Tags: ECB | Honohan | Greece | Exit

ECB's Honohan Says Greece Exit Can Be Managed, Sees Confidence Hit

Sunday, 13 May 2012 01:15 PM

A Greek exit from the euro could be “technically” managed yet would damage confidence in the monetary union, said European Central Bank Governing Council member Patrick Honohan.

A departure by Greece would be “a rather destabilizing kind of event” for the rest of the euro area and all sides are working to try to avoid it, Honohan told a conference in the Estonian capital, Tallinn, today. “It is not necessarily fatal, but it is not attractive.”

The euro fell to a more than three-month low against the dollar yesterday as Greek politicians struggled to form a government following an inconclusive election on May 6 that saw a surge in support for anti-austerity parties. President Karolos Papoulias will attempt today to break the political impasse and avoid another vote as soon as next month and keep to the terms of its two bailouts negotiated since May 2010.

Europe is “certainly more resilient” to a possible Greek exit than it was two years ago, when the bloc would have been “massively underprepared,” European Union Economic and Monetary commissioner Olli Rehn said at the same conference.

“I still believe that Greece can stay in the euro and find the way to make sure that it respects its commitments,” Rehn said. “It would be much worse for Greece and Greek citizens, especially for the less well-off Greek citizens, if Greece did leave the euro than for Europe as such. Europe also would suffer, but Greece would suffer more.”

Austerity Backlash

Europe’s more than two-year-old debt crisis was reignited this month after voters in Greece and France backed candidates opposed to austerity measures masterminded in Germany by Chancellor Angela Merkel. In France, President-elect Francois Hollande has pledged to raise taxes and increase spending to support economic growth. Alexis Tsipras, leader of Syriza, the biggest anti-bailout party in Greece, refused to join a unity government, claiming the people have rejected the bailout.

ECB council member Panicos Demetriades today criticized austerity and called for growth-oriented policies in his inaugural speech as the new central bank governor of Cyprus.

“Both in Cyprus and in the euro area, it is now becoming understood that an austerity policy alone is not enough to put countries’ budgets back on a sound footing,” Demetriades said, according to a text of his speech in Nicosia today. “Growth is needed above all else.”

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