Greece's Exit From the Euro Would Be a Socialist Disaster
Alexis Tsipras, the newly elected Prime Minister of Greece, is a socialist. Socialists believe in government, and are constantly seeking to expand it. In the recent elections, Tsipras campaigned on what amounted to a promise to use "other people's money" (mainly that of German taxpayers) to increase Greek government spending, cancel pro-growth regulatory reforms, and avoid selling off state-owned enterprises.
In other words, Tsipras wants to use wealth produced by capitalism in other countries to try to make socialism work in Greece. Socialism can never work, because, in the words of Margaret Thatcher, "...you eventually run out of other people's money."
This seems to be a lesson that mankind needs to learn over and over again, so it would best for all concerned if the "other people" "just say no" to Tsipras, and require him and his Marxist advisors to face economic reality. Greece should be forced to choose between socialism and remaining in the euro.
But wait! Wouldn't a "Grexit" (Greece leaving the euro) be "Lehman Brothers squared," as economic historian Barry Eichengreen has suggested? Yes, a Grexit would be exactly like the collapse of Lehman Brothers: a disaster if handled poorly (as Lehman Brothers was), but a non-event (for everyone other than Greece) if handled correctly.
All that would be needed to neutralize the impact of a Grexit would be for the ECB to announce-in advance-that it is prepared to lend without limit to banks in countries that are abiding by the terms of their agreements with the EU (i.e., everyone but Greece). If the ECB were to do that, there would be no "contagion" following a Grexit. Non-Greek banks with loans to Greek companies might have to take write-offs, but the impact of a Grexit on the Eurozone would be small. After all, Greece accounts for only about 1.3% of Eurozone GDP, and a tiny 0.3% of world GDP.
Assuming that the ECB were to handle the situation properly, Tsipras' implied threat to take Greece out of the euro is perfectly analogous to a bank robber holding a gun to his own head and threatening to shoot unless the tellers hand over the money. Yes, there would be a bit of a mess to clean up after the thief pulled the trigger, but the robber would get the worst of it, by far.
There are actually economists that fantasize that Greece would be better off abandoning the euro and issuing its own currency, which would probably be called the "new drachma" (ND). In a recent post in the AEIdeas blog, Desmond Lachman suggested that Greece's leaving the euro should be called "Grexodus," because, "...outside the Euro, Greece will again at least have a chance for longer-run economic and social prosperity."
Uh, no it wouldn't.
First of all, it is very unlikely that Tsipras has a plan for moving from the euro to the ND. If, somewhere in the world, ND banknotes were being printed, the news would almost certainly leak out. However, even if Tsipras did have such a plan, that plan would have to be executed in the middle of a banking system meltdown and an economic collapse. And, he would have to depend upon Greek civil servants, who have a history of being easily bribed, to apply whatever coercion his plan called for.
What would actually happen in the case of a Grexit is that the Greek government would move to the ND, but the Greek people would not. No one would trust the value of a new currency that was created specifically so that it could be devalued (to restore "competitiveness"), and printed with abandon in order to finance socialism.
After a Grexit, commerce within Greece would continue to be conducted in euros. People that had anything of value to sell within Greece would not accept NDs unless they knew that they could immediately exchange them for something of real value (e.g., euros or dollars).
If the Greek government tried to force shopkeepers to accept NDs (this would require price controls as well), the storeowners would either bribe officials to leave them alone, or they would stop restocking their shelves. The most that Tsipras could hope to achieve in this scenario would be to turn Greece into Venezuela, but without the "benefit" of Venezuela's police state. (Serious socialism requires a police state to force people to act against their own economic self-interest.)
Because no one would trust NDs, no one would be willing to hold them. This means that the euro/ND exchange rate would quickly plunge toward zero, especially if Tsipras tried to actually follow through with his plan to raise government spending, and tried to finance it by printing NDs.
The Greek people have already started deferring the remitting of taxes, recognizing that they may soon get the opportunity to pay what they owe in devalued NDs. At €3.49 billion (only 77% of budget) for January, Greek government revenues are falling far short of expectations, thus advancing the date that the Greek government will run out of money.
If Greece were to move to the ND, the Greek government would collect taxes in NDs and make payments in NDs. As the exchange value of the ND fell, real Greek government revenues would plummet. This means that the incomes of all of the Greeks dependent on government checks would also plummet in real (euro) terms. Long before this process went to completion (with real Greek government revenues and expenditures hitting zero), there would be a social and political upheaval, the outcome of which would be difficult to predict.
It's hard to imagine that any Greek leader would be so out of touch with reality as to allow Greece to exit the euro. However, socialism is based upon a systematic denial of reality, and Tsipras is a socialist. So, anything is possible.
The aftermath of a Grexit would not be pretty. It would be far from a "Grexodus," and more like a "Grecocide."