Grexit has become a popular expression, Greece leaving the Euro. But is it possible for Greece to leave the euro?
It looks quite clear that the only viable long term solution for Greece is to leave the euro but why is the country sticking to the euro despite years of recession?
Greece had cheated its way into the euro but it looked good anyway. The Greek government was just paying one percent more than Germany for its borrowing. But in February 2010 the newly elected government revealed its predecessor’s financial deception. For the previous year, government borrowings was not as had been said 5% of the annual GDP, it was 15.6%. The Greek economy was collapsing.
Needless to say, the revelations made it impossible for Greece to borrow money. The other euro countries and the IMF lent money but imposed strict conditions. The proposed changes were necessary to get some order in the Greek economy but in the short term the austerity package slowed down the economy even more. It looks like Greece is stuck in a depression.
The Greek economy is simple not competitive enough for the euro. Greece needs a weaker currency. But no country is supposed to leave the euro, no procedures exist for a euro exit. There is a good reason why no country is supposed to leave the euro. If Greece would leave the euro because the country can’t handle the strong currency, then other countries could leave the euro as well. This would start people who have money in countries which have trouble to keep up with the value of the euro to start moving their money to stronger economies. Lenders would demand higher interest as compensation for the increased risk, or may refuse to lend to some countries. This could very quickly force other countries to start thinking about leaving the euro as well.
But what would happen if Greece decided to dump the euro? Replacing the euro with a new Greek currency would most likely make things worse. A new drachma would most likely lose more than half of its value against the euro, probably much more. This would be a disaster for those who has debts denominated in euro or US dollar. This includes the Greek government. Imports would be much more expensive although few would be interested in selling anything to Greece unless they get paid up front.
All this would make the new Greek currency lose even more in value and the only way for the government to be able to pay salaries and domestic expenses would be to print a lot more money. This would cause very high inflation which would make the currency virtually worthless. Everyone would prefer to use euros, dollars or even barter rather than holding the new currency.
The change to a new currency would also become a legal nightmare. An enormous number of disputes if debts should be in euros or in drachmas would follow. Obviously debtors would be desperate to get the debts denominated in drachmas while creditors would insist on payment in euros.
Quite clearly, if Greece would leave the euro, the country needs a massive help package from EU. But that is unlikely to happen if Greece would leave the euro without agreement from the other euro countries. Given that all weaker economies would be suspected to be next in line to leave the euro if Greece left, grexit is not an attractive option for the decision makers in Euroland.
So it looks like Greece is trapped in the euro, the country is not allowed to leave because that would be the beginning to the end for the euro. But the country will be stuck in recession as long as it sticks with the euro.