There is a very real possibility that Greece may leave both the Euro and the EU before the end of 2011. Moreover, if Greece does retreat from the EU and Euro the ramifications will be felt throughout the world for some time to come. In fact, Michael Pettis, representing China Financial Markets advises that Greece will leave both the EU and Euro imminently and what is more, both Portugal and Spain will follow within 2012.
Pettis and other economists argue that since the Greek Prime Minister was effectively forced to abandon not only the proposed referendum on the Euro, but also his office, that resentment will breed and multiply within the Greek people. The focus of the resentment will not be the political powers in Greece, but rather Germany and France, who effectively forced Papandreou to leave office or at least orchestrated events that made it almost impossible for him to stay.
This resentment will fuel the fire of indignation which in turn will lead to further unrest and Greek anger. The Greeks are also aware that because European leaders have been quite vociferous about the possibility of Greece leaving the Euro. This has caused instability which has made financial markets volatile: just when Greece needs stability.
The Return of the Drachma?
If stability cannot be achieved and Greece does have to abandon the Euro, then it will have to create a new form of currency: this could be the drachma. But it is not easy to leave on currency for another. If a new currency is introduced then any savings or liabilities will have to be redenominated. At this point there is the very real chance of a run on the banks, as all savers will try to pull out their savings and so the only sensible option is for banks to freeze savings before it publicly announces that it is leaving the Euro.
Savers and business owners know this, so as speculation increases about Greece leaving the Euro, more and more people are taking savings out of banks. If this continues then there will be a banking crisis and in turn this will precipitate Greece having to leave the Euro. So it then becomes a self fulfilling prophecy.
In addition, both Mexico as well as Argentina decided that announcing their devaluations should be taken at Christmas, so this seems to be the logical time for Greece to part company with the Euro.
The real danger in all of this is that the Greek exit starts to have a domino effect and that Spain, Portugal, Italy and perhaps even Ireland could also see banking crises as people start to lose their nerves about whether or not the EU is going to be dumped. If so, then the banking problems seen over the last few years may well become much, much worse and last for a good deal longer: only time will tell!
This article was fascinating, one of the best I have read on the topic. It made the situation in Greece much easier to understand than it is from reading all the news stories on the topic. It also did well in describing what would indeed be a self fulfilling prophecy. In a sense we are all part of our own undoing in some situations, and this is a classic example of it. I for one will be interested to see what happens next.
I remember when the drachma was what you got when you went on a Greek holiday. The Euro has never seemed quite the same to me. It’s a shame to try and lump everyone in together when we are all so different. I don’t understand why we all have to try and play by the same rules when those rules clearly please some countries more than they do others. It was all bound to fall eventually.
It hasn’t happened yet but I think there is a very real chance it could do. At the moment Greece still looks as though it will be very close to leaving the Euro and defaulting on its debts. I just wonder how it will return to its old currency when the whole country will be in a state of flux. I guess we will find out in the weeks to come, because I’m certain it will happen.