AS CONFUSION reigns this afternoon over Greek plans – or not – for a referendum on the latest bailout, the question over whether Greece will remain in the eurozone has become more urgent.
Angela Merkel last night made it clear that saving the euro was more important than keeping Greece within the monetary union, with the Guardian reporting the German Chancellor as saying that while it would be better for Greece to stay in the eurozone, the “goal of stabilising the euro” is the priority.
But what would happen to Greece if it did leave the euro? What would life be like for its citizens? Would there be a bank run? And how would the markets react?
If Greece left the euro and reinstated the drachma it is almost inevitable that the new currency would be devalued. “Devaluation makes exports cheaper which would be a boost but the interest rates could be crippling,” Philip Lane, professor of international macroeconomics at Trinity College Dublin, told TheJournal.ie. The knock-on effects of a new currency – or reinstatement of the drachma – would be negative for most sectors of the Greek economy, particularly given the ongoing instability in the country.
One of the likely effects is a massive run on the Greek banking system. “Anyone in Greece who had any money, unless they’re very patriotic, would take their money out of Greece,” says Philip Lane. It’s almost inevitable that the new currency would be devalued so individuals and institutions would rush to withdraw their money while it was still worth more in euro.
Day to day life
Leaving the euro would radically change the standard of living for Greek citizens. ”They would be much less likely to take a holiday, much less likely to buy a foreign car. Imports would be much more expensive,” says Philip Lane. “People with a lot of spending power are the ones who’d be hurt. A lot of what people consume is local, so if you’re not a big purchaser of imports, the impact on your standard of living would be less.”
Any individuals in Greece who owed money in euro could find it difficult to make repayments if a new currency was worth substantially less than the euro.
“If your salary had been €40,000 per year and was then reduced to the equivalent of say, €20,000 under the new currency, your ability to repay the debt would be wrecked,” says Lane.
A Greek pull-out could lead to the “usual domino story”, says Lane. “There would inevitable be a lot of speculation about who else might leave. Ireland and Portugal would be on the front line of that, followed by Italy. Monetary systems do have a fragility about them, so the Greek situation has a knock-on effect.”
Without the guiding hand of the European Central Bank, Greece would be able to set its own interest rates. However as Philip Lane explains, it’s unlikely that Greece would be able to have rates as low as the ECB. “The country would win on devaluation as it would be a boost to make its exports cheaper, but lose on the interest costs as it would be trying to encourage people to hold drachma. The interest rates could be crippling.”
This report by economists at UBS on the effects of a country leaving the eurozone warned that civil disobedience is likely to go hand in hand with any country withdrawing. The report even warns that civil war could be on the cards, noting that it has often accompanied the break-up of monetary unions.
One of the few positive sides to Greece going it alone on the currency markets is that it would likely become a very cheap place for a holiday. The euro would be worth a lot more than the new currency, stimulating tourism and making it a potentially attractive destination for Europeans.
It may not all be bad news. This interesting report by the Monetary Authority of Singapore looked at all monetary union exists since 1945 and found that many of the 60 or so economies who did it actually recovered relatively quickly.
“The trauma in the short term would be high but after a number of years GDP may be higher because of the trade effect (where the country could export goods quite cheaply even though imports would be expensive),” says Lane. “It would be really difficult in the short term but if a country can survive all of that then things could turn out positively.”