Consequences of a Greek Exit from the Eurozone: To Leave or Not to Leave?

Posted on June 7, 2012 in Biz and Eco

By Mohit Dayal:

In the midst of renewed calls for Greece to step out of the Euro-Zone over the past few days, several vantage situations have been contemplated and cited. Analysts have argued that a Greek Exit is a matter of ‘When’, rather than ‘Whether’. But while these arguments are legitimate and reasoned, they exhibit only one side of the coin. The consequences of a Greek exit from the Euro-Zone can be catastrophic not just for Europe, but the entire global economy. It can, and probably will lead to a break-up of the Euro-Zone, and its consequences will be grave.

Setting the Clock a couple of Decades back

When we do consider a disintegration of the Eurozone, one needs to go back in history and look at the reasons as to why it was established in the first place. A congregation of a number of countries, and economic integration without political integration, it’s a concept which has been questioned time and again. Deemed flawed by more than a few analysts, it seems more and more likely that they were right. The vision of an empowered block of countries, rejuvenated by common market policies, brought all the major economies together to institute a shared currency in 2000. The dream was shared and lived for almost a decade, until it turned into a nightmare. Analysing the concept itself, the idea of economic integration and common market dynamics, coupled with political incoherence and policy diversion, is a recipe for disaster.

Together We Rise, Together We Fall

But this concept, even though flawed, was realised for more than a decade.  And the Eurozone is, and shall remain to be, the largest economy in terms of GDP, if we were to consider it as an economic block as a whole.
A Greek exit will lead to many more countries contemplating the same, and countries like Ireland, Spain, Portugal and Italy may follow suit. A Eurozone break-up will take a region a couple of decades back, as far as international geo-politics is concerned. And Europe’s might, in an increasingly multi-polar world, will be considerably diluted, something which no country or leader wants.

The Economic Fall-Out

Whatever the geo-political consequences might be, the economic aftermath is bound to be a Pandora’s Box. As and when Greece leaves the Euro-Zone, it is expected to revert back to its domestic currency, The Drachma, which would be relatively devalued. Now the good part is that reverting back to your domestic economy will help wipe off the enormous public debt. The bad part is that it will cause erosion in the bank deposits and savings of millions of people in Europe. That then will lead to a credit crunch, and lack of liquidity in the markets. The anticipation and the speculation around such a situation is another nightmare. All this will affect the global economy adversely, and contagion to other major economies would be inevitable.

So, while Greece goes to elections on June 17th, and while Euro-Bonds are seriously considered, and while the ECB and the IMF firefight this sovereign debt crisis in the best way possible, it would be wise to excogitate a worst-case scenario for a Greek exit, rather than a best case scenario, which is projected by the proponents of a Greek exit. For a Eurozone Exit is a path traversed never before, and no one is sure what lays ahead, not even those who are at the helm in Europe.

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Vijay

The solutions proposed to get tackle the EU debt crisis are lending Greece more money or allowing the drachma to come back. Lending more money is postponing the problem and allowing the drachma to come back is riskier since all lenders (EU banks) will lose money which will trigger another major crisis.

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