What Happens if Greece Leaves the Euro…


In an Associated Press report, we read:

PARIS (AP) — France’s president has raised the possibility of Greece leaving the shared euro currency, but says that’s a decision for “Greece alone” to make.

Some in Europe have expressed concern that if the left-wing Syriza party wins this month’s general election in Greece, the new government may renege on terms of a hugely expensive international bailout plan. That has revived questions about Greece’s fitness to stay in the euro.

Francois Hollande said on France-Inter radio Monday that Greece’s new leaders “will have to respect the commitments made by their country.”

But he insisted that it’s not up to others to say whether the result of the Greek vote means they should or shouldn’t keep using the euro currency.

That, he said, “is for Greece alone to decide.”

Previously, Syriza leadership declared a commitment to exiting the Euro. Unsurprisingly, that commitment has wavered now that Syriza is close to seizing power. Their leaders now claim that Greece could stay in the Eurozone, but would repudiate all austerity programs and pursue a hardcore socialist agenda, alongside rejecting the bailout programs structured by the European Central Bank with Germany’s approval. Such a move would make things very tense. German taxpayers do not want to be on the hook for another Greek bailout. The thought of subsidizing more socialist foolishness out of Greece makes German politicians nervous.

Greece’s exit from the Euro is by no means guaranteed. But it is indeed a significant possibility. Let us consider, step-by-step, what would happen if Greece did leave the Euro and return to their old currency, the drachma.

If the Greek government left the Eurozone, their first order of business would be to begin issuing drachma from their own central bank. The value of the drachma would instantly fall significantly against the euro, conceivably something near 50% down or worse; Greek savers with euros in Greek banks would take a huge loss as their savings were converted into drachma. Their purchasing power would decline by an enormous magnitude.

However, this process would have a silver lining. Greek exports, valued in drachma, would become more competitive as their price falls significantly. Furthermore, Greek wages would likely fall by a huge amount; this means the famously inefficient and unproductive Greek labor force would become competitive again, at real wages far below average throughout rest of the European Union. This would be attractive towards employers. Employment in Greece would likely rise for a time.

This would throw loans made to Greece by the other Euro nations into jeopardy. There is no precedent for repaying these loans in anything other than euro. How would Greece approach the situation?

The competitive silver lining would lose its luster quickly. While the average Greek would suddenly have better job prospects, their wage prospects would be diminished significantly. Their purchasing power would be vastly lower than what it was before exiting the Eurozone. The continued issuance of drachma would cause prices to rise. The hardest-hit class of all would be the elderly Greeks reliant on pensions and those who kept their savings in Greek banks, having lost a large amount of purchasing power.

Despite all of this devaluation and loss of purchasing power, the Greek tax system would be unlikely to make any major concessions, especially under the left-wing Syriza. The overall tax burden would likely rise. They might make some small tax cuts for middle and lower class incomes, and increase taxes on the wealthy. This would mostly be a futile and impotent move. The drag placed on the Greek economy by their high tax burden would remain the same.

The competitive advantage offered by the drachma devaluation would not last long. Greek wages would soon rise to a level in which the competitive advantage is mostly lost. Furthermore, competitors in other countries would, after maybe a few years, adjust their prices accordingly to compete with Greek goods. The persistent heavy tax load would bring a severe lag to the economy, not allowing capital resources to be used in an optimum manner, instead being dumped into the government spending furnace.

By this time, the Greek financial system would be utterly dysfunctional and toxic to investment. No international business or bank is going to want to deal in the ever-devaluing drachma. Large corporations in Greece will have access to euro-denominated loans abroad, but small businesses and regular people will be restricted to drachmas. At this point, the only people left with savings in Greek banks are fools. Anyone with an ounce of sense would have moved their savings to an account in a foreign bank, denominated in euros. The remaining people not doing this who are also not idiots are finding other ways to save and invest – but not using Greek banks.

At this point, Greece would have a toxic investment environment with haggard creation of capital and poor quality of employment. Meanwhile, the far-left government would still have welfare obligations to fulfill. Hello, deficit spending. Hello, ever higher taxes.

By today’s mainstream economic logic, the next step would be obvious: inflate and devalue the drachma even more. The mercantilist impulses of Greek politicians and exporters, seeking to regain the “competitive edge” held after the initial devaluation of the drachma, would agitate for increased devaluation of the drachma. This would further reduce labor costs and lower the price of Greek exports. This would be great for the large corporations exporting goods from Greece; but small businesses and households would see their profits and wages decline even lower.

