In game theory, it is known as “chicken”. Two cars drive towards each other across a narrow bridge. Both have an interest in swerving out of the way, since if they don’t then both drivers will get killed. So they both assume the other will get out of the way first, because they have such a strong interest in doing so. The result? According to the theory, quite often they both die as the cars crash into each other.

The stand-off between Athens and Berlin over whether Greece remains in the eurozone increasingly looks like that. Both sides might be better off reaching a compromise. In the real world, they might easily misjudge how the other side will behave. And in that case, Greece could quickly find itself out of the eurozone. Maybe there are firewalls in places, as officials in Berlin and Brussels keep assuring everyone. Perhaps the ECB has made sure that a Greek exit would be a relatively contained event. But that would still be a huge, and potentially catastrophic, event for the European continent; and while the turmoil would hit our neighbours in the eurozone much harder, the shockwaves would wash across this country as well.

The Prime Minister David Cameron and his Chancellor George Osborne have already asked staff at the Treasury to come up with some plans for how to cope with the fallout. “We’re stepping up the contingency plans here at home,” Osborne told the BBC at the weekend. And so it should. The Government prepares for all kinds of potential catastrophes: a terrorist strike on London; a closure of the ports because of an Ebola epidemic; a winter snowstorm, floods or a financial crash taking down the City. A Grexit is a lot more likely than any of those right now, and would have a huge impact on the UK economy.

And:

Five

Wring some concessions from the EU. It is never polite to kick a man when he is down. No one wants to do it. But let’s be honest here. It can also be smart tactics. In the weeks immediately after a Grexit, the rest of the EU will be in crisis mode. Officials, commissioners, finance ministers and presidents will desperately be trying to contain the situation, and stop the rot from spreading. That will be a good moment to negotiate, in the Tony Soprano sense of the word, a few concessions. Such as? The taxes threatened on the financial sector could be the first to go. If it gets really bad, we might even be able to reform the Common Agricultural Policy.

True, no one has any idea whether Greece or Germany will back down in this stand-off. Even the Greek Prime Minister Alex Tsipras and the German Chancellor Angela Merkel don’t really know what will happen next. They would probably still rather avoid a Grexit. But if they don’t, it is best to have a plan in place for dealing with the fall-out for the UK – because once it starts, events will move very quickly and it will be too late to plan anything.

David Fuller's view

Currently, the European stock markets appear reasonably relaxed about the possibility of Grexit.  Yes, they paused last week and are weaker today, but they had a very strong January, mainly thanks to the announcement of Mario Draghi’s QE programme which will commence in March. 

Nevertheless, Grexit is a potential ‘breaking situation’ in news jargon terms.  If it roils European markets over the next few weeks, that could present buying opportunities in European shares.  I would once again favour German Autonomies, and will highlight more of these companies in the event of a bigger pullback.