No deal will be worse for the Eurozone than for Greece

The current deadlock between Greece and the rest of the Eurozone is over whether Eurozone governments will lend more money to enable Greece to meet international debt payments due this year, primarily €18 billion to the IMF and ECB. Most media attention is focused on this scenario, and what conditions Greece, Germany, and other Eurozone partners are prepared to accept for such a loan extension to take place. Little attention has so far been given to understanding what will happen if this money is not lent, and if Greece therefore defaults on its debt.

Defaults can be economically beneficial for a country in a debt trap; those who lose out are a country’s creditors. In Greece’s case, the government has, and Syriza plans to have, a surplus before taking account of debt payments. Therefore, it could financially continue without new international loans as long as it is not paying its international debts.

Greece debt

Large amounts of money have already been taken out of Greece’s banks; either transferred abroad, or kept by citizens as cash. At the moment these Euros are being replaced by emergency loans to the Greek banks from the European Central Bank, loans which would most likely stop if a deal is not reached. Under this scenario, Greece would need to introduce stringent capital controls on the withdrawal of cash, and most importantly, on transferring Euros out of the country. This has already been done in the Eurozone in Cyprus. It was also a crucial part of Argentina’s recovery from crisis in 2002, and Iceland since 2008.

There is no economic reason why any of this should lead to Greece leaving the Euro. It is completely possible for a default to take place, and capital controls to be introduced, without Greece having to change its currency. If Eurozone countries did retaliate by “kicking Greece out” of the Euro, this would be an entirely political rather than economic decision.

Even if this happened, Greece could still decide to continue to use the Euro as its currency, but its Central Bank would not be able to access new Euros from the European Central Bank. Instead, all Euros in circulation in Greece would need to be there already, or come from exports and tourism. Euros would also be needed to buy imports, which would mean a further loss of the currency out of the country.

Many countries in the world use a currency over which they have no political control (for example, Montenegro and Kosovo use the Euro without being part of the ‘Euro system’. Ecuador and El Salvador use the dollar without any reference to the US government). Of course the Greek government could decide to re-introduce its own currency, but the choice would be up to them.

There would clearly be short-term pain created in Greece under this scenario. Most concerning would be a possible reduction in imports, whilst restrictions on cash withdrawals and taking money out of the country would also be problematic for local people. But Greece is already suffering from a humanitarian crisis with 25% of people unemployed. The European Commission accepts that  one-in-five are suffering from ‘severe material deprivation’ meaning they cannot afford some basic necessities such as heating or food.

The cost to other Eurozone governments of not reaching a deal would be much greater. Continuing default on the debt would ultimately cost them over €300 billion over the next 40 years. There may be other costs needing financing immediately due to how the Euro system works. Questions over the viability of the Euro would spread to other countries.

All of this is being considered in the name of trying to enforce an austerity programme which has clearly failed and the Greek government was elected to end. Eurozone governments should step back from the brink. But for the people of Greece, no deal might well be better than a bad deal.

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