Fair. Balanced. American.

Saturday, April 10, 2010

Will Greece leave the Euro?

Probably not. But I'm not sure anyone knows for sure. And these anecdotes by the Daily Mail's Alex Brummer are certainly food for thought.
All of this poses bigger questions. Should Greece be in euroland at all? And if it wanted out is there a mechanism for doing so?

Looked at from Athens it would not be that surprising if the government was starting to think about an exit.

After all, without the constraints being imposed by Germany and its euroland partners Greece could devalue its currency, borrow at subsidised rates from the International Monetary Fund and like some of the non- euro Eastern European nations work their way through the crisis more rapidly.

There are signs that Greek individuals and businesses are starting to fear the worst and shifting deposits overseas with some €10bn or 3.6pc of domestic non-central banking deposits departing. Such big capital outflows are, under normal circumstances, the precursor to devaluation.

There are anecdotal accounts of holders of Greek euros, clearly identified with a 'Y' on the serial number, seeking to transfer their cash holdings into anything but Greek euros.

It is also suggested, but not confirmed, that as a contingency, the Bank of Greece has been stockpiling post-euro drachma notes and coins so that in the case of a withdrawal the conversion could take place in a matter of weeks.

It is not inevitable that Greece will exit the euro. After all, currency unions can take decades to settle down.

The US dollar took almost 50 years to establish itself as the currency of choice across the United States. So the present convulsions could be regarded as part of the birthing pains.
More likely, however, we are at a critical juncture at which the Greek government-will have to decide soon whether it wants to stay in or out of euroland.

As Gabriel Stein of Lombard Street Research notes in a recent paper, in the first instance this will be a political decision.

Then, the government and Greek central bank will have to grapple with the practical issues.[...]

The new currency would, after a prescribed time, go into a free float and the devaluation needed for the Greek economy to adjust.

It would be preceded by large scale outflows as foreigners, not satisfied with the higher returns on Greek deposits, pulled out their money.

This is dramatic stuff. But once Greece has crossed the Rubicon it is almost certain that the speculators would turn their attention to the next weakest euroland economy.

For much of southern Europe, the game could be up.

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