Greek Euro-Crisis: Consequences Of A “Grexit”

Global media coverage has heightened awareness of Greece’s probable exit from the euro-zone and produced a nickname for the Hellenic exodus: ‘Grexit.’ It is important to understand the potential consequences of a development that is provoking fear in world financial capitals even before its occurrence is certain.

Diplomats and policymakers acknowledge a lack of thought and dialogue regarding consequences of a Grexit. That needs to be corrected immediately because some Greek citizens desire a new beginning including return of their economic sovereignty. Recent polls have shown that most Greeks favor keeping the euro, but do not support the stringent economic measures that come along with it.

Technically, an official way for a country to leave the euro does not exist because such an occurrence was never envisioned by the politicians who created the currency. Article 50 was added in the Lisbon Treaty of 2007 as an option for a member state to leave the European Union. According to Article 50 a country must choose to exit the European Union. EU members do not possess the power to force a country to breakaway, but do have to create an agreement for a country to withdraw. The agreement must then be approved by a qualified majority of member states and must be supported by the European Parliament. The European Commission has said, “The treaty doesn’t foresee an exit from the eurozone without exiting the EU.” According to this statement, Greece will have to leave the EU if it leaves the eurozone.

The most feared consequence of a Grexit is a global financial meltdown worse than the collapse of the Lehman Brothers in 2008. That is possible because a Grexit could trigger a domino effect of defaults and currency devaluations in other European nations, destabilizing trillions of dollars in U.S. financial holdings. Fear was heightened last week when Greece’s parliament was unable to form a coalition government and its central bank estimated that 700 million euros ($898 million) had been withdrawn from banks in one day, extracting liquidity from its financial system. President Karolias Papoulias admitted that “the strength of banks is very weak right now.”

While 11 of the 27 members of the EU have slipped into recession, Greece has received extra media attention because it has accumulated an enormous amount of debt. The world has watched as European leaders threaten Greece that if it violates conditions of the bailouts the European Central Bank may cut off liquidity support for banks which may cause them to collapse. While European institutions might be able to cope with the travails of one small nation (population: 11 million), the challenge is that they may not be able to deal with other countries such as Spain, Italy, Portugal and any other member-states facing insolvency. Eventually the whole framework of the eurozone will be undermined, dragging down nations invested in its presumed stability.

Potential consequences Greece may face if it flees from the EU are economic collapse, rampant inflation, rising nationalism, violent political movements or even a military coup. There is also a probability that Greece may have to print its own currency. If this occurs, the new currency will have an extraordinarily weak value because it will not be backed by other European nations. On a positive note, some believe Greece may experience a successful economic recovery, in time, after it leaves the euro. Optimists believe this can become a reality by tapping into Greece’s underdeveloped economic sectors such as tourism and potential offshore oil and by easing conditions for opening businesses. Key domestic issues which may also assist Greece with economic recovery are the imposition of more effective immigration controls and tax enforcement.

When an EU diplomat was asked if it was legal for a country to be forced out of the European Union he replied, “In theory, it is not, but it’s like the drummer in a band– if the band does not like the drummer, there are ways of getting rid of the drummer.” EU members have tactics to make the situation in Greece so excruciatingly painful that its only option may be to escape. The EU diplomat stressed that such consequences must be thoroughly thought through because “…in this case it could mean the band breaks up and never plays again.”