Greek withdrawal from the eurozone

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The Greek withdrawal from the eurozone is the potential Greek exit from the eurozone monetary union. This is also known as the "Grexit" or "grexit", a portmanteau combining the words "Greek exit". The term was introduced by Citigroup's Chief Analysts Willem H. Buiter and Ebrahim Rahbari on 6 February 2012.^[1][2]

Two days after an early election of the Greek parliament, Alexis Tsipras, leader of a newly-emerged party called SYRIZA, formed a new government. He appointed Yanis Varoufakis as Minister of Finance—an important post in view of the Greek government-debt crisis. Since then, the chance of a Grexit or even a 'Graccident' (accidental Grexit) in the near future has been widely discussed.^[3][4][5][6]

Dynamics

Financial dynamics

In mid-May 2012, the financial crisis in Greece and the impossibility of forming a new government after elections^[7] led to strong speculation that Greece would leave the eurozone shortly.^{[8][9][10][11]} This phenomenon had already become known as "Grexit".^[12]

Economists who favour this radical approach to solve the Greek debt crisis typically argue that a default is unavoidable for Greece in the long term, and that a delay in organising an orderly default (by lending Greece more money throughout a few more years), would just wind up hurting EU lenders and neighbouring European countries even more.^[13] Fiscal austerity or a euro exit is the alternative to accepting differentiated government bond yields within the Euro Area. If Greece remains in the euro while accepting higher bond yields, reflecting its high government deficit, then high interest rates would dampen demand, raise savings and slow the economy. An improved trade performance and less reliance on foreign capital would be the result.

The implementation of Grexit would have to occur "within days or even hours of the decision being made"^[14][15] due to the high volatility that would result. It would have to be timed at one of the public holidays in Greece.^[16]

International law dynamics

Some European scholars have insisted on the shaky legal grounds upon which the "troika" composed of the EU Commission, the European Central Bank and the IMF has pursued the harsh macroeconomic adjustment plans imposed on Greece, claiming they infringe upon Greece's sovereignty and interfere in the internal affairs of an independent EU nation-state: "the overt infringements on Greek sovereignty we're witnessing today, with EU policy makers now double-checking all national data and carefully 'monitoring' the work of the Greek government sets a dangerous precedent."^[17]

These scholars have argued that a withdrawal from the Eurozone would give the Greek government more room to maneuver to conduct economic and public policies propitious for growth and social equity.^[17]

Plan Z during 2012

"Plan Z" is the name given to a 2012 plan to enable Greece to withdraw from the eurozone in the event of Greek bank collapse.^[18] It was drawn up in absolute secrecy by small teams totalling approximately two dozen officials at the European Commission (Brussels), the European Central Bank (Frankfurt) and the IMF (Washington).^[18] Those officials were headed by Jörg Asmussen (ECB), Thomas Wieser (Euro working group), Poul Thomsen (IMF) and Marco Buti (European Commission).^[18] To prevent premature disclosure no single document was created, no emails were exchanged, and no Greek officials were informed.^[18] The plan was based on the 2003 introduction of new dinars into Iraq by the Americans^[18] and would have required rebuilding the Greek economy and banking system ab initio, including isolating Greek banks by disconnecting them from the TARGET2 system, closing ATMs, and imposing capital and currency controls.^[18]

Implementation

The prospect of Greece leaving the euro and dealing with a devalued drachma prompted many people to start withdrawing their euros from the country's banks.^[19] In the nine months to March 2012 deposits in Greek banks had already fallen 13% to €160 billion.^[15]

A victory for anti-bailout lawmakers in the 17 June election would likely trigger an even bigger bank run, said Dimitris Mardas, associate professor of economics at the University of Thessaloniki. Greek authorities, Mardas predicts, would respond by imposing controls on the movement of money for as long as it takes for the panic to subside.^[19]

A grexit needs to be prepared, for example with capacity for banknote stamping or printing a stock of new banknotes. However, information leaking out on such preparation would lead to negative dynamic effects, like bank runs.

