Would Greek exit help or hurt Europe’s currency union?

FRANKFURT: With aid negotiations off and ATMs running out of money, it’s not speculation any more. Greece could leave the euro. And soon.

What would that mean for the Greek people and for the European Union’s 16-year-old shared currency — the crown jewel of a six-decade-old project in binding Europe’s countries closer together?

For Greece, the short-term pain and turmoil could be extreme whereas the currency union would likely survive the initial shock. The longer-term costs — and any possible benefits — could take years to become apparent.

Ironically, a few experts think one of the most devastating outcomes for euro would be if Greece leaves and, against all expectation, thrives. That would undermine claims for euro being a key to prosperity.

On Sunday, Greeks are asked to vote on the painful demands made by creditor countries for desperately needed bailout loans. The vote could be the turning point. A ‘no’ could mean no more loans, leaving Greece little choice but to print its own currency after running out of euros needed to pay government wages and pension and to refloat troubled banks.

Here is a look at some of the possible damage — and any benefits — of a Greek-euro divorce.


There’s a widespread view among analysts that the eurozone would not collapse in the short term if Greece left. There would be turmoil. Stocks would fall. Borrowing costs for the weaker eurozone members, such as Portugal or Italy, might rise for a while.

But, this view has it, the European Central Bank (ECB) could handle it. The ECB is already pouring 1.1 trillion euros ($1.2 trillion) of monetary stimulus into the economy through regular bond purchases and stands ready to do more. Since the Greek crisis started in 2009, the governments that use the euro have come up with crisis backstops. Those include tougher banking supervision and a pot of money to bail out troubled governments.

Other voices say short-term implications are scarier. US Treasury Secretary Jacob Lew has persistently warned that the global economy, currently enjoying an uneven recovery, doesn’t need the uncertainty of a Greek euro exit, or ‘Grexit’.


For the long term, a Greek exit would disrupt the euro’s ‘Hotel California’ principle: that, as the Eagles put it, you can ‘check out any time you like, but you can never leave’. It is supposed to be permanent.

But if it turns out that one country can leave, investors might think, so can others.

They might demand more interest for the risk of lending to countries such as Portugal and Italy. A market crisis could drive another country out.

Some think such higher rates would be beneficial, by forcing countries to shape up their finances. The euro would in fact be stronger. Greece was an anomaly, a backward economy that didn’t belong in the club in the first place, the thinking goes.

A number of economists, however, think a Greek exit could cause long-lasting damage to the euro.

As analysts at Standard & Poor’s put it, ‘the permanence of the monetary union will have been proved false, and this could throw into question assumptions underpinning more than two decades of economic and political policy’.

Ben May, chief European economist at Oxford Economics, says that the worst blow Greece could deal to the eurozone ‘would be if Greece left and its economy quickly started to grow strongly’.

The example would not be lost on other weak members of the currency union.

“For perennial slower growers such as Italy and Portugal an exit, devaluation and default strategy would now become a credible alternative option.”


There’s little doubt that leaving the euro means imminent disaster for Greece.

“In the short term, which may in fact last a couple of years, the process of exit would be extremely messy,” said Zsolt Darvas, senior fellow at the Bruegel research institute in Brussels. The start would be a banking collapse that would make normal commerce impossible. Greece’s new currency would plunge, meaning default on its bailout loans denominated in euros.

The economy would plummet — some say by 10 or 20 per cent. That’s on top of a fall of 25 per cent in the six years, about the drop the US suffered during the Great Depression.

And there’s more. Greece imports energy and medicine, so those essentials could double in price. Greek companies that owe money to foreigners would be unable to pay. Many would go bankrupt. With no lenders and tax revenue plunging, the government would have to slash spending even more sharply than under the hated bailout deal. Greece might even need humanitarian aid.

Inflation could run out of control, especially if central bank has to print money to rescue banks and fund the government.


The larger question is whether Greece would benefit much from a sharply devalued national currency, which in theory helps exports. To do that, you have to have something valuable to export and sell — and to be able to do so efficiently. Olives and nice vacation beaches aren’t enough.

Economist Darvas says the demands of Greece’s lenders have pushed the country to reform some aspects of its economy, making it somewhat more competitive. Labour contracts are more flexible now, for instance.

Greece has risen from 108th before the crisis on the World Bank’s ease of doing business index to 62nd — not great, but progress. If it cuts excessive regulation and bureaucracy, that might improve further.

But that might prove more difficult if Greece was no longer a part of the euro — and did not face external pressure from fellow eurozone states to modernise its economy.