fund (IMF), known as the Troika. Barring major external economic and political shocks, the country can return to growth in 2016 and get further debt relief from the euro area. The migration crisis in Europe threatens this hopeful forecast and could even force a de facto “physical Grexit” from the rest of Europe.

Last week the European Commission started a bureaucratic doomsday clock threatening Greece with expulsion from the Schengen Area of open borders if it does not manage its border with Turkey more effectively. The legal basis for such an expulsion would be the conclusion of the so-called Schengen Evaluation Report of Greece, based on unannounced inspections to verify compliance with its rules for identification and registration of migrants at the Turkish-Greek border in late 2015.

The draft report has not been made public, but EU Migration and Home Affairs Commissioner Dimitris Avramopoulos has described “serious deficiencies in the management of the external border in Greece.” Unless Greece implements in the next three months whatever remedial measures the Commission and Schengen Evaluation Committee propose,1 a qualified majority of Schengen members (e.g. , able to outvote Greece) may reintroduce physical internal border control to protect the common interest of the Schengen Area and hence leave Greece out for up to two years.


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