In the event of a new currency being introduced, all banks would close for several days while old currency (Euros) were stamped to denote they were now drachmas, and/or a newly printed currency was distributed to bank branches for distribution to the public when banks reopened. The British money printing company De La Rue was according to rumours on 18 May 2012 preparing to print new drachma notes based on old moulds, which De La Rue refused to confirm.^[15] The time between an order for a new currency is placed and the delivery of the paper is about six months.^[20]

Wolfson Economics Prize

In July 2012, the Wolfson Economics Prize, a prize for the "best proposal for a country to leave the European Monetary Union," was awarded to a Capital Economics team led by Roger Bootle, for their submission titled "Leaving the Euro: A Practical Guide."^[21] The winning proposal argued that a member wishing to exit should introduce a new currency and default on a large part of its debts. The net effect, the proposal claimed, would be positive for growth and prosperity. It also called for keeping the euro for small transactions and for a short period of time after the exit from the eurozone, along with a strict regime of inflation-targeting and tough fiscal rules monitored by "independent experts."

The Roger Bootle/Capital Economics plan also suggested that "key officials" should meet "in secret" one month before the exit is publicly announced, and that eurozone partners and international organisations should be informed "three days before." The judges of the Wolfson Economics Prize found that the winning plan was the "most credible solution" to the question of a member state leaving the eurozone.

Earlier exit proposals

In March 2010, other contrarian financial economists had argued in favor of such a swift exit strategy combined with a massive (but not total) cancellation of public debt: "The only sensible option at this stage is for the EU to engineer some kind of 'orderly default' on (some of) Greece's public debt which would then allow Athens to withdraw from the Eurozone and reintroduce its national currency the drachma at a debased rate."^[17]

Immediate economic fallout inside Greece

On 29 May 2012 the National Bank of Greece (not to be confused with the central bank, the Bank of Greece) warned that "[a]n exit from the euro would lead to a significant decline in the living standards of Greek citizens." According to the announcement, per capita income would fall by 55%, the new national currency depreciate by 65% vis-à-vis the euro, and the recession which Greece has been in for five years would deepen to 22%. Furthermore, unemployment would rise from its current 22% to 34% of the work force, and the inflation, which is currently at 2% would soar to 30%.^[22]

According to the Greek think-tank Foundation for Economic and Industrial Research (IOBE), a new drachma would lose half or more of its value relative to the euro.^[19] This would drive up inflation, and reduce the purchasing power of the average Greek. At the same time, the country's economic output would drop, putting more people out of work where one in five is already unemployed. The prices of imported goods would skyrocket, putting them out of reach for many.^[19]

Analyst Vangelis Agapitos has estimated that inflation under the new drachma would quickly reach 40 to 50 per cent to catch up with the fall in the new currency's value.^[19] To stop the falling value of the drachma, interest rates would have to be increased to as high as 30 to 40 per cent, according to Agapitos.^[19] People would then be unable to pay off their loans and mortgages and the country's banks would have to be nationalised to stop them from going under, he predicted.^[19]

On January 3, 2015, at the American Economic Association's annual meeting, economist Barry Eichengreen warned that the move may trigger a run on Greece's banks, and also on its stock market.^[23]

IOBE head of research Aggelos Tsakanikas foresees an increase in crime as people struggle to pay bills. "We won’t see tanks in the streets and violence, we won’t see people starving in the streets, but crime could very well rise".^[19]

Political opinion

Of all the political parties which won seats in the parliamentary election in May, only the Communist KKE and the Neo-Nazi Golden Dawn have expressed support for leaving the euro, and indeed for leaving the European Union.^[24]

The centre-right New Democracy party has accused the leftist SYRIZA of supporting withdrawal from the euro. However, SYRIZA's leader, Alexis Tsipras, has stated that Greece should not leave the eurozone, and return to the drachma because "...we will have poor people, who have drachmas, and rich people, who will buy everything with euros."^[25]

Both the Greek government and the EU favour Greek staying within the Euro and believe this to be possible. However, some commentators believe exit is likely. In February 2015, the former head of the US Federal Reserve, Alan Greenspan, said "it is just a matter of time" for Greece to withdraw from the eurozone,^[26] and former United Kingdom Chancellor of the Exchequer Kenneth Clarke described it as inevitable.^[27]

2015 Grexit speculation

In January 2015, speculation about a Greek exit from the eurozone was revived when Michael Fuchs, who is deputy leader of the center-right CDU/CSU faction in the German Bundestag, was quoted on 31 December 2014: "The time when we had to rescue Greece is over. There is no more blackmail potential. Greece is not systemically relevant for the euro." A following article in the weekly Spiegel citing sources from Wolfgang Schäuble's ministry of finance further spurred these speculations. Both German and international media widely interpreted this as the Merkel government semi-officially warning Greek voters from voting for SYRIZA in the upcoming legislative election of 25 January 2015.^[28]

