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    The Pros and Cons of Grexit

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    Tanay Chitre
    Greece leaving the euro would still be bad for both Greece and the euro area. While the mechanics of Greece exiting the euro ("Grexit") would be straightforward, reintroducing the drachma would cause significant short-term economic shock and chaos. Greece would likely fall into recession and default on its debt again. While Greece is in a slightly better position now than in 2012, a sudden exit would still undermine its promising economic recovery and set the country back. For the euro area, Grexit would shatter the principle that euro membership is permanent and could spook bond markets, though the risks are less than in 2012 due to new crisis mechanisms. Overall, the costs of Grexit still outweigh any benefits of

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    The Pros and Cons of Grexit

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    Tanay Chitre
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    Greece leaving the euro would still be bad for both Greece and the euro area. While the mechanics of Greece exiting the euro ("Grexit") would be straightforward, reintroducing the drachma would cause significant short-term economic shock and chaos. Greece would likely fall into recession and default on its debt again. While Greece is in a slightly better position now than in 2012, a sudden exit would still undermine its promising economic recovery and set the country back. For the euro area, Grexit would shatter the principle that euro membership is permanent and could spook bond markets, though the risks are less than in 2012 due to new crisis mechanisms. Overall, the costs of Grexit still outweigh any benefits of

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    Greece leaving the euro would still be bad for both Greece and the euro area. While the mechanics of Greece exiting the euro ("Grexit") would be straightforward, reintroducing the drachma would cause significant short-term economic shock and chaos. Greece would likely fall into recession and default on its debt again. While Greece is in a slightly better position now than in 2012, a sudden exit would still undermine its promising economic recovery and set the country back. For the euro area, Grexit would shatter the principle that euro membership is permanent and could spook bond markets, though the risks are less than in 2012 due to new crisis mechanisms. Overall, the costs of Grexit still outweigh any benefits of

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    632 views4 pages

    The Pros and Cons of Grexit

    Uploaded by

    Tanay Chitre
    Greece leaving the euro would still be bad for both Greece and the euro area. While the mechanics of Greece exiting the euro ("Grexit") would be straightforward, reintroducing the drachma would cause significant short-term economic shock and chaos. Greece would likely fall into recession and default on its debt again. While Greece is in a slightly better position now than in 2012, a sudden exit would still undermine its promising economic recovery and set the country back. For the euro area, Grexit would shatter the principle that euro membership is permanent and could spook bond markets, though the risks are less than in 2012 due to new crisis mechanisms. Overall, the costs of Grexit still outweigh any benefits of

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    © All Rights Reserved
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    Download as docx, pdf, or txt
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    The passage discusses the potential economic impacts, both positive and negative, of Greece exiting the eurozone. It could lead to short term shock but longer term competitiveness gains, though inflation and uncertainty would also rise substantially. Greece and the eurozone both still have more to gain from Greece remaining in the currency union.

    Grexit would likely cause significant short term economic chaos and contraction as the new currency devalued substantially against the euro. Inflation would surge, undermining consumer and business confidence and pushing the economy back into recession.

    Greece would face huge debt issues as foreign debt remained in euros and surged in relation to the devalued new currency, likely causing another default. Long legal battles over past debt restructurings would also be inevitable. Cut off from the EU single market, Greece's access to trade and assistance would be reduced.

    Free exchange

    Zoning out

    Why leaving the euro would still be bad for


    both Greece and the currency area
    Jan 17th 2015 | From the print edition

    IN 2012 Greece held two elections which might have led to its exit from the euro zone. In the
    event, that was avoideda good thing since the costs of a Grexit would almost certainly have
    outweighed any gains, not only for Greece but for the entire currency area. Now yet another
    election, on January 25th, threatens Greeces membership of the euro zone. What would Grexit
    entail this time? And does it make any more sense?
    The mechanics of Grexit would be straightforward. The change in currencies would be
    immediate as the government redenominated domestic assets and liabilities into drachma, most

    likely on a one-to-one basis with euros. The Greek central bank would be severed from the
    European Central Bank (ECB) in Frankfurt. Instead it would conduct Greek monetary policy, in
    drachma, through operations with banks whose domestic balance-sheets would now be in
    drachma, too.
    In this section

