Greek euro exit no longer unthinkable

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FRANKFURT, Germany — Let Greece go: It’s a possibility that’s being considered more and more publicly in Europe.

There have been 2 ½ years of bailouts, on top of broken promises by Greece to reform. The result: a fifth year of recession and, this week, political chaos. Voters on Sunday favored parties that either oppose the terms of the country’s international bailout or want to renegotiate them. If it cannot get more rescue loans, Greece will go bankrupt and likely have to leave the eurozone, the currency union of 17 countries.

Among the possible scenarios are:

GREEK CHAOS: Economists agree that Greece, where unemployment is 21.7 percent, would suffer even more turmoil and misery if it left the euro. A new drachma currency would fall by 50 percent or more against the euro.

So Greeks would try to pull their euros out of their bank accounts – before they could be converted into a new currency worth far less. Owners of Greek stocks would sell for the same reason. Banks would collapse.

The Greek government would still owe $428 billion, mainly to the other eurozone countries that rescued it, the International Monetary Fund and the European Central Bank. Because those debts would remain in euros, it would have little chance of repaying them.

A BOUNCE-BACK: On the plus side, the weaker drachma would make Greek exports cheaper and more competitive and could help the economy start growing again. Companies outside Greece might be attracted by the cheaper labor and real estate, encouraging them to move manufacturing plants there.

Tourism would also get a boost: booking a hotel room on a Greek island, for example, would suddenly become much cheaper for foreigners.

As long as Greece uses the euro, it can’t benefit from an inexpensive currency. The euro’s value reflects the strength of healthier eurozone economies such as Germany.

Still, Greece isn’t a big exporter, so the extent of the benefits of a new, weak drachma might not be as great as hoped.

CONTAGION: The great fear, some economists say, is that if Greece leaves the euro, other troubled eurozone countries might do the same.

“The big danger is financial contagion,” said Dennis Snower, the president of the Kiel Institute for the World Economy. “The question would be, what stops the Portuguese from doing something similar?”

People might think “just in case, let me get my money out of the bank,” he said. “And if enough people think that way, then you’re sunk.”

Investors who worried that these other countries might also leave the euro bloc would demand higher interest rates to lend to them. If governments couldn’t borrow at reasonable rates, they would default on bond payments, hurting the banks that hold such bonds.

MAYBE NOT: Not everyone agrees that a Greek exit would be a disaster for the eurozone.

Greece is tiny, about 2.5 percent of the eurozone’s 9 trillion euro economy. The possibility of a euro exit has been hanging over markets since late 2009. Banks outside Greece have had time to write off their Greek investments – and not make any new ones.

Europe has bulked up its bailout fund to 800 billion euros, though part of that is already committed to earlier rescues.

“A year ago, I would have said it’s too risky, but the situation has changed,” said Commerzbank’s chief economist, Joerg Kraemer, citing the eurozone fund and ECB loans. “The combined fiscal and monetary shield is much higher than it was a year ago.”

POLITICAL EMBARRASSMENT: Ultimately, a Greek exit from the eurozone would be a terrible blow to the prestige of the broader 27-country European Union. The shared currency is a pillar of hopes for a more united continent. Its abandonment would also mean the rescue strategy pursued by leaders such as German Chancellor Angela Merkel of forcing Greece to cut its budgets relentlessly has been a failure.

There’s no provision in the EU treaty for leaving the euro, though there is one for leaving the European Union. And an exit from the euro would put Greece’s relationship with the EU itself in question.

POLITICIANS DIVIDED

Deeply divided over the value of austerity measures, Greece’s politicians failed again Friday to form a new coalition government, leaving only one more meeting with the country’s president before new elections are scheduled for June.

Socialist party leader and former finance minister Evangelos Venizelos, the third party leader this week to fail at the task, said he would hand the mandate back to the president today.

German Finance Minister Wolfgang Schaeuble suggested the eurozone could deal with an abrupt Greek exit.

“The risk of effects on other countries in the eurozone have been reduced, and the eurozone as a whole has become more resistant,” he told the Rheinische Post newspaper.


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