George Osborne has warned that the escalating showdown between Greece and the eurozone has become the “greatest risk to the global economy”.

In this the Chancellor is right. North European politicians assert with remarkable insouciance that EMU is now strong enough to withstand the effects of contagion if Greece is forced out of the euro, and some say it may even emerge stronger. This is courting fate.

It is true that QE by the European Central Bank has anaesthetised the bond markets. Yet Grexit would convert the eurozone into a fixed exchange rate system overnight, a sort of 'ERM3' in the words of Morgan Stanley. Portugal would be a sitting duck. Whether Europe’s leaders could stop the EU itself from disintegrating after such a breach of political solidarity is an open question.

Mr Osborne pointedly refused to take sides, and came very close to rebuking the EMU authorities for carelessness after his meeting with the Greek finance minister Yanis Varoufakis.

“I urge the Greek finance minister to act responsibly but it’s also important that the eurozone has a better plan for jobs and growth. We have got to make sure that in Europe, as in Britain, we choose competence over chaos.”

In Washington, President Barack Obama tilted even further towards the Greeks. “You cannot keep on squeezing countries that are in the midst of depression. When you have an economy that is in freefall there has to be a growth strategy and not simply an effort to squeeze more and more out of a population that is hurting worse and worse.”

This should be a cautionary warning to Brussels, Frankfurt and Berlin that they do not have a green light from the rest of the world to do as they like with Greece – however irritated they may feel by the provocations of Alexis Tsipras. There are larger diplomatic and strategic matters at stake.

David Fuller's view

Here is a PDF version of the article.

The best guess seems to be that Greece will get an acceptable agreement of perhaps 50 year’s duration and very low interest rates to pay off its debts.  This would be far less risky than ‘Grexit’ and conveniently, all parties to the agreement would be long gone by 2055. 

Significantly, Germany’s DAX Index reached another new high today.  While Mario Draghi’s QE started this rally, I do not think it would be continuing if buyers expected an imminent ‘Grexit’ and all the additional uncertainty that would inevitably involve.