Let Greece go. It is a possibility that is being considered more and more publicly in Europe.
There have been two-and-a-half years of bailouts and broken promises by Greece to reform. The result: a fifth year of recession and, last week, political chaos. Voters on May 6 favored parties that either oppose the country’s international bailout or want to renegotiate it. If it cannot get more rescue loans, Greece will go bankrupt and likely have to leave the eurozone, the currency union of 17 countries.
The question confronting leaders in Athens, Berlin and the other eurozone capitals could soon be: What would happen if Greece left the euro? How much damage would that do to it and other countries in the eurozone? Has Europe insulated itself to a degree that it can cut Greece loose, while keeping its currency alive?
Economists agree that Greece, where unemployment is 21.7 percent, would suffer even more turmoil and misery if it left the euro. A new drachma currency would fall by 50 percent or more against the euro.
So people would try to pull their euros out of banks before it could be converted into a new currency that is worth less. Owners of stocks would try to sell. As markets plunge and deposits flee, banks would collapse.
To try to limit the financial drain, the government would probably have to close the banks while the new currency is introduced. It might also prevent people from moving euros out of the country, including theoretically border checks to halt people lugging cash.
Every Greek company that owes money in euros — to a foreign supplier, say — would see those debts grow much heavier compared to the weaker new drachma. Many would go bankrupt. Greeks with the new, weak drachma would be poorer when buying anything from abroad or traveling.
The Greek government would still owe 330 billion euros (US$428 billion), mainly to the other eurozone countries that rescued it, the IMF and the European Central Bank (ECB). Because those debts would remain in euros, it would have no chance of repaying them — meaning it would have to negotiate forgiveness with international institutions adamant about not losing taxpayer money.
On the plus side, the weaker drachma would make Greek exports cheaper and more competitive and could help the economy start growing again. Companies outside Greece would be attracted by the cheaper labor and real estate, encouraging them to move manufacturing plants there.
Tourism would also get a boost: Booking a hotel room on a Greek island, for example, would suddenly become much cheaper for foreigners.
That sort of currency devaluation — which Greece cannot benefit from while it keeps the euro, which is reflecting the strength of healthier eurozone economies like Germany — would help the economy recover.
However, Greece is not a big exporter, so the extent of the benefits of a new, weak drachma may not be as great as hoped.
The great fear, some economists say, is that if Greece leaves the euro, other troubled eurozone countries might do the same.
“The big danger is financial contagion,” said Dennis Snower, president of the Kiel Institute for the World Economy. “The question would be, what stops the Portuguese from doing something similar?”
People might think “just in case, let me get my money out of the bank,” he said. “And if enough people think that way, then you’re sunk.”