currency, debt, bonds, greece, euroAre there economic reasons for Greece to leave the euro after defaulting on its national debt?
If Greece defaults on its sovereign debt, it will be ineligible for further EU bailouts and excluded de-facto from the international bond market. But it would also have no more debt to service. In such circumstances, and if it managed to balance its budget for the year in question, why would Greece not just keep the euro anyway?
Kosovo, Montenegro and all of Europe’s micro-states use the euro unilaterally, presumably because of its stability and convenience. Why not Greece? It might not be popular among its former creditors, but could Greece not have its cake and eat it?
This is a follow-up question to Why does the Greek debt crisis threaten the Eurozone and Why must Greece leave the eurozone if it defaults on its debt.
I am aiming to understand whether there is a hard economic case to be made for Greece leaving the euro after defaulting on its debt. I suspect there is but I can’t see what it is. If there is not, then the only plausible explanation would seem to be cultural (“Greece will inevitably need to print money to finance deficits”). If someone else wants to confirm that, I’ll accept it as an answer.
Update I am still confused about this, since the experts do not seem unanimous that euro exit would be inevitable in the case of default (but they don’t elucidate on why). Here’s columnist Wolfgang Munchau in the FT this morning:
I personally believe it would be best to recognise the desolate state of [Greece and Portugal], let both default inside the monetary union, and then use a sufficiently increased rescue fund to help them to rebuild themselves, and to ringfence the rest at the same time.
Your question asks if Greece could keep the euro. To answer this question I think we should be a little more precise in what is meant by Greece. I would at least distinguish between the Greek government and private citizens.
A Greek default means the government of Greece can not pay back bond holders. This makes future borrowing by the Greek government very expensive since there is now a risk that lenders will not get their money back. Thus, by defaulting, the Greek government realizes that it will not be able to afford to borrow in euros. Therefore the Greek government would issue its own currency so that is can borrow money. That would be a strong incentive for the Greek government to leave the euro.
The private citizens of Greeces could use euros, us dollars, yen, or any other currency they choose provided the law permits the use of other currencies. Choice of currencies, however, is rare in most countries.
Although this isn’t a detailed answer, in short, yes.
Greece has already defaulted on its sovereign debt, albeit partially. Private debt holders have already taken a ‘haircut’ (a reduction) on the amount of debt to be paid back to them.
If Greece defaulted (orderly or disorderly), then it would stay in the euro even if it wanted to leave! My understanding is that the EU treaties do not have provision to allow a country to leave the euro or to be thrown out. And I don’t think any default would change this.
A country can only leave by mutual agreement with the EU.
And I don’t think there is a ‘treaty obligation’ on a state to pay its debts.
(I’m no expert)
I am no economist. I read Mish's Blog and the blog by Pettis. A detailed argument has to be made about why keeping the Euro is worthwhile for Greece. In some tables from the blog post by Pettis (link above), one can see that Greece has for many years been one of the top ten deficit countries in Eurozone since the introduction of Euro, but was not before its introduction.
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