    A tangle of anxieties

    Drop of the pops

    Kung-fu fighting

    Saved by the well

    Pump aligning

    In the ointment

    Zoning out

    Reprints
    Related topics

    Financial markets

    World markets

    European markets

    Economics

    Economic integration

    Though the starting-point might be parity between a euro and a drachma, the new currency
    would quickly depreciate. Estimates from the IMF in 2012 suggested that it would fall against
    the euro by 50%. Such a reduction could spur an eventual economic revival by making Greece
    more competitive. After Argentina severed its decade-long link with the dollar in 2002, it
    experienced several years of rapid growth, helped admittedly by a commodity-price boom that
    played to its strengths as an agricultural exporter. The hope would be that Greece could also
    exploit its improved competitiveness, especially by attracting more tourists.
    Even so, there would be several drawbacks. Grexit would be a huge short-term shock to the
    economy. Reintroducing new notes and coins would take several months. This would be likely to
    create chaos, even though ever more people are making payments electronically. In all

    likelihood, Greece would have to leave the EU as well, which would cut it off from the blocs
    single market (and regional financial assistance). Inflation would surge as soaring import prices
    rippled through the economy; the IMFs analysis in 2012 suggested that Greek domestic prices
    would rise by 35%. The uncertainties caused by Grexit would undermine both consumer and
    business confidence.
    All of which makes an Argentina-style boom highly unlikely. The economy would probably be
    pushed back into recession, only a year after it had started to recover. The IMF estimated that
    Grexit would cause an already sliding economy to contract by an additional eight percentage
    points in 2012.

    Greece in graphics - a guide to the country's upcoming elections


    The uncertainties would persist as the Greek government found itself stuck in an Argentine-style
    legal imbroglio, making it impossible to borrow from abroad. Although the Greek government
    could redenominate domestic debt it could not do so for foreign debt. That burden, still in euros,
    would grow dramatically overnight in relation to the devalued drachma-based economy and the
    Greek tax base, which would make a fresh default unavoidable. Long legal battles would be
    inevitable, especially with private holders of the new Greek bonds issued in a restructuring in
    2012, which were written under English law.
    In some respects, Greece is better-placed now to cope with an exit than in 2012. According to the
    European Commission, the government ran a primary surplus (ie, before interest payments) of
    2.7% of GDP in 2014, whereas two years earlier it was still heavily in deficit (3.6%). Greeces
    once forbiddingly large current-account deficit (which reached 15% of GDP in 2008) is more or
    less back in balance. Grexit would therefore not cause a sudden budgetary crunch, and the
    balance of payments would be more resilient to the immediate effects of rising import prices and
    would gain from bigger exports.
    But Greece is also better placed than before to prosper within the euro zone. A sudden exit would
    set back a promising recovery. Following a savage recession, in which GDP shrank by 27% from
    its previous peak, the economy has been growing since the start of 2014. It is now much more
    competitive than before, following big falls in wage costs. The sheer size of Greek public debt, at
    175% of GDP, is cause for concern. But in fact much of this is owed to other euro-zone
    countries, and these have provided hidden debt relief through extending maturities and charging
    minimally low interest rates. Interest payments have also been deferred for ten years on a big
    chunk of Greek debt. As a result, even though Greeces stock of debt is now much higher than

    before the crisis, its interest payments are lower: 4% of GDP compared with 5% in 2008, when
    the debt was 109% of GDP.
    Beware Greeks bearing precedents
    For the euro zone, the balance of benefits and costs is also unfavourable, though less so than in
    2012. The gain for Greeces creditors from Grexit would be one of discipline. A departure would
    show that members of the currency club have to abide by its rules, sending a strong message to
    rebellious politicians elsewhere on the periphery to fall into line. The risk that Grexit might cause
    a wider break-up is lower than in 2012 thanks to various new defence mechanisms, including a
    permanent rescue fund and the readiness of the ECB to come to the aid of countries facing a
    buyers strike on their government bonds.

    Explore our interactive guide to Europe's troubled economies


    Even so, Grexit would still be a shock. Its detrimental impact on an already weak economic
    recovery could cause GDP across the rest of the euro zone to be lower by 1.5% in 18 months
    time than it would otherwise have been, according to JPMorgan Chase, a bank. Grexit would
    shatter the principle that membership of the single currency is for ever. A sell-off in the bonds of
    other countries that might appear susceptible would naturally follow. The euro zone might now
    cope better with Grexit, but the cost of showing that the currency club can fracture would still
    outweigh the gain of enforcing discipline.
    Economist.com/blogs/freeexchange

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