The Euro crisis – Could Greece leave the Euro?


           When some of us opposed early and wide monetary union within the EU we said joining the Euro was joining an Exchange Rate Mechanism you could not get out of. Some went further, and said the danger of joining the Euro was locking yourself into a common European house  and throwing away the key when the house  might catch fire.

           It is not easy for any one country to leave the Euro. It is best done rapidly, taking markets by suprise and presenting them with a fait accompli. It is easy to redonominate all bank account money in any given country by a press of  a button. It takes longer, allowing people to trigger a run on banks, to print the new currency and circulate the new bank notes. Why would people hang around with money on deposit in a Greek bank, if they thought a 15-30% devaluation was just around the corner? They would want to pocket their Euro notes and expect them to be honoured.

             It would be fairest to devalue the currency of all Greek bank account holders, but not all holders of Y serial number Euro notes. Once the drachma replaces the Euro as the legal tender in Greece, Greek holders of Euro notes would be able to sell them into drachmas. The Greek state would be wise to impose a limit on how many Euro notes a Greek citizen could convert into drachmas, imposing a lower rate of exchange on excess. There could be some leakage by Greek citizens travelling abroad to exchange larger sums. The Greek state should print a starting level of drachma notes as quickly as possible to cut down the time people had to play games against the devaluation. Once the new currency had been announced it would be possible to limit cash withdrawals pending the full print run of drachma notes.

              All debts, contracts and agreements in Greece denominated in Euros would automatically  be changed into drachmas by law. International contracts including Euro debt owed by Greece to foreigners would require negotiation by both sides where the governing law was not Greek law.

                 The new drachma should be allowed to find its own level in the markets against the Euro. The Greek central bank would need to make a clear statement of its intent vis a vis the issue and control of the new currency and the Greek government would need to make a full economic policy statement with guidance on proposed inflation, growth and monetary targets.

              Greek people would be worse off when buying foreign goods by the amount  of the devaluation. Greek goods and services would be cheaper by the amount of the devaluation. The Greek economy could start to recover as it exported more and welcomed more inward investors, holidaymakers and other sources of income and jobs.

                Countries with free floating currencies do adjust more quickly to changed circumstances and to falling living standards than  coutnries with pegged or shared currencies. Faster adjustment means less pain in the longer run.


  1. Mick Anderson
    June 24, 2011

    For this to happen, European politicians need to admit that they have been wrong about their great Euro-state project.

    Although Mr Cameron has been bucking the trend lately, this doesn’t seem to be terribly likely.

    However, they should still be decoupling.

    1. Pete Chown
      June 24, 2011

      ‘For this to happen, European politicians need to admit that they have been wrong about their great Euro-state project.’

      Either that or Greek voters need to decide that enough is enough. Look south from Greece and we see Libya and Egypt. Could the Arab Spring turn into a Mediterranean Spring, with the Greeks deciding to throw out the unelected Eurocrats who ruined their economy?

  2. Alan
    June 24, 2011

    I’m quite surprised that Mr Redwood, whom I had thought of as being on the right wing of the Conservative Party on financial matters, should propose seizing peoples’ bank accounts and forcibly converting them to another currency. That is giving the state too much power. A state should be able to decide what currency it uses, both for paying its employees and collecting its taxes, but it should not have the power to tell other people what they should use.

  3. lifelogic
    June 24, 2011

    What an entirely predictable mess entirely of the EU creation to join CAP, Recycling Laws, Fishing Policy, Energy Policy and all the rest. Why on earth, even after the Major’s ERM farce (and the Euro was ERM with no exit) did so many from all parties (Libdem’s especially) still want the UK to join.

    When we go on holiday will we now have to check all our change to make sure we are only holding German/French EURO notes numbers? Will the exchanges but dumping Greek ones on us to get rid of them?

    But lend and pretend will continue for a little while longer I assume.

  4. Robert K
    June 24, 2011

    It would be traumatic for Greece to leave the euro, but then it is traumatic being part of it too. The benefits can be imagined for the tourism industry, which represents about 15% of Greek GDP. If the country reverted to the drachma and devalued, think how much more financially attractive it would be to go on holiday there than the other Mediterranean countries.

