Mon, May 14, 2012 page9

• Greek euro exit no longer unthinkable

  Voters in austerity-blighted Greece have shown their discontent, but the political and economic fallout reaches beyond its borders

  • By David McHugh / AP, FRANKFURT, GERMANY
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  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?

  

  Illustration:Yusha

  GREEK CHAOS

  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.

  BOUNCING BACK?

  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.

  CONTAGION

  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.”

  Investors worried that these other countries might leave the euro bloc would demand higher interest rates to lend to them. If governments cannot borrow at reasonable rates, they would default on bond payments, hurting the banks that hold such bonds.

  The ECB could try to thwart that by issuing unlimited loans to banks. It has done that already, handing out more than 1 trillion euros in December last year and February. That calmed the crisis for a few weeks.

  The prosperous so-called core of the eurozone — Germany, France, the Netherlands, Finland and Austria — would likely not escape. Their banks own a lot of the government debt of Spain and Italy. With 1.9 billion euros in outstanding debt, Italy is the third-largest bond market in the world after the US and Japan.

  MAYBE NOT

  Not everyone agrees that a Greek exit would be a disaster for the eurozone.

  Greece is tiny, about 2.5 percent of the eurozone’s 9 trillion euro economy. And it would not be a total surprise. The possibility of a euro exit has been hanging over markets since late 2009. Banks outside Greece have had time to write off their Greek investments — and not make any new ones.

  Europe has bulked up its bailout fund to 800 billion euros, though part of that is already committed to earlier rescues.

  “A year ago, I would have said it’s too risky, but the situation has changed,” Commerzbank chief economist Joerg Kraemer said, citing the eurozone fund and ECB loans. “The combined fiscal and monetary shield is much higher than it was a year ago.”

  “Of course it will cause some volatility in the markets for a while, but in the end, it will not threaten the existence of the currency,” Kraemer said.

  EMBARASSMENT

  Ultimately, a Greek exit from the eurozone would be a terrible blow to the prestige of the broader 27-country EU. The shared currency is a pillar of hopes for a more closely united continent. Its abandonment would also mean the rescue strategy pursued by leaders such as German Chancellor Angela Merkel of forcing Greece to cut its budgets relentlessly has been a failure.

  There is no provision in the EU treaty for leaving the euro, though there is one for leaving the EU. Euro exit would put Greece’s relationship with the EU itself in question.
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