The possibility of a Grexit needs to be carefully evaluated, not in terms of doomsday myths but in terms of real social and political consequences.
The Greek tragedy is in its fifth season. By missing the scheduled IMF payment yesterday, imposing capital controls over the weekend, and announcing a national referendum on bailout terms for July 5th, Alexis Tsipras’s government has made its intentions clear that without drastic debt relief measures, Greece will exit the European monetary union, a grim scenario known as the “Grexit”.
While the Grexit will indeed be painful, most of all for a country with a 25 percent unemployment rate, it has led to a number of doomsday myths. I dispel the two most popular:
Some claim that Greece’s transition to a non-euro currency – whether in the form of provisional IOUs the government issues in lieu of salary and social protection payments or in the form of a new drachma – will imply long-run financial chaos. That might not be the case. The reintroduction of the drachma may prompt its immediate devaluation relative to the euro. While this runs the risk of high short-run inflation, a devalued drachma could eventually boost competitiveness. For example, Greece is heavily dependent on tourism – with the sector accounting for 7.1 percent of total employment in 2012. A cheap drachma has the potential of attracting more tourists to Greece and could pave the road for a long-run recovery.
Moreover, the Greek economy is heavily dependent on micro enterprises – businesses with fewer than 10 employees. In 2012, 57.6 percent of the Greek workforce was employed by micro enterprises. Small businesses that produce traded goods stand to benefit from a devalued currency. This will certainly be the case for a cheap drachma following a Grexit.
At this point, contagion from Grexit appears to be limited. Out of the 323 billion euros of Greek debt, foreign banks have a net exposure of 2.4 billion euros. This is actually a very small figure. To place this number in context: during the 2008 financial crisis, Royal Bank of Scotland alone had an exposure of more than 1 billion pounds to Lehman Brothers. A Grexit will, in all probability, imply a short-run weakening of the euro and volatility in the currency markets but it will not be contagious.
The 1997 Asian financial crisis illustrated the adverse effects that financial contagion can have on employment. Singapore was not directly affected by the crisis, but it spread there. Between 1997 and 1998, this contagion effect caused Singapore’s unemployment rate to nearly double. Due to the minimal exposure of other banking systems to Greece’s, a Grexit is unlikely to have similar effects on jobs in other European countries.
Dispelling these myths does not mean that Grexit should be ignored. Because Greece’s exit from the Eurozone is unlikely to have wider financial reverberations, there is a real chance that – when the dust settles – Greece’s plight will be quietly ignored. This is unacceptable because of two reasons.
One, a short-run spike in unemployment will have lasting social and economic impacts in Greece. Greece already has a 50 percent youth unemployment rate. A further increase will do great harm to the Greek economy and it is sure to stimulate social unrest as well.
Two, the possibility of a non-EU Greece will have immediate geopolitical consequences, possibly in terms of a greater role of Russia or China at Europe’s doorstep. A society made unstable by high levels of unemployment would likely create a political vacuum that other non-European powers – benign and hostile – will seek to fill to their advantage.
The possibility of a Grexit needs to be carefully evaluated, not in terms of doomsday myths but in terms of these real consequences.