

Will Greece leave the euro – and if so, what would happen next?

The question has been bandied about for a few years now, but has gained more attention after Greek elections gave big boosts to parties opposed to the terms of the country’s bailout by the European Union and International Monetary Fund.

Jörg Asmussen, a member of the European Central Bank’s executive board, recently said that Greece must adhere to the bailout’s terms – which require the Greek government to make additional cuts to public spending – if it wants to remain in the eurozone. Although most Greeks do want to stay in the eurozone, austerity measures, such as reducing the minimum wage and cutting pensions, are deeply unpopular.

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Some analysts speculate that a Greek exit from the euro (or a “Grexit”, as it’s been dubbed) could set off a chain reaction, causing economic panic in other peripheral eurozone countries such as Spain.



Al Jazeera’s Sam Bollier spoke to Evi Pappa, an economics professor at the European University Institute, Florence, about the ramifications of Greece leaving the currency.



Sam Bollier: Can Greece be kicked out of the eurozone? If so, how would this happen?

Evi Pappa: You probably know that no document exists that provides information about how a country can be kicked out from the euro. The Maastricht Treaty [which eventually led to the adoption of the currency] has to be rewritten in order to have somebody kicked out of the euro.

SB: So it’s more likely that Greece would voluntarily leave?

EP: That’s the only way it can happen, because I don’t think that the eurozone could take the responsibility of kicking Greece out of the euro.

SB: What would happen to other eurozone countries if Greece leaves the currency?

EP: If Greece was to leave the euro, then this would have indirect consequences on many other European countries. If Greece leaves the euro, it’s going to default, obviously, on all its debt – which means that the banking system is going to be terribly affected by the default.

The issue is whether the European countries have liquidity … If Greece does leave the euro, then would you, as an investor, put money in Spain, or in Portugal, or in Italy? Probably not. This means that somebody will have to serve liquidity for those countries. And if the ECB [European Central Bank] cannot do it, then the stability of the eurozone will be crucially questioned.

It’s easy to say it’s not costly to kick Greece out of the euro. Probably it’s true. But the issue is what’s next. I think that before talking about leaving the euro, we really have to think about the consequences.

SB: Which sectors of the Greek economy would benefit from leaving the euro? Which would be hurt?

EP: If Greece leaves the euro, it is going to be disastrous for Greece. I don’t think that there’s going to be any sector that will come out as a winner. Because what is going to happen is, if Greece is going to leave the euro, we will have to go back to some drachma or new drachma, or whatever you want to call it. Greece is going to call for likely repeated devaluations, which can be controlled or uncontrolled depending on who’s going to be in the government. These devaluations are going to be by at least 50 per cent.

So one would think, well, maybe tourists are going to benefit because it’s going to be a lot cheaper to go to Greece. And that’s probably true. But can we grow out of tourism? No, because if tourism was the growth engine of the Greek economy, it would have served also as a panacea in the current situation. We need to have exports.

Now if Greece is going to leave the euro and devalue, it could be a good moment for foreign investment. But the issue is that Greece has developed issues of bad faith, ill-will and untrustworthiness in the past two years. This means that Greece has lost its credibility. So I don’t see how any business can possibly gain from exiting the euro.

SB: Will Greek exporters gain from leaving the eurozone?

EP: Greece doesn’t have a huge export market. We just export agricultural products. We have no significant exporting industry at the moment. The other things that we are exporting are services and tourism. Most of the businesses in Greece, they have loans in euros. So if Greece is to leave the eurozone, Greek loans will still be denominated in euros. It means that many Greek companies will go bankrupt. For me, Greece going out of the euro is like a disaster for my country.

SB: If Greek businesses were to default on their loans, would this affect banks in other European countries?

EP: I know for sure that it will in Cyprus, because Cypriot banks – like Bank of Cyprus, or Laiki [Bank] – are heavily invested in Greek debt and debt of Greek companies. They have over-lent, so they have liabilities of six times the Cypriot GDP. So you can imagine another Icelandic case emerging in the Mediterranean. They are going to be the immediate victims of everything going on in Greece.

SB: Logistically speaking, how difficult is it to take a currency out of circulation and introduce a new currency?

EP: Most commentators compare Greece with Argentina. But Greece is not Argentina because Argentina had the peso in circulation when it stopped the peg to the US dollar.

Greece doesn’t have a currency at the moment. This means that Greece would have to bring the currency to circulate in the economy. And tactically speaking, you need at least four months to create a new currency. They will probably set an exchange between the new currency being circulated and the euro, then they will keep the banks closed for who knows how long, probably for some weeks, so that there’s no bank run. And before banks are reopened, the new currency will have devalued, who knows by how much, relative to the initial announced exchange rate.

It will take time. It will not happen in one day, that’s for sure.

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SB: Will the results of the recent election in Greece make it more likely that the country will leave the euro?

EP: The Greek election results express the anger of the Greek population. They had somehow to punish the two political parties that have been in power the past 20 years. So they voted in anger and in protest, I guess.

But I think that now, most likely, elections are going to be redone in a month’s time, more or less, and I think that people will be more wise now in voting. I think that the majority of Greek people do not want to leave the euro. I think that most of them realise that leaving the euro is going to be disastrous for Greece.

SB: Would switching to a new currency cause inflation?

EP: Of course. You would expect three things if Greece leaves the euro: inflation, devaluation, and banking collapse.

SB: Could this inflation be desirable?

EP: Inflation is sometimes good. But the problem is that Greece is not going to experience inflation. It is going to experience, most likely, hyperinflation. Hyperinflation is not good at any time.

SB: What would your advice to Greece be?

EP: The million-dollar question. What I would say is that it looks like Greece is facing a real tragedy. It is like we are condemned to die – like Antigone, in the tragedy of Sophocles. Antigone was condemned to be buried alive in a cave by Creon, and when the Chorus finally convinced Creon to save her life, a messenger arrives announcing that Antigone has hanged herself.

Modern Greece, like Antigone, is condemned to the austerity measures of the European Commission, burying it alive, and it looks like, when the Europeans come to her mercy, it might be too late – and Greece might commit suicide by deciding to leave the eurozone. I don’t have a lot of hope for Greece.

Evi Pappa is a professor of economics at the European University Institute, Florence.