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What Happens If Greece Quits The Euro?

Will Greece be forced to reintroduce the drachma?
Will Greece be forced to reintroduce the drachma?
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By Rikard Jozwiak
BRUSSELS -- On June 17 Greeks go to the polls in a general election that could determine whether the crisis-hit country remains in the 17-nation eurozone. What happens if Athens quits -- or is forced out of -- the single currency?

How important is the general election in Greece on June 17?

This is a repeat election after the May 6 vote resulted in no party having enough support to form a government. The leftist Syriza party, which is tied in the polls with the conservative New Democracy, has promised to tear up Greece's stringent 130 billion-euro ($164 billion) deal with the EU and International Monetary Fund (IMF) that is needed to avert a Greek default.

It's not clear if Greek parties will be able to put together a coalition government this time either. But if Syriza emerges as the clear victor, expect market turmoil -- central banks in some major economies have already announced they are ready to take steps to stabilize the markets if needed.

And, "even if there will be a government, if that government will not have an agreement with the IMF and the eurozone partners, then the IMF and the eurozone partners will stop financing Greece further and money will run out at the end of June," warns Zsolt Darvas, an economist with the Bruegel think tank. If that happens, a Greek exit from the euro is likely.

What would a Greek eurozone exit look like?

No one really knows because no country has left the common currency before. Janis Emmanouilidis, a policy analyst at the European Policy Center, notes that the EU treaties only foresee an exit from the European Union -- but not explicitly the eurozone. "In legal terms, any country exiting the EU or the eurozone would have to exit the EU and re-enter the EU under new conditions," he says.

But Emmanouilidis says he's convinced there must be a so-called "friendly exit" in which everyone involved -- including the EU institutions, the EU member states, and Greece -- agrees on a procedure on how the country should leave. The catch is that this might require a decision in the Greek parliament or a Greek referendum -- something that might prove tricky considering polls indicate that 70-80 percent of Greeks want to remain within the eurozone.

How would leaving the eurozone affect Greece?

Initially, at least, a "Grexit" is likely to be extremely painful. "The financial sector would collapse, most of the private sector would default, the economy would fall much further, unemployment would be higher, budget revenues would also largely disappear because nobody would pay taxes since the economic activity will go down," Darvas says.

There are already smaller bank runs happening in Greece with people moving their money to other parts of the EU, Switzerland, or under the mattress. Greece's economy shrank by 13 percent between 2007 and 2011 and it's estimated that an exit from the eurozone would cause the economy to shrink by 40-50 percent in the first year. Greece would have to introduce a new currency -- likely the drachma -- which would plunge in value, raising the cost of imports.

The flip side of the plummeting currency is that Greek exports would become more competitively priced, bringing benefits to the economy over the longer term.

What will happen to the rest of the eurozone if Greece leaves?

A Greek exit could further erode confidence in banks, such as in France, that are most "exposed" through lending to Greece and through their Greek subsidiaries.

And then there's the risk of "contagion." Emmanouilidis notes: "People might start saying that 'what happened to Greece was something which a year or two years ago was said would not happen to the country. We were always told that no country would have to leave the eurozone.' So then psychologically people will start asking the question, what does that mean for other member states?"

The cost of borrowing for other "weak" economies such as Spain and Italy would likely rise. This could spell danger for Madrid, whose yield on benchmark 10-year Spanish debt this week surpassed the 7 percent threshold that triggered bailouts for Greece, Portugal, and Ireland. That's despite a eurozone deal reached last weekend to help Madrid by lending its banks up to 100 billion euros ($125 billion).

The Fitch rating agency said this week that this measure should help cushion Spain from any contagion unleashed by a Greek euro exit. But it said banks in Portugal and Ireland would be more vulnerable as these countries "could be perceived 'next in line' for a euro exit."

What would be the impact on the U.S. dollar and gold?

A Greek exit would lead to a decline in confidence in the euro and a subsequent appreciation of the U.S. dollar -- a move not expected to be welcomed in Washington, as it would make the U.S. economy less competitive, undermining what is already a weak recovery.

Gold should rise, too, says Cinzia Alcidi of the Center of European Policy Studies. "The price of gold started to increase significantly when the financial crisis started in 2007 and the price has followed a steep upward trend. The main reason for this is that when there is uncertainty, gold becomes a secure investment."
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Comment Sorting
Comments
     
by: J from: US
June 15, 2012 12:37
Be done with it already. It is a small country, too much attention in my opinion.
In Response

by: Eugenio from: Vienna
June 15, 2012 14:05
:-))) J, judging by this comment you are just an economic genius - you understand economics even better than George W. Bush understood the Middle East :-)).
In Response

by: J from: US
June 16, 2012 03:35
It's a tiny economy. It is silly to think a power like US would be affected by anything that happens to them. Or to Austria. Claro?
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by: Eugenio from: Vienna
June 16, 2012 11:56
Obvio, J, nothing affects you, guys: neither what is happening in Greece, nor what is happening in Austria, nor in Iraq, nor in Afghanistan. You are just always doing fine :-)).
In Response

by: J from: US
June 16, 2012 14:16
Yes, that's the point I am trying to make. The stock market traders react with panic to every little news from the tiny Greece here in the Western hemisphere too. I remember Greece's GDP before the crisis was estimated to be close to Wallmart stores yearly income. I don't know what it is now, but must be 1/3 of that number if you consider their debt. The stock market would maybe drop by 50 points if Walmart had a hard time to pay its debts.
But Greece all of a sudden makes a big impression. We need some perspective here.
In Response

