Greek Euro exit talk = hot air?

Lots of talk in the financial markets about a possible exit from the Euro. Some quick observations on this possibility and the chatter associating it:

– A care-taker government organising a Euro exit against the wishes of most political parties? If the Greek politicians could organise that kind of deception they wouldn’t be in such trouble. Hence no way that any exit is imminent. It would need an elected government with a clear mandate to do it and that is many months away at least.

– There are many wild stories about the intricacies of an exit that deflate as soon as you think them through. The notion that Greece would ‘stamp’ the Greek Euros in circulation and that Greeks would voluntary let their Euros be stamped is a good example. Think about this one: if the Greek-printed Euros would be worth half in Greece as outside of Greece (in other countries all central banks still have the duty to treat them as legal tender) then which Greek in their right mind is going to let their Euros be stamped? All liquidity would disappear immediately upon announcement. And, given Greek’s clientelist political system, there will be leaks. Hence the Greeks would have to introduce a new currency which takes a bit of preparation.

– The underlying reason for talk of a Greek exit is fascinating from an economic theory point of view: what has to happen is that all Greek prices should go down by some 50%. In a true flexible-price system this should happen overnight, right now. However, to politically organise that 50% reduction in anything connected with the state (welfare benefits, wages, pensions, etc.) would probably lead to a situation resembling civil war whilst no such thing would happen in a normal devaluation. A textbook case of nominal price rigidities. Re-introduction of a whole currency as solution to the coordination problem of price reductions and the loss of face of being seen to acquiesce in price reductions. Fascinating stuff on which no clear political economy model yet exists.


My money is still on a Greek default without exit from the Euro. Default is probably not too far off. What it mainly needs is for the Germans to realise they are tearing the Union apart by their futile attempts to bail out countries in free-fall. It leads to extreme ingratitude.

Author: paulfrijters

Professor of Wellbeing and Economics at the London School of Economics, Centre for Economic Performance

7 thoughts on “Greek Euro exit talk = hot air?”

  1. I’m assuming the stamping will occur at the banks, so it will affect all money withdrawn from ATMs. And all government wages and benefits will be paid in the new currency, so it will take hold pretty quickly.

    Sure, there will be unstamped euros in circulation, but so what? There are plenty of US dollars floating around as well. And Greece runs a current account deficit of nearly 10%, so they’ll leave the country pretty quickly.

    I hope Greece gets kicked out of the EU as well. I’m sick of referring to Macedonia as FYROM.


  2. Paul,

    I think it is obvious to anyone who actually thinks about the reality of implementing theoretical ‘sound’ policies, that Greek will have to default on all (almost all) debts, that new loans will have to start being made for a sustained transition periods (decade+), and that they will stay in the Euro currency area and union.

    This assumes the primary motive for all Euro member is to maintain peace.

    However, the nutters will come out of the woodwork in situations like this, so I don’t rule anything out.

    Matt and Paul,

    Are there really many ‘Greek’ Euro’s left in Greek banks? I wouldn’t have thought so. People will just keep trading with real Euros or on credit even if a new currency is introduced – who would trust it?


  3. Paul,

    What are your thoughts on the likelihood of war (civil or otherwise) in the EU? I know it sounds speculative or melodramatic but it seems a real possibility now in Greece at least, and if it happens it could turn regional.


  4. There is an answer to the Greek problem and the wider PIIGS problem in general.

    The universal solution to a problem is to properly identify the problem, propose a tentative solutions, practice error elimination (test the theory) and repeat the process until you have a tentative solution that appears to work. Then test it. But be prepared for unforseen consequencies and be prepared to drop the tentative solution and try a modified tentative solution.

    The problem with the PIIGS was properly identified my Mervin King. It is not a question of liquidity but a propblem of solvency. They each need a bankable business plan. They each need statesmanship to deliver a future in a competitive world.

    Without statesmanship they falsely turn to benefits,they turn to Germany for long term support. This year, next year and forever.

    Greece is only 2% of the EZ. They are not too big to fail. They cannot go forward getting loans that they will never repay. They cannot even form a war cabinate.

    The ECB can and should devalue them tomorrow via target 2 and support their poor via NGOs.


  5. David Lilley,

    What’s happening in EU is a coordination/collective choice problem. That isn’t so easy to solve. Australia solved it over 100 years ago with Federation. The US solved it with the Civil War.


  6. To answer Cameron’s question –
    > People will just keep trading with real Euros or on credit even if a new currency is introduced – who would trust it?

    They will if they can get their hands on hard currency, but most wages and all benefits will be paid in Drachmas, so most Greeks won’t have a choice. Just like any other country with a collapsing currency.


  7. Thanks for all the comments. I decided to spend the weekend with the family and keep off online debates, so my reply is later than reasonable, but still:

    0. Stamping probably is not enough to prevent it from being legal tender elsewhere: a stamped dollar note is still a dollar as long as you can read one and a half of the 2 numbers on it. The issue is thus that the ECB and other European banks have an in perpetuity obligation to keep accepting these Greek Euros making them worth something different outside than inside, an impossible situation. I hence dont think stamping is going to work and the mere hint of this would mean a mass flight. What they would need is a true new currency to be used for all the wages and other expenses (because that would not necessarily involve capital flight. You would simply have two currencies in operation) but they would probably need someone else to help introduce them and print them. They are too unorganized to do it themselves.
    1. Forget about any talk of civil war in Europe. It is about as likely as war between New Zealand and Australia. Europe is basically internally pacified, partially because no individual country matters enough anymore, partially via the EU that even with this crisis gives real benefits, and partially because of internal pacification inside every country. Riots on the streets of Greece and perhaps a bit some real nastiness against migrants is the worst you can expect, but that’s it.
    2.David Lilley, what is your point?


Comments are closed.