There is some concern about Greece’s current debt strait causing it to leave the EU, and there is additional concern about “contagion” spreading—that with the precedent set, other members might leave, also. Mark Dowding, BlueBay Asset Management’s co-head of investment grade and a senior portfolio manager, offered this, for instance:
If we get a Greek exit, you have to say the potential for other countries to exit the eurozone is suddenly no longer negligible. That would need to be reflected in bond prices.
It’s certainly true that the potential for others leaving is no longer negligible. However, it’s neither sudden—the possibility has been there for years—nor is it much higher than negligible. The only nations with any non-zero likelihood of leaving at all are the remaining PIIGS, and they’ve either already been through their crises (Ireland, for instance), or they’ve already begun taking steps, however halting, to improve their financial situation.
Megan Mcardle had an excellent column about this the other day. Fundamentally, being on the EUR changes the nature of the risk in lending to poorly governed Eurozone countries, in that you no longer bear inflation risk, but bear higher default risk. You can push the risk around, but you can’t make it go away.
http://www.bloombergview.com/articles/2015-06-29/the-moral-of-the-greek-story
She’s also right that Greece has no business being in the eurozone or in the EU. But Greece isn’t the only one; I don’t see the EU or the eurozone having any durability given the disparities in fundamental philosophy concerning the purpose of money and the role of government in society.
On the other hand, with smaller, more homogeneous currency unions, these kinds of risks can be better managed rather than disguised.
Eric Hines