Germany's largest selling tabloid, the right-wing populist Bild, raised further anger when it compared Greece to an unfair footballer: "What happens to a footballer who breaks the rules and does a crude foul? – He leaves the pitch. He is sent off as a punishment. No question."^[29]

The German government's interference in the upcoming elections in Greece was strongly criticized by leaders of European Parliament groups including Socialists & Democrats (S&D), the liberal ALDE and the Greens/EFA group, when S&D president Gianni Pittella said, "German right-wing forces trying to act like a sheriff in Greece or any other member states is not only unacceptable but above all wrong."^[30] It has also been criticized by German oppositional parties with the German Greens' speaker Simone Peter calling the debate over a Grexit "highly irresponsible".^[29]

Economists of German Commerzbank said that preventing a Greek exit was still desirable for Germany, since a Greek exit would wipe out billions of euros in European taxpayer money, and "it would be much easier politically to renegotiate a compromise with Greece, albeit a lame one, and thus maintain the fiction that Greece will pay back its loans at some point in time."^[31]

FTSE "considers Grexit following the election to be highly unlikely...".^[32]

On February 9, UK Prime Minister David Cameron, chaired a meeting to discuss any possible ramifications in the event of an exit.^[33] According to a Bloomberg report George Osborne said at the meeting of the G-20 finance ministers in Istanbul: "A Greek exit from the euro would be very difficult for the world economy and potentially very damaging for the European economy."^[34]

In February 2015 the Russian government stated that it would offer Greece aid but would only provide it in rubles.^[35]

Kathimerini reported that after the 16th February Eurogroup talks Commerzbank AG increased the risk of Greece exiting the euro to 50%.^[36] The expression used by Time for these talks is "Greece and the Euro Zone dance on the precipice".^[37]

After an emergency meeting of eurozone finance ministers (20 February 2015), European leaders agreed to extend Greece’s bailout for further four months.^[38]

International financial shockwaves

Effect upon the European economy

Claudia Panseri, head of equity strategy at Société Générale, speculated in late May 2012 that eurozone stocks could plummet up to 50 percent in value if Greece makes a disorderly exit from the eurozone.^[39] Bond yields in other European nations could widen 100 basis points to 200 basis points, negatively affecting their ability to service their own sovereign debts.^[39]

But, as early as March 2010, other European financial economists had supported the notion a swift Greek withdrawal from the Eurozone and the simultaneous reintroduction of its former national currency the drachma at a debased rate, arguing that the European economy as a whole would eventually benefit from such a policy change: "Such an abrupt readjustment might be painful at first, but it will ultimately strengthen the Greek economy and make the Eurozone more cohesive, and thus better at confronting the difficult economic circumstances and dealing with them."^[17]

Effect upon the world economy

Europe in 2010 accounted for 25 percent of world trade, according to Deutsche Bank.^[39] Economic depression within the European economy would ripple worldwide and slow global growth.^[39]

Legality

A working paper published by the European Central Bank concluded:^[40]

… that negotiated withdrawal from the EU would not be legally impossible even prior to the ratification of the Lisbon Treaty, and that unilateral withdrawal would undoubtedly be legally controversial; that, while permissible, a recently enacted exit clause is, prima facie, not in harmony with the rationale of the European unification project and is otherwise problematic, mainly from a legal perspective; that a Member State's exit from EMU, without a parallel withdrawal from the EU, would be legally inconceivable; and that, while perhaps feasible through indirect means, a Member State's expulsion from the EU or EMU, would be legally next to impossible. … with a reminder that while, institutionally, a Member State's membership of the euro area would not survive the discontinuation of its membership of the EU, the same need not be true of the former Member State's use of the euro.

In the legal literature, the question of whether a country can unilaterally leave the Eurozone without leaving the EU is controversial. Jens Dammann has taken the view that under certain conditions, it is possible for a Member State to end its membership in the Eurozone without leaving the European Union.^[41]

See also

• Withdrawal from the European Union
• Euroization
• Greek drachma

References

External links

• "Viewpoints: What if Greece exits euro"? 14 May 2012 BBC News
• "'Bloody doomsday machine': How shock waves will reach the US if Greece drops the euro". Associated Press, 16 June 2012.
• Greece Debt Crisis 19 June 2012
• Why A Grexit Is Not Going To Happen 31 August 2012