The domestic turmoil in Greece has diverted attention from a far bigger development in the crisis. For the first time, eurozone leaders were willing to openly acknowledge that a member state might actually leave the euro. In Cannes, Merkel (and Sarkozy) emphasised the aim to keep the euro stable and that though they would prefer to do that with Greece the former would take priority.

It would be too simple to take these words as a ruse to influence the result of the referendum or prevent it – though this has evidently worked. Obviously, political leaders assume that if Greece were to leave the eurozone its exit could be managed in an orderly manner, holding together the rest of the currency union or even strengthening it. We have some doubts about that. Even with the outcome of the last EU summit, ring-fencing other countries from the Greek debacle remains difficult and requires ongoing ECB involvement. If Greece were to leave the eurozone, the spiral of contagion could immediately spread to other debt-laden countries. Exchange rate risks could suddenly become a feature in the eurozone again, undermining the economic basis and triggering a retail and wholesale bank run in countries perceived to be at risk of leaving the eurozone. The knock-on effect might stop only north of the Alps. Thus, the seismic shift in European convictions presented en passant in Cannes could come back to haunt its authors.

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Copyright © 2011 • Deutsche Bank AG, DB Research

Deutsche Bank Research is responsible for macroeconomic analysis within Deutsche Bank Group and acts as consultant for the bank, its clients and stakeholders. We analyse relevant trends for the bank in financial markets, the economy and society and highlight risks and opportunities. DB Research delivers high-quality, independent analysis and actively promotes public debate on economic, fiscal, labour market and social policy issues.

Published by kind permission of Thomas Mayer.