Being the economics commentator of what passes in the UK for a serious newspaper doesn’t mean that you have any idea about how the EU works, or indeed about the basic facts of economic life. Yesterday Hamish McRae in the Independent was speculating that Greece will leave the eurozone. It won’t.
Firstly, the legal position is very far from clear. Euro membership is a treaty requirement and is a condition of membership of the EU. There is no specific provision for a country leaving the eurozone. The ECJ would have to rule but it is quite possible that leaving the eurozone would mean leaving the EU itself. That would be possible but it could not happen immediately and, as we will see, time is the important factor here.
Even if there were no legal obstacle to Greece’s leaving the eurozone, what would happen if it wished to do so? It couldn’t be done overnight; it’s not like leaving the ERM or dropping the gold standard. We are talking about changing a currency. There would have to be a fixed exchange rate, and even if that could be negotiated and decided in the utmost secrecy, then what? You can’t say one morning that as of today we are going to use drachmas instead of euros. Where are the notes and coins? They have to be printed and minted, and that could never be done in secret. How will ATMs work? They will have to be adapted. What about prices in shops? How will they be converted immediately? What about taximeters and vending machines? When the euro came in we had two years of its existence as an underlying virtual currency that was valid for commercial purposes (invoicing and accounting for example) but that had no physical existence, and there was a long awareness-raising campaign about the coming change-over followed by a period of dual circulation.
Leaving the euro would be a similar process to joining it and it would take time. So let us imagine that Greece announces that in three months’ time it will leave the euro. Immediately every liquid euro that is not required for minimum day-to-day expenditure will shoot out of the country at the speed of light (literally in the case of electronic transactions). It is after all a currency union. It would be impossible to stop it. So, on D-Day there would be only a tiny amount of euro currency in Greece to convert into new drachmas. For that reason, and because the new drachma would be undesirable in the markets, its value would go down the drain faster than the eye can see. Result? Greece has a worthless currency but still has huge debts that are still denominated in euros. It obviously can’t pay them, so that debt becomes unrecoverable. It is held largely by French and German banks, which will then go bust spectacularly.
So, Greece will not wish to leave the euro*. And it certainly won’t be forced out. And all this is not about rescuing Greece. It is about rescuing stupid, greedy banks that lent money that they never should have lent in the first place.
*Update 2-11-2011: This was posted before Papandreou announced that he would be holding a referendum on whether or not the country should commit economic suicide and drag the rest of the EU down with it.