Bloomberg News

Greece Euro Exit Threat Is ‘Pandora’s Box,’ Morgan Stanley Says

November 07, 2011

(For more on the debt crisis, see EXT4.)

Nov. 6 (Bloomberg) -- European leaders may have opened a “Pandora’s box” of unintended consequences by raising the possibility of Greece leaving the euro, according to Morgan Stanley.

Responding to Greek Premier George Papandreou’s plan to hold a referendum on the nation’s second bailout, Angela Merkel and Nicolas Sarkozy last week said the question must be framed as a choice between staying in the euro and submitting to the bailout, or exiting the single currency. Papandreou canceled the vote amid growing pressure on him to resign.

The possibility of leaving the euro has been “so far a taboo in European political circles,” Joachim Fels, Morgan Stanley’s chief global economist in London, wrote in a note to clients today. “European governments may have set in motion a sequence of events which could potentially lead to runs on sovereigns and banks in peripheral countries that make everything we have seen so far in this crisis look benign.”

Responding to the sovereign debt crisis that is sweeping through Europe’s peripheral economies, euro area leaders have torn up the rulebook in their efforts to stem contagion. As well as offering Greece a choice about remaining in the euro, they have been forced to abandon the clauses prohibiting bailouts in the treaty governing the euro.

‘Coercive Force’

After cancelling the bailout vote and winning a parliament confidence vote, Papandreou is now trying to form a unity government and preserve international aid. President Karolos Papoulias met in Athens today with Antonis Samaras, head of the main opposition party, in a bid to persuade him to support a national government. Samaras signaled today he’ll back such a government once Papandreou steps down.

“The coercive political force of this threat cannot be underestimated,” Jacob Funk Kirkegaard, research fellow at the Peterson Institute for International Economics in Washington, said in a posting on the institute’s website. “The euro area now has been equipped with a political and institutional nuclear weapon to use against recalcitrant members and seemingly has the will to use it.

‘‘A taboo was broken that cannot be undone,’’ he said.

--Editors: Fergal O’Brien, James Kraus

To contact the reporter on this story: John Glover in London at

To contact the editor responsible for this story: Paul Armstrong at

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