The arduous negotiations between the EU and Greece over a temporary loan to resolve Athens’ bailout crisis has reawakened fears of a “Grexit”, or Greek exit from the single currency bloc.
Here are in three questions some of the issues at stake:
The European Commission insists that a country cannot leave the common currency, because there is no provision for it in the EUs treaties. So once youre in, youre in.
“Even if there is no clause” permitting a country to quit the eurozone, “it is still possible to find a legal construct” which would allow it, according to Janis Emmanouilidis, from the European Policy Centre.
Leaving the euro might have to be tied to an exit from the European Union.
If Athens fails to fulfil its bailout obligations, the eurozone and European Central Bank (ECB) have the means to push the country out by putting the squeeze on its lenders and forcing it to introduce a parallel currency.
That drastic measure is not on the cards for now, with the ECB Wednesday extending and increasing for two weeks the amount of emergency liquidity available to Greek banks.
The Jacques Delors institute in Berlin has warned of two other possible scenarios, in the first of which Greece introduces a parallel currency to enable it to fulfil its pledges to end austerity and ease the burden on the poor.
But most Greeks are in favour of sticking with the euro and the radical left ruling party SYRIZA has never hinted it would contemplate such a dramatic move.
In the second scenario, Greece exits the euro “by accident”, because a failure to reach a deal or even just a pause in negotiations sparks a sudden bank run, forcing the Greek government to introduce a parallel currency.
Greece’s Finance Minister Yanis Varoufakis has said the eurozone is like the Hotel California of the Eagles song, somewhere you can never leave.
Athens would default on its debt and would no longer have access to the financial markets.
The country, heavily dependent on imports which would soar in price, would find itself at the mercy of “vulture funds”, or be forced to ask China or Russia for help, a move which would have unprecedented geopolitical consequences.
But the Greek economy could profit from the expected rapid depreciation of its chosen new currency, as well as boosting exports and tourism.
Former French president Valery Giscard d’Estaing has said Greece cannot get back on its feet while in the eurozone because of the strength of the euro — and has called for it to leave on its own in a “friendly exit”.
Numerous analysts believe a Grexit would be less damaging to the eurozone than if Athens had crashed out at the height of the debt crisis in 2012, because since then safety nets such as the European Stability Mechanism have been put in place.
Standard & Poor’s ratings agency said Thursday that a Grexit “would not lead to a degree of direct contagion that would drive other sovereigns out of the euro”.
It also believes “the financial burden of a Grexit on the remaining 18 eurozone sovereigns would be moderate and absorbed over decades.”
But an exit would still be very costly for those countries holding Greek debt, and a domino effect cannot be ruled out, according to experts such as US economist Barry Eichengreen.
“When a Portuguese family or Spanish businessman sees that euros have been converted into drachmas, they will take their cash out of their accounts. That could lead to a run on the banks,” he told Germany’s Die Welt daily.
Matthieu Pigasse, CEO of investment bankers Lazard — who are advising the Greek government in their talks — says the exit of any country, however small, from the eurozone would mean the end of the common currency. [AFP]