If the Jan. 25 elections lead to Greece being forced out of the Eurozone – a Grexit – the return to the drachma may show some initial benefits but in the long run would be costly.
That was the analysis from The Economist in a piece called Zoning Out, which detailed the gains and pitfalls, both for Greece the other 17 countries in the Eurozone using the euro.
Prime Minister and New Democracy Conservative leader Antonis Samaras has imposed harsh austerity measures on orders of the country’s International Lenders, the Troika of the European Union-International Monetary Fund-European Central Bank (EU-IMF-ECB) that put up 240 billion euros ($306 billion) in two bailouts.
The big pay cuts, tax hikes, slashed pensions and worker firings have satisfied the Troika to insure it would get paid back but Samaras’ coalition government, which includes the PASOK Socialists, is in danger of losing the polls to the anti-austerity major opposition Coalition of he Radical Left (SYRIZA) that wants to revise the Troika terms or walk away from the debt.
While SYRIZA leader Alexis Tsipras has moderated his “take it or leave it” tone to the Troika and now says he would negotiate before acting unilaterally, the prospect of a Leftist leadership for Greece has already rattled markets and banks and sent Greeks scurrying to withdraw deposits.
The Economist noted that a return to drachma could also be unsettling for Greeks, especially a new generation that has never used it.
At first, the drachma – unlike its previous version – would likely be pegged at 1-to-1 with the euro but could fall in value as much as 50 percent, providing an initial boost by making the country more competitive, especially with wages having been decimated by austerity already.
The Greek central bank would be severed from the European Central Bank (ECB) in Frankfurt. Instead it would conduct Greek monetary policy, in drachma, through operations with banks whose domestic balance-sheets would now be in drachma, too.
“Even so, there would be several drawbacks. Grexit would be a huge short-term shock to the economy. Reintroducing new notes and coins would take several months. This would be likely to create chaos, even though ever more people are making payments electronically,” the magazine stated.
Greece would also probably have to leave the EU and inflation would then set it brutally, driving up prices 35 percent and undermine consumer and business confidence. The economy, on the edge of recovering, would probably relapse and shrink up to 8 percent.
While the government redenominate domestic debt it could not do so for foreign debt. “That burden, still in euros, would grow dramatically overnight in relation to the devalued drachma-based economy and the Greek tax base, which would make a fresh default unavoidable,” the analysis pointed out.
It added that legal battles would be inevitable, especially with private holders of the new Greek bonds issued in a restructuring in 2012, which were written under English law.
With Greece now having reached a primary surplus and its current account deficit in balance, a Grexit would not likely cause an immediate budgetary crunch, and the balance of payments would be more resilient to the immediate effects of rising import prices and would gain from bigger exports.
Almost five years after first receiving bailouts and austerity, Greece is more poised to handle some shock although its debt is still 175 percent of Gross Domestic Product (GDP) although the Troika has already extended better terms with lower interest rates and a longer time to repay – as Samaras and Tsipras said they both want still better terms.
The Eurozone also has more defense in place, unlike in 2012 when Samaras was elected on a second ballot and Greeks and investors were running scared about what would happen to the economy.
“Even so, Grexit would still be a shock. Its detrimental impact on an already weak economic recovery could cause GDP across the rest of the euro zone to be lower by 1.5% in 18 months’ time than it would otherwise have been,” the magazine said, citing investment bank JP Morgan Chase.
But there’s a big drawback, as was noted: “The Eurozone might now cope better with Grexit, but the cost of showing that the currency club can fracture would still outweigh the gain of enforcing discipline.”
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