Greece could well conclude that the costs of Euro membership – the continued uncompetitiveness and the forced restructuring – outweighs the benefits. Or maybe German taxpayers will call a halt to the bailouts. But because the Euro was conceived as a one-way European unity project, no wind-up clauses were built in. That makes it harder and more painful for countries to leave – or be ejected – than need be. In the long run, though, Greece’s departure might spare protracted pain for both sides.
If Greece (or Italy, Ireland or Portugal) is to go, leaving must be a surprise. Leaving the Euro means adopting some new currency that is worth less. That’s the point. But if people get wind of that, speculation would be a one-way bet. There would be bank runs as citizens pulled out their cash in order to put it in other countries where it might keep its value. Businesses would be squeezed as bank finance dried up, and because foreign customers would be slow to pay and quick to demand payment in the hope of benefiting when the devaluation occurs.
So it needs to be a shock announcement, preferably on a Sunday morning when the markets are closed. That gives Greece no time to print all the new currency it needs by the time the shops open on Monday. But all Euro notes have a national registration letter in the serial number – Greece is Y, Italy is S, and so on – Greece could still use those until its new drachmas are printed. When the Austro-Hungarian Empire broke up, the existing banknotes were simply stamped with the symbol of the relevant country.
This new currency is of course worth less than the old Euro. That is the point – Greece wants to make its exchange rate more favourable. Its announcement would proclaim that all local assets and liabilities are now denominated in this new currency. It would need capital controls to hold things together while people adjust to it. Foreigners might try to sue Greece for its default. It could buy time by promising to honour Euro-denominated liabilities in Euros when they fall due. Or it can tough things out.
Would anyone ever lend to Greece again, once you had defaulted? History shows that yes, investors generally come back to such countries quite quickly. That is because the default gives an immediate competitive advantage against your neighbours – a chance to sort out your economy and make it a better, and cheaper bet for people who want to trade with it and invest in it. You can also afford to offer them higher interest rates, which are presently decided in Frankfurt.
Yes it is messy, but there can be clear advantages to Greece leaving the Euro – for the other Euro members as well as Greece.