10 rock solid reasons why we shouldn’t take the Greek government’s threat at face value
We’ve just had the biggest hint yet that Greece might leave the euro and return to the drachma. Greek government spokesman Pantelis Kapsis told Skai TV: “The bailout agreement needs to be signed otherwise we will be out of the markets, out of the euro”. That, and Deloitte’s survey out today of the UK’s top CFOs, who on average believe there is a 37 per cent probability that one or more eurozone countries will leave the single currency in 2012.
The situation in Greece is undoubtedly serious. Greece needs to redeem euro 14bn of bonds in March – money it doesn’t have. GDP fell by more than five per cent in 2011. Strikes are ongoing. On Monday it was the turn of Greek doctors and pharmacists to down tools. State hospital doctors said they would only treat emergency cases until Thursday in protest against the austerity programme. The yield on Greece’s 10-year bonds is 29 per cent (and as a rule of thumb, seven per cent is considered too high to sustain).
So should we believe Mr Kapsis? Is Greece going to be the first nation to leave the euro?
The emphatic answer is No. Greece has neither the ability to leave, nor is there any desire to do so at political or popular level.
So the next time this subject is raised, feel free to hit back with these 10 rock-solid reasons why Greece is not going to leave the euro.
1. The governor of the Greek central bank is completely opposed to reissuing the drachma
“A return to the drachma would mean real hell, at least in the first years,” says George Provopoulos, governor of the Bank of Greece. “Living standards would plunge. The new currency would be significantly devalued, possibly by up to 60-70 percent.” He warned “The situation would take us back to the 1950s” and forecast a Greece in which police cars would be unable to move for lack of fuel.
2. The Greek people overwhelmingly support the euro
A poll by Kapa Research conducted in December showed 77 per cent of Greeks say their nation should take all measures to remain within the euro. A mere 16 per cent said they preferred a return to the drachma.
3. Prime minister Lucas Papademos is ruling it out. As are all the other Greek politicians
In fact, not only is he ruling out a return to the drachma, Papademos is the guy who made his name managing Greece’s adoption of the euro and is a former vice-president of the European Central Bank. And he’s unlikely to be going anywhere soon. Elections are scheduled for April, but Papademos has an approval rating of 66 per cent. Even the Greek Communist Party rules out a return to the drachma, with leader Aleka Papariga arguing it would be “catastrophic”.
4. Printing a new currency would take too long
The boss of the world’s top banknote printer, De La Rue, says he could start printing a new currency “within six months”. He also says that De La Rue would be overwhelmed by such an order appearing out of the blue. In fact, Greece has its own printing presses, left over from the drachma days, but there would be questions over whether they incorporate necessary anti-counterfeit technologies (as seen in Canada’s new banknotes). Greece has a deadline of March 20 to meet a redemption of more than 14bn euros.
Not to mention that the moment Greece announces it is leaving the euro sheer chaos would ensue – no more loans to the Greek government or Greek businesses, a wave of Greek bank failures and a mass exit of businesses from Greece.
5. Greeks would refuse to hand over their euros
Ask the Greek public to change their euro notes for a drachma and they’d refuse en masse. Why would they, when the new drachma would be certain to plunge in value immediately after launch. Hang on to your euros and you’ll be richer than your drachma-holding neighbour. Result? Nobody will participate in the switchover.
6. Euro-denominated loans will become unpayable
Ask an Icelandic mortgage holder about the problems of a currency devaluation. During the boom, Icelanders took out loans in foreign currencies to buy houses. As Iceland’s currency plunged by up to 90 per cent the monthly repayments soared. Greek firms with loans denominated in euros would find their interest payments unmanagable as the drachma devalued.
7. “Greece must leave the euro if it defaults”
Nonsense. No one suggests that California would be compelled to leave the dollar if it defaulted. Greece could default and simply carry on using the euro. Many commentators believe Greece should default and leave the euro, such as Nouriel Roubini, aka “Dr Doom”, in this comment piece for the FT. In fact there is no logical reason why Greece can’t default and soldier on with the euro.
8. The impact to GDP would be unbearable
One of the best impact assessments on a nation leaving the euro is “Euro break-up – the consequences” by UBS. The verdict? “We estimate that a weak Euro country leaving the Euro would incur a cost of around euro 9,500 to euro 11,500 per person in the exiting country during the first year. That cost would then probably amount to euro 3,000 to euro 4,000 per person per year over subsequent years. That equates to a range of 40 per cent to 50 per cent of GDP in the first year.” By contrast, if Greece sticks with the euro then GDP will shrink only three per cent in 2012, says the OECD.
9. Greece can’t be expelled
There is no legal basis to expel a eurozone member. Article 50 of the Lisbon Treaty suggests a nation could leave voluntarily. But there is no mechanism for forced ejection.
10. The European Commission won’t allow an exit
The currency is more than an economic device. It is the culmination of a grand European Project. Suggesting the Project be unwound is unthinkable. The European Central Bank is as singleminded as the Commission. Mario Draghi, the president of the European Central Bank, admitted last week the ECB was refusing to examine the idea of a member-state leaving
: “It would be imprudent to create contingency plans when we see no likelihood that they could happen.”
Fanatical support for the euro in both Greece and Brussels, combined with overwhelming support for the euro by Greek citizens and the threat of GDP plunging by 50 per cent in a year if the drachma were introduced, means the euro can not and will not be replaced.
PS: Let me nail one more euro-rumour: “Germany is printing deutschmarks.” It is not. The sole source for this untruth was Philippa Malmgren, a former economic advisor to George W Bush. Her quote, given during a panel discussion in September, which then zoomed around the Twittersphere, was: “I think they have already got the printing machines going and are bringing out the old deutschmarks they have left over from when the euro was introduced.” This was pure speculation. No evidence at all. And no one has provided a shred of corroboration since then.