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Wednesday, 16 May 2012

Goodbye Euro, hello again Drachma! Greece’s way out of the Euro-Zone

The die is cast; the Greeks will be called to the ballot, again. After none of the leading political parties (neither the socialists under Evangelos Venizelos, nor the conservatives under Antonis Samaras) has succeeded to call for a coalition in order to establish a more or less stable government, the Greek constitution calls for a new general election which will take place in mid-June. These next elections will most likely be the final act for the Euro in Greece, and the crisis torn country is facing imminent bankruptcy. A return to its former national currency seems to be a mere matter of time and formalities. The Greeks are preparing for the worst case scenario outlined since the very beginning of the debt crisis

Economist Paul Krugman assumes that Greece will leave the Euro-zone within the next month, resulting in a massive capital movement from Greece to Germany (approximately 250 billion Euros have already been transferred out of Greece), but also massive movements from the other crisis torn countries like Spain, Portugal, and Italy to more stable EU member states. There is literally very little time for Greece to reintroduce its old currency, which raises serious concerns for a chaotic readjustment to the old monetary system, leading to hyperinflation and massive acceleration of pauperisation in Greek population. Specifically Spain is seriously concerned about the possible outcome of the next elections in Greece and the imminent withdrawal out of the Euro-Zone, since it is the next on the line to follow a similar path as Greece does.
The economic disaster of Greece is manifold: a massive balance of payment imbalance – with imports exceeding exports by 23%, a deteriorating GDP down to 182 billion Euros, a rapidly increasing unemployment rate up to 17,7% (although still lower than in Spain with nearly 25%). The Greeks are already withdrawing their assets from their banks (up to 900 million Euros by now), President Karolos Papoulias tries to set up a provisional government in order to prevent a “tragedy” – it will certainly not be a national one only, and its rapid acceleration of the past few days won’t be prevented with the president’s final desperate attempt.

On the other hand: if Greece goes bust and reintroduces the Drachma, things can only get better. Greece would have the opportunity to start from scratch, according to US economist Kenneth Rogoff: by inflating itself out of the crisis through a depreciation of the Drachma. This would make exports far cheaper and Greece’s competitiveness would increase, Greeks will tend to purchase more of their own goods rather than imports. Also, financial support to Greece will not cease with Greece’s withdrawal, it will continue receiving rescue bonds from the EU, but not solely from the other Euro-Zone countries, but from all 27 EU member states, including the UK.

However, Greece will just be the first one to drop out from the Euro-zone. It is likely for Greece to cause a domino effect in the entire Euro-Zone, with the crisis in Spain and other countries to worsen and also leading to the same effects as the ones currently occurring in Greece. If Greece leaves the Euro-Zone, the political and economic pressure for fiscal discipline will rapidly decrease. This means that austerity discipline deteriorates, deficits increase, and in the end the entire monetary union will be facing its imminent demise. If austerity fails in Greece – and all sign are indicating it, it will also fail in Spain, Portugal, and Italy; and it will also have a hideous impact even in those EU member states which are not affected by the crisis yet, such as France and Germany.

The next candidates are already queuing: Spain, Portugal, Italy, then probably Ireland, Belgium, Austria, and finally France and Germany. The Greek domino is dangerously shaking and about to tip over for good. And what happens next?

Hello Drachma, hello Peseta, hello Franc, hello Deutsch Mark.... so long Euro, bye bye European Union?

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