Is a Euro Exit actually a viable option for Greece?IB
After reading this article it got me thinking whether exiting the Euro is actually a viable option for Greece.
Let's look at how things might play out (please bare with me for any simplifications etc. and should there be errors in my logic feel free to point it out).
To begin with Greece would have to convert all bank accounts from Euros to "New Drachma" (hereafter ND), wherein already the first problem might arise. For a currency to actually work people have to recognize it as store of value. Now, looking at the bank runs in Greece already starting I highly doubt that the Greece public has any confidence in the hypothetical ND. If I were Greek I would run to the bank right now and get my Euros somewhere safe.
So before even thinking about converting to ND, withdrawals from bank accounts would have to be limited. This information of course cannot get out before implementation or there aren't going to be any Euros left in Greek banks as bank runs would start. Does it seem achievable to keep this information a secret in Greece? I doubt it, so there actually won't be any Euros left in the banks to convert.
I now assume that the government has no efficient way of handling this (conducting raids to collect Euros from each citizen for example), but Greek people and firms need money to buy things and pay their employees, so the government has to step in, giving companies and citizens interest free loans (or even a prize money for not leaving Greece). Kind of sounds similar as to how they've got themselves into this mess.
The Greek government now still needs its stimulus program, so turn on the printing press and make some money. Inflation here we go and happy are those that were able to keep onto their Euros. Besides the inevitable devaluation of the ND in the currency markets this will only amplify the effect. Furthermore, the price of imports will be much higher within the blink of an eye when switching to ND, thus not really making it "la dolce vita" the Greek citizens would like to keep.
However, to be competitive Greece would still have to slim down its state apparatus, cut pension and be more efficient. The conversion to ND just gives them the option to delay it and live over their means again, quite likely never solving the issue. At least then they won't take whole Europe down with them.
It is also reasonable to assume that Greece then would default on its debt as with a devalued currency it has just become that much more expensive. This would definitely be a hard hit for the other European economies, and all other lenders. Repercussions are impossible to estimate and might well backlash against Greece in some way.
Furthermore, given how they then defaulted on their debt, unwilling to restructure their economy it is hard to believe they will find any willing lenders in the future. For that risk massive premiums would be necessary, which on the other hand make a default more likely. Estimated return on such a bet cannot be enough to compensate for the risk, so they are very likely on their own.
In the end it does not seem to matter whether they will be paid fewer Euros for their jobs than now, or whether the salary they make in ND converted to Euros is less than what they earn now. Either way they will not be able to live life as they used to, and have to give up on luxury import goods.
So is an exit a viable option? I personally believe that fiscal austerity and downward pressure on Greek wages to make Greece more competitive are the right way to go. Life for the Greeks will pretty much suck either way, but at least they won't hurt the global macro environment and keep their reputation intact. They've got themselves into this mess so they should bear the consequences.
Nevertheless, to ease transition and make the Greek economy more competitive, I think a stimulus package would go a long way. Of course this stimulus package would come with strings attached. In addition to adhering to all fiscal measures required to get the funds to pay their debt, they should also give up part of their control as to how this stimulus package is used, e.g. a veto right for the troika.