  5. Alan
    June 24, 2011

    A far easier way to leave the euro is to default whilst the currency is still euros. That reduces the debt and enables the economy to start working normally. Once a default has taken place it is unlikely there would be another default for several years so (short term) loans would be possible. At that point there is no immediate need to convert to another currency but if Greece were to decide that was in its long term interest it could then move in a more orderly way to a new drachma.

    This would not involve forcibly converting peoples’ holdings of euros to the new drachma. Greece would pay its employees and collect its taxes in the new drachma and would make it a lawful currency for settling debts within Greece. It would quickly become the usual currency for normal transactions. Most businesses would pay their staff in new drachmas. People could keep euro bank accounts but, except for those who had a frequent need for euros, these would gradually become disused as people either spent the euros or converted them to new drachmas so that they were available for everyday use. People who did have a frequent need for euros would continue to have euro bank accounts, just as some people in the UK who frequently travel in the rest of Europe or have business interests there have euro bank accounts.

    It would be technically interesting if Greece were to avoid the need to print new bank notes by converting to electronic cash. Everyone who wanted one would be issued with a card that could hold at least two currencies. People could put euros on to the card and use that for everyday transactions, alongside the paper and metal euro currency. After this was well established, when Greece wished to issue the new drachma, these would not exist as paper and metal but only on the electronic card or in bank accounts. I’d love to see this tried, but I imagine that the Greeks would find it unacceptable. The British certainly would.

    1. andydan
      June 24, 2011

      “It would be technically interesting if Greece were to avoid the need to print new bank notes by converting to electronic cash. Everyone who wanted one would be issued with a card that could hold at least two currencies.”

      I think this is an excellent idea. It’s time that cash and coins were made history, especially in a society where tax evasion is rife. I have friends in Sweden who tell me that actual cash is very rarely used. You would certainly never pay a tradesman with notes. I find it difficult to get work done where I live without paying cash in hand these days. Of course there are difficulties, but these aren’t insurmountable.

  6. Duyfken
    June 24, 2011

    I note you say it would not be easy! Even were the process to be handled competently, there seems to be scope for unfairness and confusion. Even now, the possibility that Greece may change to the new drachma and devalue, should encourage all those trading with the country to take contingent precautions, the main one I suggest being to denominate any transactions in a currency other than the euro.

  7. Helen
    June 24, 2011

    It must be an incredibly scary time for the Greek people.

    I wonder though, would France and Germany allow this to happen? Would they not be tempted to punish the Greek government somehow? Surely if a nation left the euro and successfully recovered for it, that would be a bad example for those who want the euro to work? Would they be able to allow that recovery to work, or would they seek to find ways to make life even worse for the Greeks?

    This is also a question related to those who wish to leave the EU. An example would have to be made of that nation, to prevent others following suit.

  8. Mike Stallard
    June 24, 2011

    Newly independent countries – even in Africa – have managed to change their currencies on independence. In the 1990s all those new Baltic currencies were formed out of the rouble.
    It isn’t impossible. You have just spelled out the details.
    But I do not think the Eurocrats are going to allow it yet. They have far too much to lose. And, as you (and we) constantly point out, they are unaccountable and unelected.
    Civil Servants know perfectly well how to prevent things happening by slowing down the process and throwing obstacles in the path of the reformers.
    Even when Athens has been set on fire and the Greeks are in total revolt, still they will not listen. Which says a lot about our modest proposal for a British referendum.


    I thought that it was rather moving last evening on that dreadful Question Time when you were pitched against a minor LibDem, a very very rookie Labour MP, a comedian and a Presenter who is famed for her slimming. The Chairman, Mr Dimbleby, interrupted you constantly and the audience, completely impartial as ever, cheered the Labour speech to the roof (what was she on about?) and left yours in perfect silence.
    Then, impressed by your dogged attachment to the truth, your knowledge of just the right facts and your obvious concern, slowly you won them over. Actually I went to bed in the middle because I couldn’t bear any more.

