9-May-2011

According to a German magazine Spiegel, the Greek Government is likely to leave the 12 year old European Union (EU) and will be reintroducing its own currency "drachma". However, the report was denied by the Greek finance ministry and officials from other member states as being "not only completely untrue but also written with incomprehensible flippancy despite repeated denials by the Greek Government as well as other EU Member States". They also added "Such articles are not only provocative but also highly irresponsible as they undermine Greece's efforts and those of the Eurozone and serve only the interests of speculators.

Greece became the 12th country to join the single currency in 2002.

Over the past decade the Greek government borrowed heavily but the revenues generated through tax were not enough to counterbalance this, mainly as a result of widespread income tax evasion. As a result, the budget deficit swelled up, becoming more than 4 times the limit under Eurozone rules. Last year, Greece was forced to accept an 110bn-euro ($136bn) bailout by the EU and the IMF to finance its huge deficit. But despite the government spending cuts and other reforms, Greece economy is still struggling to come out from the crisis.

If Greece leaves the Euro zone and reintroduces the drachma, Greece could sharply devalue its currency against the euro and keep the official interest rates at low level which would help it to regain competitiveness and tackle its debt problem without any violent political and social disruption associated with years of austerity-fuelled recession.

However, it will have huge economic, social, reputational and strategic costs for Greece or any other country. After the reintroduction of a new currency, Greece will remove its bank deposits from the rest of the euro zone banking system which will risk a run on its banks as the people of Greece will exchange their holdings into the euro, and also create a huge disruption for its companies. Banks across Europe would also face loss on their Greek debt and it may trigger the mother of all financial crises. Also, there will be disruption in trade flows and unpredictable business costs which may inhibit investment. It may also result in labor unrest and social strife which would create mass unemployment, inflation and brutal public spending cuts.

Moreover, absence of a legal procedure for leaving the Eurozone would make the exit all the more difficult. Some economists are also of the view that treaty changes may have to be incurred before the exit happens. The legal formalities could trigger years of litigation on all the debt held outside the country.

The costs of business disruption and labor unrest would far outweigh any potential boost to exports or tourism revenues from devaluation.

The bloc as a whole could suffer a huge setback, considering that the common single currency is largely perceived as a mark of the culmination of half a century of European integration.

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