German Chancellor Angela Merkel and EU President Jose Manuel Barroso are among the European politicians saying that if Athens could not abide by the rules, it would have to leave the eurozone.
The Guardian asked three experts to analyze the potential consequences such as collapsing banks and soaring inflation, but also possible salvation.
The expert view on what could await Greeks through a separate negotiation.
BY COSTAS LAPAVITSAS
A Greek exit from the euro is approaching and it has little to do with state incompetence. The fundamental reason is cumulative loss of competitiveness for Greece and other peripheral countries, mostly because Germany has kept its labor costs frozen for years.
Since 2010 things have become worse as austerity increased the burden of debt across the eurozone. Greece can no longer handle the discipline of European monetary union, while Portugal, Ireland and Spain are likely to follow.
A Greek default and exit would remove the pressure of debt, boosting competitiveness, lifting austerity and allowing for proper restructuring of the economy and society. In the medium term, the results would be better, but in the short term the shock would be severe — made worse by two years of “rescue,” which will have brought a 20 percent contraction of GDP and 25 percent unemployment by the end of this year.
The first step for Greece should be to denounce the bailout agreements and default on its debt, opening the path for aggressive cancelation. Exit would follow, presenting three sets of problems: monetary, banking and commercial.
The main difficulty of policy would be to keep these separate as far as possible.
Briefly put, the return to the drachma should be sudden, accompanied by a short bank holiday and an immediate imposition of capital controls. For a period, the new drachma would circulate in parallel with the euro and possibly other state fiat money.
There are 35 billion euro banknotes in Greece, mostly under mattresses. If they could be mobilized, a lot of problems would be made easier.
Banks would find themselves in the firing line as assets and liabilities would have to be converted. To protect depositors, but also to control credit in order to prevent a wave of company bankruptcies and to support employment, banks should be immediately nationalized. The Bank of Greece should rapidly build mechanisms to generate liquidity independently of the European Central Bank.
The exchange rate of the new drachma would collapse in the open markets, making it difficult to secure supplies of oil, medicine, foodstuffs and other goods. As far as possible, the exchange rate should be managed — there should also be administrative controls to ensure that vital goods reached key enterprises, as well as the weakest, during the first critical months.
After the initial shock, the fall in the exchange rate would prove positive for the economy. Greece remains a middle-income country with a substantial productive sector that could recapture the domestic market once imports became more expensive. There is plenty of productive potential in Greece.
What the country truly needs is an industrial strategy, as well as redistribution of income and wealth. That is also why default and exit are necessary.
Costas Lapavitsas is professor of economics at the University of London.
BY NICK PARSONS
The choices facing Greece are deeply unattractive. On a three to five-year time horizon, there is no policy option that will turn a bad situation into a better one and the likelihood is that it will become even worse for many of its people.
If Greece stays in the euro, it faces a long, slow depression in an effort to remain solvent. If it exits, it could see the collapse of the domestic banking system, the decimation of private savings, and a crippling increase in the cost of imported goods and energy.
Greece could claw back some competitiveness through devaluation, making its exports cheaper, but the markets would demand devaluation, and then some. The drachma was fixed at 340 to the euro when Greece joined the single currency, But if a new drachma is introduced at parity with the old currency, then 1 euro would quickly buy about 1,000 drachma, or possibly even more.
Just look at the evidence of Argentina, which in 2002 decided to abandon its fixed 1:1 US dollar-peso parity, which had been in place for 10 years. A provisional “official” exchange rate was set at 1.4 pesos per US dollar, but within six months the market rate had jumped to 3.90 pesos.
The peso had lost almost 75 percent of its value. Savings were effectively expropriated and import costs tripled. It was a far from painless transition.
A similar fate awaits a post-euro Greece, with capital controls, border controls and a potential EU exit.
Financial markets today are in a better position to withstand the shock than they were two years ago. Again, though, better does not mean good. Asset prices, such as stocks, would not just be volatile, but also prone to significant drops, even after their recent declines.
However, a Greek exit does not mean the end of the euro. It will, instead, mark a new beginning.
Germany has a long and proud tradition of currency strength, but it could not cope with going back to the deutschmark because it would rocket in value and destroy the country’s competitiveness.
Some 97 percent of the eurozone’s population would continue to use the single currency and their leaders will circle the policy wagons to protect what is left.
A Greek exit could be the trigger for a stronger and more stable euro, led by politicians and institutions with a clear interest in both its success and theirs. After a very difficult summer, should Greeks choose self-determined, rather than European-imposed, pain, the outlook for financial markets should be much brighter by the end of the year.
Nick Parsons is head of strategy at National Australia Bank.
BY RAY BARRELL
Should we stay or should we go?
This is the question Greek voters must now ask themselves. Each must do a careful cost benefit analysis, looking at the gains from being in the euro and the EU, against the costs of leaving.
If the Greeks leave and default on the rest of their debt, there is a good chance they may not be welcome at the EU table. The benefits of leaving are transitory, while the benefits from staying may be permanent.
On balance, the advantages would press the Greeks to stay. Some of the advantages of being in the EU could be kept with an association agreement, such as Norway has, but it would be harder to influence trade and competition policy, and subsidies would dry up.
The euro raised growth in the past. Leaving the EU would mean slower growth for a period. Similar estimates exist for the benefits from monetary union for the core countries, but these benefits from increased flows of investment and greater competition still lie in the future for countries such as Greece.
Their potential would be lost on exit and if there were no benefits from leaving, the Greeks would be poorer in future than if they had stayed.
The gains from leaving would be immediate, with a devaluation restoring competitiveness and raising employment, but borrowing costs and inflation would climb and be more variable with a floating currency. The need to reform the labor market would be less pressing and raising the retirement age from the lowest in Europe could be delayed, but taxpayers would soon have to face the reality that they would have to pay for those pensions and support all the other structures that need reform.
Economists normally advise that bygones should be bygones, but this might be the time to remember past favors. Outside the euro, the Greeks would not have been able to borrow 200 percent of their GDP to finance a higher living standard and restructuring their debt would have been more expensive.
Ray Barrell is professor of economics at Brunel University.
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