  9. Graham Swift
    June 24, 2011

    Excellent article. Of course the Europhiles would never allow it to happen because of the domino effect. Ireland, Portugal, Spain, Italy would follow quickly. The Euro is doomed to failure eventually. That is why Cameron et alia will never allow a referendum on UK membership of the EU. Neither will they oppose any legislation imposed from Brussels. Soon we will be swamped with several hundreds of thousands from North Africa and Cameron will do absolutely nothing. Likewise with budget control. Last to leave please remember to turn off the lights.

  10. Javelin
    June 24, 2011

    You’ve clearly thought about this. I’m still struggling to define the curves and thresholds for a trading strategy. At a crude level the curves are tax receipts and expenses – and the threshold is a zero deficit. This is all muddied by elections in 2103, the European strategic fund on July 2013, Eu bailouts and politician tensions.

    From what I can see Greece can’t default comfortably until they reach a net tax surplus, otherwise they will have to cut spending because no one will lend to them. So ironically there is a skewed ‘n’ shaped probabilty curve. With a default or currency exit more comfortable as the Greeks cut their spending. As they cut their spending they must juggle how much of a hair cut will cause the least damage. So if they assume a 50% hair cut will only damage their borrowing for only 5 years then as their deficit approaches 50% of their interest payments they can trigger a default.

    I need to do the maths but the key point is that the Greek Government can “successfully” default – I.e. the point of least damage – at a point that isn’t a tax surplus. Let’s say they are paying e20bn in interest and their deficit is e10bn then a 5o% hair cut will bring their interest payments down to affordable levels. Again bottom line is once their interest payments are in the same region as their deficit then this is in the zone of probable default.

    1. Mike Stallard
      June 24, 2011

      I cannot pretend to understand this.
      And when I cannot understand things, it is 53.91% of the time because I am not meant to.

      1. norman
        June 24, 2011

        I tried to read an article on CDS (credit default swap I believe) on the website zerohedge the other day. After the first paragraph my eyes were glazing over, by the second Ed Balls’ economic panacea’s seemed more sensible to me than the article.

        I’m happy to occupy my small niche and defer to others when the subject under discussion is theirs.

  11. Richard1
    June 24, 2011

    The argument by the ECB & others against this is there would then be a bank run in Portugal and perhaps Ireland & even Spain in expectation of the same thing happening there. Probably special pleading by banks & some sort of restructuring in Greece must be inevitable. What Greece really needs is a decade of Thatcherism. The underlying problem is 30 years or more of corrpution + socialism. Euro membership has enable Greece to postpone the day of reckoning.

  12. alan jutson
    June 24, 2011

    Never know, Greece may of course already have a store of newly printed notes in a secure location somewhere.

    There were some rumours going around last year, that Germany had such a stock of marks, just in case of course !.

    This is all the suff of nightmares for any saver who “did the right thing” and attempted to live within their means, and made an attempt to provide for themselves for the future.

  13. JimF
    June 24, 2011

    Spot on!
    Any visitor to Greece can see the mismatch.
    This morning I call my German supplier who will make my parts “after coffee”. In Greece there is no machine to make the parts, and if there were it would likely take a lot longer. To compete with Germany the Greeks would need to turn themselves into a southern Swizerland, and that might take a century or 2, with their own currency and self-governance.

  14. A.Sedgwick
    June 24, 2011

    Greece exiting the Euro is complicated but perfectly feasible if planned. Why not the Greek Euro instead of the Drachma? Lots of countries have their own version of the Dollar.

    It won’t happen though until the market crashes around their ears and there is no choice, then it will be messy.

  15. Richard
    June 24, 2011

    Im surprised you feel only a 15%-30% devaluation would result if Greece dropped the Euro and tried to bring back the Drachma.
    I think the drop in value compared to the Euro could be well above 50% initially and then it would continue to fall particularly if there were defaults at the same time.
    Years ago a Greek holiday was 2 or 3 times cheaper than one in the UK but now due to the Euro rate effectively being set by Germany, Greece is an expensive destination.