by: Eugenio from: Vienna
June 17, 2012 06:26
BY THE WAY, Professor J, I have just read in the Spanish newspaper "El País" that Ban Ki-Moon (in case you don't know who it is, Professor, this guy is the UN Secretary General :-) said yesterday (Saturday) that "it will be crucial to avoid massive withdrawals of money from bank accounts in the coming months in order to prevent a FINANCIAL PANIC" (Ban Ki-moon dice de que en los próximos meses será "clave" evitar retiradas masivas de depósitos de los bancos y que no se desate el "pánico" financiero).
I know, Professor J, you will say that none of this will affect you, but to me it sounds like Ban Ki-Moon is kind of saying that LIMITS ON CASH WITHDRAWALS from people's bank accounts are likely to be imposed in the next few months.
This once again reinforces my conviction in that the decision to keep my savings in a stocking under the pillow was the correct one.

by: Eugenio from: Vienna
June 15, 2012 13:52
Congratulations to the team of the RFE/RL - they have once again remembered about the fact that, actually, the European decision-makers are not out their primarily in order to pretend to imposing sanctions on anyone or attend (or not) football matches. They are there to guarantee economic well-being of the European population. And what has been happening in Greece (Spain, Portugal, Italy, Ireland) over the last 3,5 years shows clearly and distinctly that they FAILED to guarantee anything other than ever lower living standards for the population of these European countries.
What is coming for Greece (a country that has been an EU member for more than 30 years) is a DEFAULT (be it now or a few months from now) followed by either a fall-back into total underdevelopment, or a civil war, or a coup d'état, or a foreign (German/British/US) military intervention - or all of the above together.
And this "bright European present" should make all those who have been "invited" to become EU members think about their own future: it will be no different from that of Greece, that was also "invited" to become an EEC member state some 35 years ago.
In Response

by: Dick Wittingham from: Opelousas, Alabama
June 15, 2012 17:10
Eugenio, do you really think Greece will result in a civil war or a German invasion?
In Response

by: Eugenio from: Vienna
June 16, 2012 11:08
Dear Dick, of course, these are two of the possible options. The two camps in the Greek political arena are already opposed to each other in a very agressive manner - I do not know if you had a chance of watching on TV/Internet the video in which a neo-fascist Greek MP attacked in a TV studio two female Communist MPs (one from the Syriza and the other one from the Communist Party).
This societal tension is apparently very present on the streets of Greek cities. Should none of the two camps prevail in the coming Parliamentary election, the chances of the situation getting radicalized are very high.
In Response

by: Dick Wittingham from: Opelousas, Alabama
June 17, 2012 17:56
Eugenio, you are correct. Syriza has won the election. Now comes the civil war. I think this will leave you quite satisfied.

by: Jack from: US
June 15, 2012 14:05
"No one really knows because no country has left the common currency before". This is clearly a false statement. The former republics of x-USSR have left the common currency (ruble) in the years 90-92. And equally important, those who left earlier have ripped more benefits than those who lingered. The whole "euro" project had only one purpose - enslavement of the minions by Germans. Leaving the euro disaster zone does not automatically mean end of slavery, it all depends on conditions. Not only Greece should leave euro, it should completely discard and nullify all euro-denominated debt. Only then it will be a successfull exit. However that's exactly what Germans are fighting to prevent. They want Greece out but still owing hundreds of billions of euros in debt.
In Response

by: Eugenio from: Vienna
June 16, 2012 12:04
A very good point, Jack! Another example of countries leaving a common currency area - which is often cited in Austrian media - is the one of Hungary, Czechoslovakia and Slovenia leaving the zone of the Austrian Krone after the desintegration of Austria-Hungary in 1918.
Both examples - that of the countries leaving the Soviet Rubble area in the 1990s and that of the countries leaving the Austrian Krone area about 90 years ago - demonstrate that the collapse of a common currency is always followed by several years of extremely high inflation and collapse of living standards of the population. This will inevitably happen here in the EU as well once one or several countries leave the Euro-zone and we all have to thank only Herr Helmut Kohl and Frau Angela Merkel for this gift of nature!
In Response

by: not jack
June 16, 2012 12:16
Learn to read. "The common currency" refers to the euro, not all common currencies. If this was the intent, in English we would use the indefinite article, "a". Obviously, many countries have broken off and begun their own currencies, you silly troll.
In Response

by: J from: US
June 16, 2012 14:06
Yes! Finally someone with a brain!

by: Eugenio from: Vienna
June 15, 2012 15:42
Europe deserves turmoil, if only for the way they have treated Israelis, who themselves were mistreated by Palestinians.
In Response

by: Eugenio from: Vienna
June 16, 2012 11:23
Konstantin, thank you for having used my name for this comment: I can subscribe under every word :-)).

by: American Troll
June 16, 2012 22:35
This is an existential disaster for Europe and indeed the death knell for the entire West. Without precious Greek legions of fifty-year-old retirees and third-generation tax delinquents to bootstrap Germany's tiny economy, the inevitable result is global bankruptcy, revolution, and war, leaving the machines to inherit a barren, radioactive Earth. It's all happening exactly as the Mayan sage Nostradamus prophesied in the Book of Revelation. As further evidence, a revival of Dallas swept the ratings last week. CONNECT THE DOTS PEOPLE.

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