The negotiations between Greece and the eurogroup are focused, as before, on one goal – to persuade the Greek government to implement reforms so new aid can flow to the struggling nation.
Prime Minister Alexis Tsipras, however, refuses to move ahead with reforms so talks have halted and the Greek economy continues to slide. That hurts the Greek population and undermines the reputation of the 19-nation euro zone.
Time is running out for ending the uncertainty over Greece’s future, with a referendum if necessary. If it comes to that, voters and politicians in Greece must understand exactly what the options are that they are being presented with.
The first option, or Plan A, is clear: the implementation of the reforms and cuts agreed upon in the bailout program, and in turn, Greece stays in the euro zone.
It will be difficult to prevent a sudden exit – with big shocks and losses for Greek bank deposits.
What plan B looks like, is less clear. Without the bailout loans, the Greek government would quickly run out of money. But what happens then?
There are two scenarios, the first being an exit from the euro zone at a determined date. Greece would have to introduce capital controls to curb capital flight. Then a law would be enacted to change currencies. Banks, companies and officials would technically have to prepare for the currency conversion.
There should be talks to ensure that Greece remains in the European Union, despite leaving the euro. Then Greece’s euro debts would have to be negotiated. The country owes the other euro zone countries and the European Central Bank about €330 billion, or $360 billion. A good €80 billion of that is owed to Germany, and at least half of that would be written off.
A second possible Plan B scenario would be a gradual transition, with parallel currencies. When the money runs out, the Greek government would begin to pay wages for public service and pensions in part with debt certificates, or IOUs.
These papers – let’s simply call them drachmas – would not replace the euro as a currency. However, future tax debts could be paid with them. Little by little, they would take over the function of a currency. They would be traded at a clear discount to the euro. Therefore, public servants and pensioners would have to cope with income losses. As compensation the government could also legally stipulate that rents and other bills could also be converted to the drachma.
The question is if the population would understand how to deal with two currencies. In many emerging countries, the euro or dollar already circulate as a second currency without causing chaos.
But there is a more serious problem: Through the spread of payments in drachmas, more and more households and companies would find it difficult to pay off their debts which would still be in euros.
That would cause problems for banks, because deposits would also remain in euros. If Greek banks must, for example, write off 50 percent of their domestic assets, they would lose about €170 billion from their balance sheets.
One could plug this hole by imposing a write down of around three quarters on deposits --- currently amounting to around €230 billion. With that, however, small investors would also have to suffer losses.
If one wanted to avoid that, then that would mean shifting the €170 billion losses to taxpayers in the rest of Europe. That would be in addition to haircuts on the Greek government debts, so there would be no difference there to the sudden exit scenario.
So Plan B either means a sudden exit or a gradual transition, in which the euro remains as a means of payment in Greece, but is supplemented by a second currency.
The gradual transition would have the advantage of not looking like an exit and gradually allows for the building up of the drachma as a currency.
For the Greeks, this path would be more attractive, because their bank deposits would be protected from losses – but at the cost of taxpayers in other countries.
It would, however, be extremely difficult to persuade citizens in other euro zone countries to do just that.
That is why it will be so difficult to prevent a sudden exit – with big shocks and losses for Greek bank deposits.
One should make that clear to the Greek voters and their government.
Openly negotiating the consequences of such an exit from the euro could still help to prevent it.
Clemens Fuest is president of the Center for European Economic Research. To contact him: [email protected]