    There would be riots in the streets if all Greek citizens Euro bank deposits were suddenly switched to Drachmas and then these Drachmas were found to have half or less purchasing power.
    Perhaps they could adopt the Pound or the Dollar instead ?

    1. El Camello
      July 4, 2011

      ..or adopt a low value, high circulation currency that keeps things cheap without danger of devaluation.

      Greece, say hello to the Chinese Yuan.

  16. norman
    June 24, 2011

    Perhaps someone more enlightened than me can answer a question that’s been nagging me.

    What proportion of the new Greek bailout is going to be provided by the IMF and what proportion by the euro-members bailout fund? In other words, how much are we saving by winning this opt out rather than, as usual, throwing our hands up and said ‘in for a penny, in for several tens of billions’?

    I’d really like to think the PM won a solid victory yesterday and not a pyhrric one.

    The first bail out was 30 IMF, 80 EU

    1. norman
      June 24, 2011

      Thank you for the reply (the last sentence is a reply, I had no idea the proportions of the first bail out).

      I feel there is some gain to be made in the Conservatives spelling this out. I read everywhere that we are upping our IMF contribution by £9 odd billion (is this per annum?) and the inference is that what we are gaining by the left hand we are giving away by the right hand.

      If it were spelt out by the PM along the lines of ‘If I had agreed to participate in this rescue package it would have cost the British taxpayer an extra £3bn (or whatever)’ I think this would go a long way to undoing a lot of the bad will the recent capitulations to the EU (Portugal, Ireland) has brought about.

  17. mark
    June 24, 2011

    This could not work. If a country tries to introduce a currency as a means of sustaining a large structural surplus, it is very likely to be able to generate any form of credibility for that currency. Most households and businesses – recognising the lack of monetary credibility – would prefer to use a hard currency for transactions (most likely the euro). Hence Greece would very quickly find themselves in the situation of 1980s Latin America or parts of Eastern Europe in the 1990s where they effectively were dollarised by private sector preference. Printing money to finance the 10% deficit Greece has would send domestic inflation sky high, largely wiping out any “competitiveness gain”.

    A default at a time of high surplus would see the government be unable to raise funds to pay for services/welfare/etc and likely see the domestic banking system collapse (wiping out much of the private sector). This would create a dramatic and sudden collapse in living standards, and fundamentally threaten the stability of the state.

    It is fundamentally alarming to see normally sensible people like yourself recommend policies which involve such extreme financial repression and stability risks.

    The Euro may be a straitjacket – but it’s one which forces governments to sort their finances out and not resort to theft of household wealth through inflation.

    reply: If that were so Greece would now be able to b orrow in the markets at a normal rate.

  18. Bernard Otway
    June 24, 2011

    Here I go again trying to get a comment shown,nevertheless I will still try.
    All it is, is to completely agree with Mike Stallard about your question time appearance of last night ,don’t expect the Bolshevik BBC to invite you too often now,you even showed up the audience.I even phoned up my relatives up there many of them [some lefties] my mother is Yorkshire and had 9 brothers so the brood is over 50 strong,they all had to agree with me
    and the lefties are distinctly wavering.I told them all to read your diary on a daily basis and the comments as well, particularly Javelin for expert technical understandable explanations
    complimenting your analysis.See that wasn’t too seditious was it

  19. Bernard Otway
    June 24, 2011

    Further to my comment above,the BBC seem to me to deliberately select an audience not only
    to be tribally left,but also not realising that Reasoned argument and explanation ,as you showed last night will win them over to Not be tribally against you.As another commenter said the liebour lady did not make sense at all,she was in my opinion like a football fan not appreciating Barcelona play rings around their team.Sorry to say this but Fern belongs on the sofa only.Also DC should be ashamed to have Mr Baker in the cabinet and you out of it.

  20. Kenneth
    June 24, 2011

    I am glad that someone is thinking about the mechanics of the default and currency conversion. I fully understand that the ECB and governments do not want it to be known they are working on Plan B but it would be irresponsible to not be doing so in actuality. If any countries are working on a Plan B I suspect the most advanced and earnest planning can be found in Germany and Greece (separately).

