Varoufakis, Y. (2014) “If Scotland, why not Greece?“, Yannis Varoufakis Thoughts for the post-2008 World, 10 March
Why an independent Scotland should get out of sterling, but Greece should not volunteer to exit the Eurozone
Scotland should state its intention to decouple from sterling, once independent, rather than petitioning for a continuation of its subservient role in an asymmetrical sterling union. Or so I argued in the Scottish Times in ‘Scotland Must Be Braver’ (28th November 2013). But if this is good advice for Scotland, why am I arguing that Greece should not sever its links with the even more odious monetary union known as the Eurozone? Unless the two cases differ, my argument lacks consistency. But they do differ. Fundamentally too.
Why should Greece not exit the Eurozone?
The main reason is that there are no Greek banknotes either in circulation or in storage. Any decision to exit from the Eurozone will be accompanied by a weeklong bank closure during which euro notes will be marked manually (e.g. with indelible ink) to differentiate them from euros and brand them as New Drachmas (NDs), until freshly minted NDs circulate many months later.
Even before the prolonged ‘bank holiday’ begins, the ATMs will have run dry and will remain so for a while (as the banks will not have the authority to dispense euros any more). In the meantime, Greeks with hoarded cash will try to take it out of the country, to prevent their stamping and devaluation. Liquidity will thus disappear. Meanwhile, strict capital controls will re-appear and the Schengen Treaty provisions will be suspended indefinitely, since every bag and every suitcase leaving an airport, a port, or a land border will have to be checked by armed police. And when the banks re-open, long queues of angry depositors will form outside seeking to withdraw their stamped euro notes with a view to trading them as soon as possible for unstamped ones (or for other currencies) based on a self-confirming expectation that the NDs’ exchange rate will fall and fall and fall…
In summary, a Greek exit from the Eurozone will trigger a week-long bank closure, the rapid loss of liquidity for the already fragile private sector, a subsequent bank run upon the banks’ re-opening, an instant exodus of cash savings, and Greece’s loss of one of the European Union’s few achievements: unimpeded movement within the EU. It will also mean that the Athens government will no longer be in a position to negotiate a write-down of its debt with the EU and the IMF (appr. €280 billion), as a de facto default on its euro-denominated debt will be unavoidable. The economic impact of these developments will be, undeniably, shattering.
Relevant posts:
- Bastian, J. (2014) “Greece’s return to capital markets: Why not try a diaspora bond first?”, macropolis.gr, 4 March.
- Varoufakis, Y. (2014) “What you should know about Greece’s present state of affairs an update”, Yannis Varoufakis Thoughts for the post-2008 World, 4 March.
- Christodoulakis, Ν. (2013), “From Grexit to Growth: On Fiscal Multipliers and How to End Recession in Greece”, National Institute Economic Review, No. 224, pp.66-76.