Many small businesses would ultimately go under entirely as the devalued drachma ravages their profits. Before long, the only businesses with any political clout left are the large exporting firms, who seek drachma devaluation. Businesses that oppose the devaluing drachma shrink and shrivel until they no longer present any significant opposition.

This is where things start to get really prickly. None of this happens in a vacuum; this drama unfolds within the context of the whole EU. As mercantilism pushes Greece to further devalue the drachma, the price of Greek goods and labor will fall. This will start to make many of the other nations in the EU upset, specifically those still in the Eurozone who are competing with an ever lower drachma.

When the next recession hits the Eurozone countries for whatever reason, the exporting companies in nations outside Greece will complain to EU leadership that the cheap drachma is destroying their business, and that competing with Greece is too difficult. EU leadership will before long start a trade war with its own member nation, Greece: they will impose hardnosed tariffs against goods imported from Greece. This will serve to only further enrage Greeks, who already resent the EU and European Central Bank.

Meanwhile, insolvency and mounting unemployment due to recession in other Eurozone nations may push them over the edge. The two major nations to watch out for would be Italy and Spain, both of whom are on economic edge of the cliff already. I do not think it outrageous to speculate that Italy and Spain, both of whom have vibrant anti-Euro movements, may also choose to leave the Eurozone. Part of this will be due to their inability to compete with Greece. Germany and France will not tolerate a devaluation of the Euro to subsidize inefficient Italian and Spanish exporters; therefore, we will see the return of the Lira and the Peseta as Italy and Spain dump the Euro. Of course, they too will pursue a policy of devaluation as they seek competitive footing against Greece. This will lead EU leadership to impose the same harsh tariffs on Spain and Italy as were placed on Greece.

By this time, Europe is in mired in total economic chaos. While Spain, Italy, and Greece all poop on their small businesses and households as the large exporting firms and their allied politicians push a mercantilist agenda of currency devaluation, French and German banks take an enormous hit as their euro-denominated loans to these 3 nations are re-denominated into the new currencies. It is highly likely this will be done at a 1-to-1 ratio. This means the French and German taxpayers who subsidized these loans will lose a huge amount of money. The euro flies into complete turmoil as France and Germany panic at the new reality.

Finally, we reach what I believe to be the endgame for the euro: after what could be either a few months to a few years of hand-wringing and stress from the French and German governments, both of whom have been utterly shaken to their cores politically by this point, the final nail in the coffin of the euro is hammered deep. France and Germany abandon the euro, returning to the Franc and the Deutschmark, and the euro is effectively destroyed. All of the other small countries on the euro have no choice but to ditch it and return to their previous currency.

France and Germany then join the mercantilist devaluation party. Wages fall. Prices fall. Before long, no single EU nation seems to possess the competitive advantage, as all have devalued their currencies to such a point as to where they honestly cannot go much lower. Employees find that their paychecks are essentially half of what they used to be. Depositors in European banks who were too complacent to remove their money before the chaos began lose most of their savings’ purchasing power.

The deeply felt socialist tilt in most European nations will rear its ugly head yet again. Taxes will remain oppressive. The price systems in European countries will remain completely distorted. Smart financial capital will flee most European markets as their governments become increasingly socialist and regulatory in the face of stagnant employment and wages alongside rising prices. Of all the problems, unemployment will be the greatest bugger of all.

This prediction may seem complicated. However, it’s not difficult to arrive at; all it takes is a step-by-step analysis. The main takeaway is this: the nations abandoning the euro will think that currency devaluation is the key to success. It will seem that way for a while, as those nations gain a brief competitive edge. But the edge will wear fast. Meanwhile, those governments will continue to tax and spend heavily. Eventually, they’ll end up in the same frying pan as they were before. The more things change, the more they will stay the same.

The Eurocrats in Brussels have made it clear multiple times that they are 100% opposed to any nation leaving the euro, especially any nations as large as Greece, Spain, and Italy. These countries are too large to not make any waves across the European economy. If any one of them pulls out, I think the scenario I described above will play out entirely.

There is one other possibility: Greece pulls out, and it is such a catastrophe for them that the peoples of Spain and Italy are scared into playing along with austerity measures if it allows them to remain in the euro. It is possible. But I think my original prediction has more weight to it. The 2nd possibility would require real reform.

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