It is debatable whether Grexit will be more or less likely after a YES or NO vote on Sunday. While it has been argued that a NO vote may reinforce Tsipras’ hand in negotiations and may thus lead to concession on debt forgiveness, my impression is that the Greek team has alienated her Euro partners to such an extent that a NO vote is more likely to lead to Grexit.That may happen in different ways: the ECB stops Emergency Liquidity Assistance, ELA, by (reasonably) claiming that Greek Banks are insolvent and therefore ineligible to ELA; the ECB raises collateral requirements for getting liquidity, and makes it impossible for Greece banks to face the run of deposits.
The Grexit process would be difficult to govern: in the short run, it will likely lead to a chain reaction of bank-firm failures, collapsing stock and real estate prices, wealth expropriations in the form of deposit levy or inflation, plunging output and soaring unemployment and poverty.
Who stands to benefit from such dramatic events? My short answer is that Italy and other Southern Europeans (including France) would probably be among the beneficiaries.
In the summer of 2011 Italy and other Southern Europeans,along with Ireland, were adversely affected by “economic contagion” from Greece: fears of default spread across the weakest EUZ countries (see my research piece with Luca Zavalloni), as markets priced a positive probability of exit into their sovereign bonds’ interest and CDS spreads. Peripheral countries had weak fundamentals and unstable governments. At that time, Germany and other “safe havens” countries benefited from low interest rates.
This scenario is unlikely to repeat itself, for three main reasons. On the one hand, the EUZ now disposes of an anti-contagion instrumentation that was not available in 2011 (the ESM, the OMT, the QE, an (imperfect) Banking Union). The ECB has shown to stand ready to prevent a EUZ break-up. On the other hand, Ireland, Spain, Portugal and, to a lower degree, Italy have made their homeworks, both in terms of fiscal discipline and of structural reforms. They are out of the recession and therefore less likely to be singled-ot as the “next X-exit”. Finally, these countries have much more stable governments: the challanges now come from anti-Euro parties.
This time, if Grexit occurs in the dramatic way described above, Italy , Spain (and France) may
benefit from “political spillovers”. The sight of bank runs, mass unemployment, mass protests and riots with the police, spreading from TV screens into people’s living rooms would serve as a scarying bogeyman for the consequences of a Euro-exit. Anti-Euro movements (Podemos, Lega, 5 Stars, Front Nationale etc.) would take a hit, while pro-Euro governments, their stability and incentives for implementing structural reforms, would be strenghtened. Growth would benefit, and interest rates, after initially rising, may soon fall.
Finally, the possibility that Southern Europeans’ exports may suffer because of increasing competition from Greece’s return to the Drachma, is likely to be negligible: Greek exports are tiny, impefect substitutes to Southern Europeans’ , and they are likely to implode in the short run.
In brief, Italy and other Southern europeans stand to gain from Grexit, since Grexit, to paraphrase Joe Stiglitz, may serve as a “discipline device” through stabilizing political spillovers.