Greece is approaching the edge of the cliff again.


Investors and economists are speculating on the prospects thenation will remain in the 19-nation euro area or be forced out bypolitical and financial miscalculations—a rerun of the crisis thatpeaked almost three years ago. A review of Bloomberg News storiesshows that use of the word “Grexit” is higher than at any timesince those dark days of 2012.


The tumult follows this week's election of Alexis Tsipras asprime minister. He won on a platform incompatible with the terms ofthe bailout loans Greece has relied upon since 2010. He promised adebt writedown, higher pay, and an end to austerity.


While he has committed to do all that while staying in the euro,analysts say he's on a collision course with his European peersthat might still spell Grexit.


So how likely is it? At Berenberg Bank in London, chiefeconomist Holger Schmieding puts the chances at about one inthree.


Here are the arguments made by economists on either side of thedebate:


Why Greece should go:

  • Devaluation: A weaker currency should spur exports andtourism.
  • Public finances: The budget, excluding interest payments, is insurplus as is its current account. Bond yields are lower than wherethey were in 2012.
  • Policy flexibility: Athens would not be subject to the dictatesof creditors, allowing a looser fiscal policy amid unemployment ofabout 25 percent.

Why the Eurozone should let Greecego:

  • Less spillover risk: Spain and Ireland have turned the cornereconomically, while Portugal wants to pay off the InternationalMonetary Fund (IMF) early.
  • Stronger defenses: Three years ago, Europe had only a makeshifttemporary bailout fund. Now it has the 500 billion-euro EuropeanStability Mechanism. The European Central Bank (ECB) is evenabout to buy government bonds for monetary policy-reasons.
  • A message to others: A chaotic Greek departure might send amessage to others that euro membership is worth the price of fiscalrectitude and economic overhaul.

Why Greece should stay:

  • Hyperinflation: Introducing a new currency could send inflationsoaring, wipe out small savers and businesses, and push up bondyields at a time when Greece would probably be an Argentina-style pariah in markets.
  • Banks: Commercial banks would lose access to ECB support, whichas of late October totaled 44 billion euros. A bank run may be setoff as investors seek to remove the deposits they haven't taken outalready, making capital controls necessary. The FTSE/Athex BanksIndex this week closed at its lowest level since at least1995.
  • Voters: For all their complaining, opinion polls suggest aboutthree-quarters the public want to stay in the euro.

Why the Eurozone should keep Greecein:

  • Precedent: The loss of Greece would prove that the 16-year oldeuro wasn't built to last. As in the last round of crisis,investors would quickly begin assessing the vulnerabilities of thenext potential exit candidates.
  • Economic fallout: The resulting spike in uncertainty and bondyields would slow a euro-area economy already forecast by the IMFto grow just 1.2 percent this year, or one-third the pace of theUnited States. Without Greece, the euro could be an even strongercurrency, squeezing exporters such as those in Germany.
  • Meltdown risk: Barry Eichengreen of the University ofCalifornia-Berkeley says, Grexit could end up being “LehmanBrothers squared.”

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