The Biggest Winners Of A Grexit Could Be The European “Far-Right”

So far there’s no sign of contagion in Europe stemming from the Greek crisis judging by sovereign yield spreads and neighboring stock markets, but that was to be expected. Greek debt has mostly been consolidated on the books of official creditors and everyone has had plenty of lead time to decide how much exposure to Greece they want to have. But Nomura Holdings, Inc. (ADR) (NYSE:NMR) (TYO:8604) analysts warn that there is a serious chance of political contagion if the unfolding crisis empowers anti-EU parties in other countries (the choice of the term ‘contagion’ tells you how they feel about such an outcome). Of the four possible scenarios, only one seems like it would be a positive for Brussels.

A generous deal for Greece could bolster right wing parties in northern Europe

The Nomura analysts Frida Wallnor, Alastair Newton, and Jens Nordvig divide the various outcomes into four broad categories: a deal with major concessions to Greece, a deal without major concessions, Grexit followed by a medium-term recovery, and Grexit without a recovery in the next two to three years.

If Greek PM Alexis Tsipras were to simply fold and accept further austerity with some aesthetic changes then we would be back in the pre-election status quo. Eurosceptic and anti-austerity parties probably wouldn’t get a boost either way. If the Eurogroup were to make dramatic concessions, this would likely strengthen eurosceptic parties from creditor nations like the Finn Party in Finland or the Freedom Party in the Netherlands, not that concessions are very likely.

Marie Le Penn of the Front National is using the Grexit to build political capital. The Euro skeptic told CNBC:

I think that Greece, by saying that it will not quit the euro, in reality it’s making promises that it cannot keep. For the simple reason that the euro and austerity are indissolubly linked

“It (the EU) mocks and brushes aside the popular wish expressed in the Greek elections and it seeks to impose a policy of austerity, the continuity of policy of austerity which the Greek people no longer want. And confronted with the choice, who will win? Democracy or Euro-Dictatorship? It’s up to the Greek government to take up its responsibilities,”Grexit could hurt Brussels whether Greece recovers or not”

But Grexit is looking more likely every day. Citi has recently made Grexit its base case, either immediately or within a few years after kicking the can one last time in the days ahead. Then the question is whether Greece would recover thanks to a devalued currency, or languish for many years. If Greece recovers then it could be seen as a roadmap for exiting for other small economies or debtor nations to follow out the door. It’s not much better for Brussels if Greece fails to recover, though for different reasons.

“Socio-economic turmoil in Greece would, in our view, trigger increasing sympathy for the Greeks and antipathy towards ‘Brussels’ (as well as Berlin),” says the Nomura report.

Even if voters aren’t willing to leave the eurozone, knowing that core European nations are willing to stand by while a fellow European nation collapses will make it that much harder to move toward fiscal and banking unity. And without fiscal integration there will eventually be another credit crisis since current account imbalances will continue.

There are some important general elections in southern Europe this year, but that would be too soon for either of the Grexit scenarios to have played out. Instead we might want to look to the 2017 presidential election in France.

“Marine Le Pen, whom we have long regarded as a credible candidate in the 2017 presidential election who could follow the footsteps of her father in 2002 by winning through to the second round,” says the Nomura report. “A Grexit and rapid Greek recovery would play well to her anti-EU platform and could yet see her spring what would be an electoral surprise – and a major shock to markets.”