Managing Grexit Fallout: How to Maintain the Euro’s Credibility

With the announcement of the referendum in Greece, a Greek exit from the euro area has become a possible scenario. A so-called “Grexit” would have a high price for both sides. The other euro area members should be ready to take steps that reestablish the credibility of the euro area as a monetary union built to last. If markets perceive the euro area as just another system of fixed exchange rates that countries can leave and join freely, this can drive the monetary union apart.

 

The moment Grexit becomes likely, political communication will be key. An emergency euro area summit should announce a number of initiatives to bolster the euro area’s credibility. Policymakers should commit to the completion of the Banking Union, including a pan-European deposit insurance scheme. They should nominate a president of the euro area summit, establish a regular meeting series, and create a committee for euro area affairs in the European Parliament. Leaders should also commit to discussing a fiscal capacity and broader institutional reforms for the euro area.