Why Greece will NOT exit the Euro

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With Greek political leaders entering a fresh round of negotiations aimed at forming a government after last week’s election, speculation that Greece is on the verge of exiting the Euro has reached fever pitch. Here, Dr David Toke, Senior Lecturer in Politics at the University of Birmingham, explains why he believes this talk is overblown.

A lot of nonsense is being talked about the Greeks being about to exit the euro. This is rather less likely than Wolverhampton Wanderers winning the Premier League in two years time. It is even less likely than Germany leaving the euro. Indeed if you ask the question: ‘who has threatened to leave the euro? – the German Chancellor or the Leader of the (anti-austerity) Greek Syriza Party? the answer is, perhaps a surprise to most people, ‘Angela Merkel’ (albeit in a passing moment of irritation). Now, Germany leaving the euro, by the way, is not very likely either, through probably slightly more likely than Wolverhampton Wanderers winning the Premier League in two years time. Germany could survive outside the euro, well, with a rather nasty shock and harsher trading conditions after things stabilised – it would not be much fun for them.

More to the current point, however, Greece would do much less well outside the euro. Indeed the large majority of Greeks know this and do not want to take British eurosceptics’ advice to reinvent the drachma. So, if the Greeks do not want to leave the euro, will they be forced to leave the eurozone by the EU itself? The answer to that is a very firm ‘No’. Why? because there simply is no mechanism to force any country to leave the eurozone. Sure, if there were Treaty changes made to establish such a process, it would be possible. However making changes to EU Treaties takes years to do even when all the leaders of all the EU countries agree to sign up to them. When some disagree, it becomes impossible. Indeed the first to refuse to cooperate would be the Greeks themselves, not to mention the Irish who have to have referendums on Treaty changes….and I think they would vote no! I rather doubt that other countries would agree….Italy? Spain? Portugal?….France?…….no, it does not even merit a second thought. EU Commission President Barosso has said as much.

So, are there other plausible conditions whereby somehow Greece might find the situation makes them leave the euro. Again, no. People may say: ‘Ah, but if the Greek Government (when they get one) decides to reject the EU-backed austerity plan, and they do not get their next instalments of loans from the European Central Bank and the International Monetary Fund (IMF) to pay their debts then this will put them in a position of default on their loans. Will that force them to ditch the euro and take up the drachma?’ Well, no it won’t at all. Indeed it would be a very silly thing for them to do. Now a decision to default on their remaining debts (remember they have been effectively allowed to default on the majority of their debts already) will have serious consequences – Greek banks will face bankruptcy for a start, but leaving the euro will not stop that happening. Indeed it will make things worse for two reasons. First the Greeks would exchange use of a solid currency (the euro) for one of highly uncertain (and probably rapidly depreciating) value. Second, the rest of the eurozone would be severely challenged as banks stop lending to each other for fear that euros used in Portugal might suddenly change into escudos, into liras in Italy etc, and that would not help Greece either, along with the whole of the EU, in or out of the eurozone – points which, amongst others, have been raised by Bank of England adviser Robert Jenkins writing in the Financial Times on November 7th last year. People say that a cheap Greece would be a magnet for holidaymakers. However, after a eurozone crash there might not be many holidaymakers left. This logic is part of the reason why the large majority of Greeks themselves do not wish to leave the euro.

So if Greece exiting the eurozone is less likely than Wolverhampton Wanderers winning the Premier League in two years time, why do people go on about it so much? Well, it is about public relations. You should remember that what politicians, bankers etc say is not necessarily actually likely to happen, but is aimed at affecting other people’s behaviour, in this case the Greeks. People who have lent Greeks the money, or think they have (Germany via the ECB, bankers etc) would prefer to get it back and they want to frighten the Greeks into towing the line, and keep up the terms of the austerity package to make further heavy cuts in public spending. So they make empty threats. The Syriza Party say these threats are bluffs. On this point Syriza is correct. By the way Syriza and the Democratic Left Party are, well, left, parties, not fascists as implied in much of the press. We would do well to pay them more respect before we start to encourage the real fascists in Greece.

One reason why so many Greeks are now voting for anti-austerity parties is that they are being made aware that the money they are being given by the ECB and IMF is mainly to repay loans….lent by the ECB and the IMF. If the Greeks decided to renege on their debts then their budget would actually be yielding a small surplus this year – so they would not need much, if any, of the loans anyway.

There is of course the not insignificant matter of the Greek banks. Syriza reckons it can solve this problem by nationalising them. Well, I suppose we nationalised Northern Rock…..Now I’m not going to debate the details of what the Greeks (or indeed the ECB) would do in this situation. But I do make a plea that the ECB, Germany, etc start thinking seriously about a Plan B that does not involve making empty threats against the Greeks to impel them to suffer even more pain than they have got already. Rather we need a plan that instead involves negotiating with the Greeks to reduce their debts further and to allow them the chance of rebuilding their economy without the painful regime that has been imposed upon them. Plan A clearly is not going to work.

Posts provide the views of their authors only. They do not represent the position of the POLSIS Blog, the Department of Political Science and International Studies, or the University of Birmingham.

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