    Greece knows that it will never pay back all that it owes:

    if there is a political union of the Eurozone it will receive grants instead of loans with its economy being run by a foreign central bank;

    if there is no political union of the Eurozone it will default and renegotiate with creditors from a position of some power.

    As such, I cannot see the why the Greek government will go too far down the route of austerity especially with many voters apparently hating this policy.

    In any case, austerity can be reversed. However, state sell offs at cut price are harder to reverse. I wonder if Greece will drag its heels on state sell offs? Selling the family silver would make sense in order to revitalise nationalised assets and gain maximum long term benefit for the treasury and country. However a fire-sale of national assets for a country that may at this moment be dusting off the Drachma printing presses is a very unpatriotic thing to do if you are not expected to be in the Eurozone club for much longer.

    We should also watch out for the eu quango’s offer (of our money) for ‘Greek infrastructure projects’ and priority to Greece for more eu quango subsidies (more of our money). What madness! Mr Barroso, who calls himself a ‘president’, has promised to “look at how we can use existing European structural funds in Greece so that they have an immediate impact on growth and jobs,”

    I hope this is not an ever-growing back door fund to massively subsidise Greece and I hope and pray that we will not be tapped for yet more money for this fund.

  21. Javelin
    June 24, 2011

    As I have been saying for months now the Italian banks are the dark horse in the Eu crisis. It appears the rumour mill on the trading floors is catching on.

  22. Denis Cooper
    June 25, 2011

    Apart from the practicalities there are the legalities, one of which is that under Article 128 TFEU only euro banknotes can be treated as legal tender in Greece.

    “The European Central Bank shall have the exclusive right to authorise the issue of euro banknotes within the Union. The European Central Bank and the national central banks may issue such notes. The banknotes issued by the European Central Bank and the national central banks shall be the only such notes to have the status of legal tender within the Union.”

    Countries with a derogation, like the UK, are temporarily exempted from this Article, although in December 2001 the Labour MP Graham Allen did unsuccessfully propose that the UK should give the euro the status of legal tender alongside the pound:

    It may also be recalled that there was a brief episode when Margaret Thatcher suggested that there could be a “common” currency circulating in parallel with national currencies, but she was promptly told that the “single” currency would be the only currency.

    Of course for the Greek government to give the status of legal tender to new drachma banknotes would just be another small illegality among the numerous illegalities which have attended Greece’s involvement with EMU right from the start and which have now led to the need for massive and massively illegal financial bailouts.

    But I do wonder why we or any other parliamentary democracy should want to be part of an international organisation which operates on the basis of agreeing unworkable treaties, getting them approved by national parliaments down to the last comma, and then breaking them.

  23. Lindsay McDougall
    June 25, 2011

    Hallelujah!!!! And Greece would execute a partial default by means of inflation. Much better than any of the alternatives. It would be very wrong of me to so ‘I told you so’ – but I will.

    Meanwhile, here in Sri Lanka, the expansion of the Port of Colombo has been based on the Government of Sri Lanka’s WISH to accelerate real GDP growth from its recent average of 5% pa to 8% pa in order to alleviate poverty!! And who will alleviate poverty of thought, I wonder? Back to the days of Harold Wilson, George Brown and the national plan – to say nothing of one J.V. Stalin.

    All Sri Lankans in government offices in Colombo stand to attention while their national anthem blasts out through loudspeekers at 8.30 am and their flag is run up the pole. Just think of hearing ‘God save the Queen’ at 8.30 every weekday morning!

  24. David
    June 26, 2011

    The majority of Finance Ministers say that there are no good options as far as the solutions to the financial crisis in Greece are concerned. What seems as a paradox to me is the decisions of the EU to pour even more money into additonal rescue packages. When some European countries refused to contribute into them last year they were strongly criticized and now that the world leaders see that the accumulation of debt won’t solve the crisis they ask for the same thing once more.

  25. El Camello
    July 4, 2011

    Why the austerity measures? EU, just give Greece your money. When Euro started, Germany knew they would end up paying to keep Greece afloat. A child could have foreseen that.

    Now instead of traveling down to spend on 3 week island vacations, Germans simply give Greece their money directly.

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