Greek Exit a Worse Mistake Than Adoption of Euro

Forget about kicking cans down the road, certain European Union political leaders are beginning to think it might not be so bad if Greece left the euro after all, and that simultaneously it would also benefit the Greek economy itself should the country exit.

Aris Messinis | AFP | Getty Images

This column has consistently suggested that there can be no “orderly” withdrawal from the euro, and no matter how painful or costly it becomes to try to maintain Greek membership of the currency union, both pain and cost will be higher still should there be an exit. Nothing new there.

Where we might have fallen in erroneously with the crowd was in suggesting that leaving the euro would actually benefit Greece. It would in the long run, yes, but as Mr. Keynes famously once noted, in the long run we’re all dead.

The benefits from reverting to the drachma would occur only after a very painful period of high and rising unemployment, falling government revenues and decreasing economic output. The idea that increased revenues from more tourists would make up for this is alarmingly naive. Euro exit would, as Mr Papaconstantinou so refreshingly noted this week, open the door to hell.

There can be no orderly withdrawal because such a move would precipitate a bank run that would close down Greek banks and have a knock-on effect on the EU (and wider) banking market that will hurt just about everybody.

"There are no easy solutions. Either we stay within the framework we have all agreed or we tear it up in which case we have a complete and utter catastrophe." -Former Greek finance minister, May 21, 2012, George Papaconstantinou

As we noted before, one did not need to have direct exposure to Lehman or hold Lehman debt to experience severe funding difficulties in 2008. The liquidity impact of a Greek euro exit would be much worse than in 2008. It is not a question of “lancing the boil,” rather one of opening the floodgates to panic.

Greek voters opting for anti-reform parties in next month’s election are in effect stating they wish to leave the euro, in which case they will suffer economically more than anyone else. One hopes they do not make this choice. It is imperative that the EU does not compound the bad mistake of 2001 – letting Greece into the euro – with a second more catastrophic mistake.

On another note, Facebook shares fell by just over 10 percent on the second day of trading after the IPO. Sigh …

“Equity market valuation and the illogic of emotion are twin siblings joined at the hip. Discuss.”

The author is Professor Moorad Choudhry, Treasurer, Corporate Banking Division, Royal Bank of Scotland.

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