Here is an article from WSJ which puts in a nutshell the domino effect that would be set in motion once Frankfurt legalises Greece's exit.
Exit the Euro Zone? Think Before You Leap
Greece’s departure from the monetary union would be legally difficult and financially ruinous
By Carol Matlack and Jeff Black
“Everything must be done to keep the euro zone together.” That was Chancellor Angela Merkel speaking on German radio
on Sept. 13 as she denied reports that Germany
was preparing for Greece’s exit from the monetary union.
That the leader of Europe’s biggest economy must dampen speculation of a breakup shows the rising unease about the common currency. Two years ago most politicians and investors believed firmly that the euro area was indivisible. As the finances of Greece
, and Italy
have fallen into crisis, that has changed. It’s still unlikely that any member
state will bolt or be banished. Greek Prime Minister George Papandreou, for one, vows to keep Greece
in the euro zone. Still, a growing number of policymakers and analysts are talking seriously about an exit.
In Greece, the issue is enmeshed with a possible default on its sovereign debt. Yields on credit default swaps on its short-term debt are at 98 percent, a sign that investors consider default inevitable. “If the Greeks don’t make it despite all of their efforts, you can’t rule
out” their leaving the currency union, Horst Seehofer, chairman of Germany’s CSU party, a coalition partner of Merkel’s ruling CDU, said on Sept. 11.
Any country that dropped out of the euro would regain control over its monetary policy. Its central bank could set interest rates and would not be controlled by the European Central Bank in Frankfurt. It could reinstate and devalue its own currency, making exports more competitive. An exit would probably lead to sovereign debt restructuring or default, since the country couldn’t repay all its euro-denominated debt with a cheaper currency. Economists reckon that a reintroduced Greek drachma, for example, would be worth only half as much as a euro. Yet Greece seems likely to default anyway, so what’s the difference?
In reality, leaving could be a lot messier. The treaties that created the euro provide no opt-out mechanism. Legally, an exit would require a unanimous vote by euro member
states to change the treaties, says Peter Becker, a researcher at the German Institute for International and Security
Affairs. Expelling a country against its will is effectively impossible. A voluntary exit could be negotiated, but could take months.
What spooks Merkel and other leaders is that a Greek exit could unleash a chain reaction of departures from the euro by other weaker members. Also, an inside-the-euro default by Greece would be less complicated and costly than a default outside the zone, because the ECB and other European bodies could help reach a deal with creditors.
Quitting the euro looks even scarier for the Greeks. Their economy would shrink by at least 40 percent after an exit, predicts Stephane Deo, chief European economist at UBS (UBS). The banks and stock market would collapse, government
and businesses would be frozen out of global credit markets, and corporate balance sheets
and individual savings would be reset in a devalued currency. Devaluation wouldn’t help exports much, Deo wrote in a Sept. 6 note: Other countries would likely raise tariffs to protect, say, Spanish olive oil
against cheaper Greek oil
. Social turmoil would probably increase. “Greece is going to go decades back” if it leaves the euro, says Vassilis Korkidis, president of the National Confederation of Hellenic Commerce, “This is going to be a disaster.”
Greece spent many decades under foreign rule
or domestic dictatorship, including a junta that imprisoned Papandreou’s father and exiled his family
. The political class sees membership
in the European Union and euro as a sign of how far Greece has come, and as a guarantee against slipping back. With Turkey
growing powerful, Greece doesn’t want to be cut loose from its economic and political moorings. Moreover, Greece experienced devaluation and inflation in the 1980s that “not only failed to improve competitiveness but also eroded the value of people’s savings,” says Miranda Xafa, a senior investment strategist at Geneva-based IJ Partners and ex-board member for Greece at the International Monetary Fund.
So if no one wants an exit, how could it happen? Willem Buiter, chief economist for Citigroup (C) in London, offers a scenario in a Sept. 13 report: As Greece resists EU, ECB, and IMF demands for more austerity, the exasperated troika cuts off funding
. Greek banks can no longer post Greek debt as collateral for loans from various EU agencies. With no funding
available from the euro area, writes Buiter, “Greece could blunder into exiting.”
The default feared by investors would then occur. European banks—which according to the Bank for International Settlements hold a total of $128.8 billion in Greek debt, including $42.9 billion in public debt—would take a hit. Investors would push up the cost of government
borrowing in Ireland
, and Italy
, and funding for those countries’ banks would dry up, predicts Nick Kounis, head
of macro research
at ABN Amro Bank. “You’d wonder,” he says, “if the euro zone would fall apart.”
The bottom line: The costs to Greece, not to mention the entire EU, would be enormous if the Greeks were to leave the euro zone.
With Simon Kennedy and Tom Stoukas
Matlack is a Paris correspondent for Bloomberg Businessweek. Black is a reporter for Bloomberg News.
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Hugo van Randwyck
2 days ago
The Greek people could benefit from having 2 referendums.
First, an EFTA referendum: EFTA/EEA or EU/EEA? www.efta.int
- this would allow them to be in the European Economic Area and have free movement of: goods, services, capital and people.
Second referendum: Euro or Drachma, as currency.
As the article said, the Drachma would fall by 50%, which means the Greek economy has no chance, within the current
Euro, of prospering and creating jobs. Yes, Turkey
is doing well and has it's own currency and is not part of the EU - there's the clue.
Also, how many times has Greece gone bankrupt in the last 200 years, 4 times? or more. It's probably better if each Euro country had a referendum on re-introducing their own currency again. Norway
and Switzerland are in EFTA = European Free Trade
Association. EFTA = less EU regulations
= more jobs
2 days ago
Either the EU project
has to be completed or it has to be abandoned
1 day ago
Yep. It would be a total disaster for Greece to regain control of its own currency and default.
Just look at Argentina
1 day ago
This is no more than a temporary pain of giving birth to the united Europe
. Everybody has known for the last two decades, that some particularly archaic economies would never adapt themselves voluntarily to the rules of the game
for a REAL European Union, as designed by Germany
. Now it's the bitter reality that forces them to change, for good. Within 15 years we will have a much stronger and homogeneous euro and EU. If Greece doesn't apply the political and economical structures of the "modern" and competitive Europe
, they will end in poverty. It may happen, but it wouldn't benefit anybody, so it's VERY unlikely.