If Greece left the euro, inflation and unemployment would probably rise
Greek politicians are struggling to form a new government.
There are powerful factions that do not want the austerity measures imposed on Greece by its international lenders.
But unless Greece can satisfy the demands of the European
Union and the IMF, then they will cut off Greece's last remaining lines
of credit.
Without that, Greece will not be able to pay its bills and could drop out of the euro altogether.
Below are the views of several experts on what would happen if Greece were to leave the euro.
Chaos. Greek banks would go bust. Greek companies would go bust. Unemployment would go up. The new drachma loses lots of value.
Food and energy prices go through the roof. It would be an explosive cocktail.
The turmoil would weigh on growth. The outlook for the eurozone would worsen.
The drachma would be devalued by at least 50%, causing inflation.
Interest rates will have to double and all mortgages, business loans and other borrowing will become much more expensive.
There will be no credit for Greek banks or the Greek state.
That could mean a shortage of basic commodities, like oil or medicine or even foodstuffs.
A lot of Greek firms rely on foreign suppliers, who may cut
off Greek customers. Greek companies could be driven out of business.
Greece will lose its only reference point of stability, which was its euro status.
The country would end up in a volatile period. There would be institutional weakness.
The worst case scenario would be a social and economic breakdown, perhaps even leading to a totalitarian regime.
I think that either the Greeks or European policy makers
talking about an exit in a casual blase way are being highly, highly
irresponsible.
Total cost versus the total benefit remains overwhelmingly negative, both for the eurozone and Greece.
In one shot, a Greek exit could undo a large part of good work in Ireland and Portugal.
If you are a Portuguese saver with money in the bank, even if
there is a small likelihood of losing that money, it would make perfect
sense to move euro deposits while you can to a safer haven, like the
Netherlands and Germany.
There would be a significant deposit flight in peripheral countries.
It would immediately weigh on investment in the real economy,
because corporations would be very reluctant to invest anything at all.
You would see cascading bank defaults in Greece and everybody would take money out of Portuguese and Spanish banks.
A big part could be plugged by the European Central Bank (ECB) through a liquidity operation that would backstop the banks.
The ECB has already done that several times and it would step up to the plate again.
But that would not stem the political contagion or unrest. We
have seen four elections in two weeks. In Greece, France, Italy and
Germany, electorates have voted against austerity at home.
However, Greece is a small country and the rest of the eurozone has been making provision for this for a long time now.
The eurozone could survive a Greek exit. Depending on the
choreography, the exit could be better for everyone involved if managed
in a co-ordinated orderly way.
But if it were done by a unilateral default, an exit would be a worse option for Greece.
In the currency market, we are already seeing money fleeing to safe havens.
The alternatives are few and far between for those who want to stand aside from the euro.
The dollar is performing relatively well. The dollar index -
the dollar against a basket of other major currencies - is at the
highest level in two months.
A new drachma would not be the most widely trading currency in the world and would probably drop in value by 50%.
What everyone is missing is a third possibility.
If credit is withdrawn by the EU and IMF, then Greece becomes
a cash economy. It means the government can only pay what it collects.
The government starts shutting down, 10-15% of state employees don't get paid and unemployment surges from 20% to 30%.
But Greece can still use the euro.
It would be difficult for the ECB to keep banks afloat. The Greek banking sector would collapse as well.
That would cause more unemployment, as credit for companies would dry up.
What happens next is a political question.
European nations would probably not accept another Western European country descending into chaos and collapse.
The EU and IMF would probably negotiate some kind of aid. But Greece could continue with the euro.
Article from Ekathimerini today.
