Economics Stack Exchange Archive

Why would leaving the Euro cause a bank run?

I’m not studying economics or business or anything. I’m just kind of curious: Why would leaving the Euro cause a bank run?

As I understand it, one problem the Greeks are having is that they don’t have their own free-floating currency anymore, and so can’t reduce their labor costs without severe pain. It also seems that they can’t leave the Euro because that would cause a bank run. Why does leaving the Euro cause a bank run?

If they say they’re leaving the Euro and returning to the Drachma(right?), they would just exchange everyone’s Euros for Drachmas. Why would I, Greek Q. Citizen, run to the bank to withdraw my Euros? What am I going to do with them? Take them back to the bank for Drachmas in a week? I don’t see it.

Thanks.

Answer 1107

As EnergyNumbers has posted, a bank run would occur because people would withdrawal their euros with the hope of trading them back at a later date for a better exchange rate.

When the Greek government decides to leave the Euro they will convert everyone's euro savings to Drachma. At that point it is typically too late to try to withdrawal euros from bank accounts.

Which is why the bank run has already begun in Greece. (chart from here).

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Answer 1105

What am I going to do with them? Take them back to the bank for Drachmas in a week?

Yes, pretty much that.

Withdraw the euro sum. Wait for the inevitable devaluation of the new Drachma against the Euro (after all, the whole point of the exercise is to allow the new Drachma to devalue), and then cash in for a lot more new Drachma, once devaluation has happened - maybe a week later, maybe a year later.

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