Leaving the EU might not be the panacea some believeby George Magnus / June 29, 2015 / Leave a comment
Conspiracy theorists would have us believe that Syriza’s goal all along was to get to the point where the public would vote for Greece to leave the Eurozone. There will be plenty of time to disembowel this assertion, but next Sunday Greek citizens have been promised a referendum, in which they will be in essence voting on this issue.
Given that the referendum is over whether the Greek public accepts creditor terms that might not by then exist, the vote will effectively be on whether to reject the government of Alexis Tsipras and Syriza, while trying to stay in the Euro, or support it and quit. The unpredictability of random events means that a Yes vote could still end up with Grexit. A No vote, by contrast, would be a slam dunk Grexit. This option would at least give the government the authority to carry out its programme without interference and answer to the Greek people accordingly, but it is unlikely to be the easy ticket out of economic misery some imagine.
A No vote would bring a new economic darkness. There is widespread agreement that the initial period would be characterised by default on Greece’s obligations to creditors, a chronic liquidity contraction and a solvency crisis in the banking sector, which would keep the banks shut. It would see a sclerotic blockage of most forms of economic activity. A further sharp GDP contraction would ensue. Whether or not the government chose to introduce a parallel currency to pay wages, pensions and other bills in the interim, a “new drachma” would be introduced. The currency would almost certainly drop sharply, most likely by about 50 per cent at first. Behind the wall of capital controls, the Bank of Greece would then print money. The risk of Greek deflation would disappear at a stroke. Banks would re-open, supported by the central bank and by a government programme to recapitalise them.
So Syriza would finally have re-taken control of Greece’s economic destiny. But it is unlikely to be successful in delivering a bright economic future, without help, for at least three reasons.
First, the principle purpose of a large currency devaluation is to switch resources away from the domestic economy into the…