Greece exit is nightmare, US data posts 'no QE' sign: ING

In the backdrop of the Greek situation and US market data, Rob Carnell, chief economist, ING tells CNBC-TV18 that the consequences of Greece's exit presents a nightmare for both the nation and the EU as a whole.

He bemoans the involvement of politics in the resolution of the Greece's problem and says that the people needed to take a clear decision. He points out that the US market data indicates a refusal of any further quantitative easing and adds that the US Fed could pass on some of the dollar’s strength to the euro. Below is a transcript of the interview on CNBC-TV18. Also watch the accompanying video.  Q: Risk assets are having a rally today and the reason perhaps would be statements announcing G8's interest to keep Greece in the EU and the group’s preference to growth over austerity to calm nerves in the financial markets. How much credence would you give to these statements? Do you think there is something material behind them?
A: I think it's certainly possible. There has to be a give and take on both sides and in the Greek case there is a need to ease the demand for austerity. It's quite clear that austerity isn't working; growth is collapsing and unemployment is shooting higher.
As a result to some extent in response to the demand fiscal austerity these policies have delivered very significant political instability in the sense you have got new parties coming up with suggestions of various other ways.
I don't think there is another way. Greece out of the EU is a catastrophe. So the EU is going to do everything possible to try and keep the EU united. But on a strong sense of moral hazard, the EU dosn’t want to give into Greek demands to let off on austerity, as the country got itself into this mess.
We don't want to encourage other countries to think that they have to let-up on austerity. So there is a real game of brinkmanship and of words taking place and the fact is that politics is playing a very substantial role in these negotiations. That is adding a lot of nervousness as politics doesn’t always deliver the right outcome from an economic point of view. Q: What are the possible repercussions of Greece exiting the EU? Do you think there could be a big crisis in financial markets across the globe?
A: The repercussions from Greece leaving the EU are very easy to set out; very easy and very complicated and a lot more immediate.
But the first consequence is a separate currency and that in itself is a massive undertaking. When a new Iraqi currency was established after the fall of Saddam Hussein, it took the printing company three months to print, working night and day, the new notes and it was sent in over 37 jumbo jets to be distributes around the country.
Now it will take four months to do that for Greece. You cannot imagine how much of a burden that would be for people who will unable to withdraw money from ATMs. The new currency itself would probably collapse almost immediately.
Our guess is that looking at other currency regimes to broken there will 80% depreciation in the Greek currency, the 'new drachma' for want of a real name In effect, internationally Greece's economy would become a fraction of what it was prior to leaving the EU. In the meantime, no one would do business with Greek companies as no one would know on what basis the contracts are written.
That would see companies go bust. It's not the case that Greece could depreciate its way back into a nice healthy growth environment without surviving an absolutely gut-wrenching recession for many years.
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So I think that's something that really should be avoided and the Greek people need to be aware of the outcome. For the EU as a whole it depends. Contagion is going to be a massive problem, countries would think that if Greece so can Portugal, Ireland, Spain and you can keep the list going as far as Germany.
So that would require a lot of policy actions with the added risk of runs on banks. It could be bad. So you got to hope that all this posturing, all this talk is going to lead to some action. At the moment it's largely just talk. Q: How do you expect the events in Greece to shape up from now to June 17 when they will be holding their elections? Are we likely to see any action from ECB, maybe a QE push?
A: It is a real shame in a way that everyone is looking to the ECB to solve Greece’s problems- it is not a monetary issue.
It is a combination of a property booms and burst, unstable financial systems and in the Greek case, some others, but not across-the-board, serious fiscal problems.
The moment you have got policy response which is to a mixture of different issues including fiscal austerity, applied across the board.
I think a number of things could happen.
Firstly, a slight push back from austerity is appropriate as growth has disappeared. There needs to be lesser emphasis on austerity, the ECB can only help a bit. So yes, we could see another cut 25 bps – that is going to make very little difference.
I think a more immediate initiative for the ECB would be to just not defend the euro verbally. If ECB president Mario Draghi could state that the ECB doesn’t mind markets finding the right level for currency, I think markets will take that as a green light to see further euro weakness and the euro will be down at 1.20-1.15 against the dollar. 
This will begin to provide quite a bit of benefit for some of the peripheral countries where the problem is competitiveness and not fiscal. Q: How are you then placed on the US markets because the economic data has been more or less mixed? So is the US strong enough to ride the storm or is there a likelihood of QE3 ?
A: The macro data simply says 'Don’t do QE'.
You've still got growth, it is not great, but it's positive at around 3%, core inflation is moving higher after having stalled in the last couple of months. But inflation is already above the levels that in the past the Federal Reserve would have considered appropriate or acceptable for the US.
The unemployment rate, which seems to be the key factor for the US Fed right now is coming down, it is in spurts but it is moving lower and I think now will continue.
The data flow has noticeably improved since a bit of a weak patch around March-April. In the end, QE will probably be a response if it comes., it will be to something that happens in Europe.
If there is a further escalation of the crisis in Europe, then the Fed may initiate a sterilised unemployment QE just to reduce the downward pressure on the dollar which was a factor in previous episodes of QE, and there is no need to do that.
It will be a sort of 'beggar-thy-neighbour' policy and at the moment they are in better shape than Europe.
The US rather pass on a bit of dollar strength to the euro weakness. I think there is no justification for a QE at all.