Citigroup chief economist Willem Buiter has fired off another shot today in the intellectual battle over Greece. In an op-ed piece in the Financial Times the expert claims that despite the recent formation of a new coalition government, “he considers it highly unlikely that Greece will comply sufficiently with even ‘the lightest clauses of the’ fiscal austerity conditions, let alone with the structural reform conditions, including privatization targets, which are unlikely to be relaxed.” He also notes that political opposition to austerity measures and reforms is “stronger than ever before”.
In his opinion, the “troika” (European Commission, European Central Bank and International Monetary Fund) might allow a Greek failure in September’’s program evaluation, but it is unlikely they will tolerate it yet again in December. “Grexit (the term for Greece’’s exit from the euro) may well be triggered by a troika review declaring a Greek willful non-compliance with the conditions of its programme, stopping the disbursements to the Greek state,” Buiter writes.
Thus, the Citigroup economist remains convinced that the country will default and the Eurozone emergency financing will be suspended. “At that point Greece will exit the euro zone, following the imposition of capital controls, foreign exchange controls, restrictions on deposit withdrawals and a temporary suspension of the Schengen agreement,” he says.
Under that scenario, Buiter believes that it is “highly unlikely the core Eurozone would be willing to take on significant exposures to Spain and Italy”. Fear of contagion would effectively put the breaks on any aid to these last two countries. It is for this reason that Buiter argues for a banking union that would limit the risk of a run on banks.
“A road map to a banking union will likely be announced at the EU summit on June 28-29. It had better be a credible path. In any case, implementation is the hard part, and time is of the essence,” he says.
(source: FT, Share Cast)
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