What if Greece exits the EU ?

What happens if Greece leaves the European Union?

The European debt crisis is an ongoing multi-year debt crisis affecting some of the major European Union member states since end of 2009. The European debt crisis erupted in the wake of the Great Recession around late 2009, and was characterized by an environment of overly high government structural deficits and accelerating debt levels which reached such critical levels that four Eurozone states needed to be rescued by sovereign bailout programs, delivered jointly by the International Monetary Fund and European Commission - with additional support at the technical level by the European Central Bank.

Greece has been the worst affected by this crisis and now a situation that seemed outrageous couple of years back looks likely to happen. So what happens in case there is a Greece exit or “Grexit” as it is termed from the Eurozone? There are a number of consequences-

   Monetary Consequences

  1.  Greece introduces new currency Drachma as it can no longer use Euro as its legal tender however the value of Drachma dwindles rapidly which mounts inflationary pressure on the economy.

  2.  The key to managing this is stalling the new drachma's free-fall is a carefully managed money supply, but the allure of printing more cash to maintain government services could lead to hyperinflation which in turn would make basic necessities and imports costly. 

  3.  The Euro would also collapse although not substantially due to heightened risk aversion and flight to safe- havens outside the Eurozone such as the Swiss Franc or the Sterling.

  4. Unable to borrow from anyone (not even other European governments) and with people in a rush to take their money out of Greece, the Greek government would simply run out of euros. The government would have to impose a freeze on withdrawals and on people taking money out of the country. This could lead to queues of ordinary Greeks trying to empty their bank accounts before they get converted into a new currency worth substantially less than the previous one.

  5.  On the bright side however a devalued currency might help Greece gain a competitive edge in the long run but given that it is able to improve its tax collection system and control government spending.

 Economic Consequences

  1.  The GDP of Greece would see a collapse of up to 50% and the living standards could fall by 80% within a few weeks of exit.

  2.  Tax receipts would probably fall as the economy contracted, so the government might finance spending by printing money.

  3.  Due to the uncertainty prevailing in Greece, nervous depositors in other struggling Eurozone countries, such as Spain or Italy, as a chain effect may move their money to the safety of a German bank account, sparking a banking crisis in southern Europe. 

  4.  Confidence in other banks that have lent heavily to southern Europe - such as the French banks - could also be affected. The banking crisis could conceivably spread worldwide, just as it did in 2008.

  5.  The government would not be able to repay its debts due to severe shortage of Euros, which now amount to a total of about €320bn (£237bn), most of it owed to European governments and agencies and the International Monetary Fund.

Political Consequences

   1.  As the Greek Minister of Civilian Protection, Michalis Chrysohoidis pointed out in an interview recently that Greece "will end up in civil war" if the country exits the Euro, political unrest could ravage Greece which has already been racked by violent protests in the past specifically after the implementation of austerity measures. The fear is rife that in case of a sharp economic downturn the severe dismay on the streets could transform into violent mass protests.

  2.  Greece's failure to pay off its debts could result in it getting embroiled in decade-long legal battles with so-called “vulture funds”, particularly if it decides to pay some creditors and not others.

  3.  These "vulture funds" specialize in speculating on troubled sovereign debt and then sue when they don't get paid, they are likely to instigate legal battles to make sure that Greece meets its commitment.


- Tarang Gupta