Posted by : Enzio von Pfeil

Channel News Asia TV Show

Q) Asian stocks got a lift from some positive earnings news, but the question of Europe’s debt still lingers. Now, there’s revived talk of Greece potentially leaving the EU. What’s the likelihood of this being a reality?

It is very likely that Greece will leave the Euro - but not the EU!

She will leave the Euro because her competitiveness is extremely sickly: Greeks will want the convenience of a Drachma devaluation in order to prod their few, price-sensitive exports. That a substantially weaker Drachma will boost imported inflation won’t be a concern of irate voters, who are mad at their vested interests being usurped by lenders from Germany, the EU and the IMF.
However, she definitely won’t leave the EU: she gets far too good a deal off the Euro subsidies gravy-train. This gravy train pertains particularly to Greece’s farmers skimming off the EU’s subsidy programmes.
Besides, not all EU members have adopted the Euro.

Q) What are the consequences and implications on the Asian economies if Greece does leave the EU.

As just put forth: Greece probably will leave the Euro, but stay in the EU. So my observations focus on Greece exiting the Euro.
The key consequence for us out here has to be less Asian exports to Europe:

Price, or currency effect. The Euro weakens substantially, e.g. to USD 1.10/Euro. This means that all currencies, Asia's included, will strengthen against the Euro. Given the price-sensitivity particularly of China's exports to Europe, a stronger RMB will impinge upon China's exports. This tale of a weaker Euro will also affect particularly the price-sensitive exports particularly of price-sensitive Southeast Asia, e.g. those of the Philippines, Thailand and Malaysia.

Income effect. With Europe's Economic Time® deteriorating, expect her personal income levels to keep sagging. This means that there will be less disposable income around: people will consume less, implying less imports from Asia.

Q) Once Greece leaves the EU, is a breakup of the union not far away? How catastrophic is this scenario on the world economy?

I don't think that Greece will leave the EU: she likes receiving EU subsidies far too much! But she probably will leave the Euro.

But even if Greece did leave the EU, this would not be catastrophic for Europe or for the world economy: Greece is a punk punching way above her weight. After all, she accounts for a mere two per cent of EU GDP!