Whether or not partial or whole Grexit prompts contagion will depend on the forces in favour of a transfer union amongst the remaining members. Syriza has been talking up the risks of contagion, describing it as a near certainty, because this was its main bargaining chip in seeking easier terms from the creditors. Unfortunately for them, so far at least, all the data that has come out has pointed to there being no run on other sovereigns. This implies that markets think that the forces in favour of the risk mutualisation required for calling the markets’ bluff (that would take place on the ECB balance sheet) are healthy.
This might seem surprising, since one way of looking at the current impasse is that the Greeks are asking for terms that might have existed if there were a transfer union in place beforehand. And the creditors are objecting, because from their perspective they did not sign up to a transfer union.
However, as Chris Giles pointed out when he circulated my last blog post, it may be easier to engage in transfer union behaviour [transfer unity?] once the outlying or dissenting former club member is out of the picture. The previous reluctance fades because the new core membership worry less that they will end up on the wrong side of the union, since, ex ante, all of them look more similar. The new members start to resemble Rawls’ hypothetical individuals in the original position, less sure who it is who will be unfortunate enough to have to dip into the pot they are proposing to fund together.
The other force propelling this kind of integration is, of course, the realisation that the current difficulties were caused by not having it in the first place. It doesn’t seem cut and dry that this would be a force for togetherness. The lesson might be that it is either all or nothing as far as the transfer union goes. In which case enough might choose ‘nothing’ to cause disintegration. But, so far at least, this is not what is being concluded by investors, and that does not augur well for Syriza’s current strategy.