Photo: Wikimedia Commons
While more and more investors and economists gush about the likelihood of a Greek exit for the eurozone, one a major Wall Street investment bank is poo-pooing such a contingency: Goldman Sachs.Analyst Themistoklis Fiotakis and Chief European economist Huw Pill write in a note titled, “Greek Exit Fallacies: Currency Introduction Would Be No Easy Choice for Greece,” that the clamor for a Greek exit from the eurozone will take place “in a matter of months, if not weeks” ignores significant realities about the hardships of a Grexit not only for Europe, but for Greece itself. In reality, they argue, currency devaluation is not all it’s cracked up to be.
Thus, they “argue that the costs of introducing a new currency are large enough to act as a strong disincentive for either Greece or the Euro area to move in that direction in the near term.”
Fiotakis and Pill list a handful of reasons for this conclusion:
- Greeks would mistrust the new Greek currency, seeing it simply as a way for their insolvent government to finance its debts through devaluation.
- Foreign companies and investors are not likely to see the currency as a viable way to do business.
- Demand for euros would spike, generating further devaluation, capital outflows, and bank runs.
- Thus, austerity and disciplined monetary controls would be the only way to return credibility to the currency. The country would likely need more euros to do this effectively, because such methods would probably entail pegging new notes to the euro or backing them up with euro reserves.
These logistical difficulties come on top of risks that a Grexit would pose to the credibility of the eurozone, and the likelihood that the Greek economy would immediately tank in its wake.
Fiotakis and Pill summarize:
From a purely theoretical perspective, many have made the argument that a Euro exit could lead to an alleviation of Greece pressures by helping the government default on internal payments via higher inflation and competitiveness gains via currency devaluation. In practice, the process of introducing a new currency is far more complex and punitive for the country than portrayed.
Whether Greece leaves the Euro will largely depend on whether local leadership will take extreme unilateral measures against international lenders. Assuming a correct understanding of the costs discussed above, it would not be very straightforward for a Greek government to opt in for such a solution in the near term. And even if it does, it is not clear it would have the parliamentary or popular backing at this point of time.