Greece Leaves the Euro-Zone? This Could Solve So Many

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It seems that European politicians will do everything to avoid this scenario – a break of European unity. But interesting times call for creative solutions, especially as there could be so many benefits for one of the strongest symbols of unity – the Euro.

Greece is on the brink of default. Yields on two year notes are at 25%. Even the ECB has abandoned Greek paper. They were the last active buyers out there. German Chancellor Angela Merkel is already preparing the public for the previously denied possibility of a Greek restructuring.

So maybe she’ll take one step forward and push for Greece to leave the Euro-zone? European leaders have called for unity – this includes politicians such as Merkel and Sarkozy, and senior officials such as Trichet and Rehn.

But it’s not what the people want.

The Germans, Finns, Dutch and other citizens of rich European countries find the funding of failed European states quite annoying. A subsidy here, a bailout there, and more concessions all the time. Patience is running out as these steps just don’t seem to work. A year after the bailout, and no improvement in sight.

Also the citizens of the troubled countries aren’t pleased, to say the least. The Greek economy is squeezing under austerity, and riots have been seen more than once. The Greek people aren’t feeling that the IMF and the EU are helping them, to say the least.

Ireland’s case is more extreme – the country’s finances were very solid. It’s the banks that got into trouble. But the government took over the banks, and now the Irish taxpayer has to pay with severe austerity in order to cover up for the banks’ debt to German, French and British banks. They don’t like it whatsoever…

The ECB’s policy leans towards the stronger countries, which enjoy strong growth and might suffer from inflation. With widening gaps between the rich and poor, it’s becoming impossible to keep everyone under the same umbrella.

What would a departure achieve?

  1. Merkel would gain credibility: She has been accused of lacking leadership, and her party is struggling in local elections. Making such a bold move will win her a lot of points towards the general elections. This move will be popular with voters.
  2. More Unity: Throwing out one of the member states isn’t an act of unity, but the current situation of huge gaps between the countries that share the same currency isn’t a sustainable union. Without Greece, the gaps will be smaller.
  3. A More Competitive Greece: The Euro makes Greece uncompetitive. A return to the Greek drachma will see a quick devaluation of the old/new currency, making it more attractive for investors that want to export, and for tourists.
  4. A Stronger Euro against inflation: Without Greece, the Euro will be stronger. This can curb inflation by making imports, especially of oil, cheaper. With less inflationary pressures on Germany, the ECB won’t need to raise the rates, helping the other vulnerable countries have the much needed low lending rates.
  5. Saving other countries: Apart from the aforementioned advantage of a stronger Euro, the Greek departure, if done right, could deter other countries from reaching the same situation. By “done right”, the terms should include not only a return to the drachma, but some additional limits on Greece within the European Union. For example, some limits on banks could serve as means of keeping the union more tight.
What do you think? Is this scenario too far out? What do you think will happen to the Euro if this indeed happens?
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About Author

Yohay Elam – Founder, Writer and Editor I have been into forex trading for over 5 years, and I share the experience that I have and the knowledge that I’ve accumulated. After taking a short course about forex. Like many forex traders, I’ve earned the significant share of my knowledge the hard way. Macroeconomics, the impact of news on the ever-moving currency markets and trading psychology have always fascinated me. Before founding Forex Crunch, I’ve worked as a programmer in various hi-tech companies. I have a B. Sc. in Computer Science from Ben Gurion University. Given this background, forex software has a relatively bigger share in the posts.

18 Comments

  1. Hi,

    But by having a weaker EURO, is not it favourable for the exporters in Germany or any EURO export based country?

    On the other hand, what does Greece have to pay incase it wants itself to be out of the Euro zone for new revaluation of its old/new Drachma incase it wants? I know it sounds compelling to make it more competitive by getting out of Euro, but would not that make every other PIIGS league of nations to sort out that and continue Greece way and thus can actually make EURO weaker. Right?

    But what does it hold in everyone’s interest for that to happen anyway?

    I see EURO shorting, weakening, Dollar shorting, weakening, Yen shorting, weaking — who is winning then? who is gaining? Is it China, somehow.

    Cheers!

  2. what are the chances likely that Greece will get out of Euro league? (This will be a big set back for Euro (for Euro/Dollar) I guess. I am not sure what is the case with Iceland.. is it doing happy now that it is out of Euro zone?

  3. I live inside a UE country with many financial problems in the last 3 years and it was difficult for me to believe that Euro will grow so much. Romania it might have more problems then Greece, it depends from the point of view. Anyway, many people here are really fighting just for survive and no more. But now, after I saw the rally of Euro, especially in the last few days, I must admit that it will grow more and more for a long time. I don’t know the end, but I was very impressed to see EURO/USD so high lately in such a short time… and I must realise this is reality… If you look on monthly chart, starting from january this year, it is up, up and up again… no pause.

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  6. fxpreacher on

    great read. keep up the good work. i’m not sure Greece is competitive enough for a restructure. how big do the hair cuts have to be to offer any relief? if you can’t pay back your loans with a 10% IR what good does shaving 5 off do for you?

  7. Dear readers,

    I wonder what will happen to the Euro when Greece steps out, because of the billions of debts Greece has to the European banks, also from before this massive budget deficit became known to the world. When Greece is thrown back on itself, paying back is not their first priority anymore. They have proven to be very good in protecting their selfinterest already!

    Regards,
    John

  8. It will never work. Greek businesses, especially those largely working with tourism, will simply demand to be paid in Euros. The Drachma will be shunned, and the Euro will simply become the de facto currency if not the official one.

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  10. It turns out that Greece is indeed considering to leave the Euro zone(Courtesy: Dow Jones newswire). So, has been the effect that Euro falls another 100pips and also breaks the channel support that has been intact protecting the uptrend. Now much more has to be seen what happens with Euro Dollar pair. Not only Euro/Dollar but any other pair that has Euro pairing. Interest rate differentials have been playing their own role while the restructuring debt issues are playing their own chords. Which ones will make their sound more hearing, is the question. Chances are the second option, increasing the strength in the dollar otherwise too.

  11. btw, market fell by more than 200pips, fast approaching the 50day SMA on daily charts at 1.425/6. This shows that markets do not want Greece to go out of Euro zone or is actually a point to tell that Euro loses its shine without Greece? I wonder what had actually happened when Iceland left Euroland, I do not have the sufficient data at the moment, but that could be a good lesson and reference to see from the past.

    On the other hand, if Greece leaves Euro, the markets would have supported this news. Right? It is not actually clear, whether the markets have reacted to the news of Greece getting out of Euro or they have reacted to the news that Greece default is imminent and that could pose serious problems to the Euro banks?

    Euro fall has also likely caused fall of the commodities that one could see in days, but was that just a sample and is the fall of the commodities more to come? This May is proving to be very volatile indeed.

  12. Yohay, I am waiting to hear your comments more on this. What do you think of this? If Greece leaving Euro can make Euro competitve as you stated, the markets should have strengthened Euro actually right? or was the news so sensistive about to cause such a downfall in the recent history? What would be the road ahead if the so called secret meeting from Luxembourg turns out that Greece is going to leave Euro(with a chartered plan, ofcourse)?

  13. yes, so shocking… friday night after such a difficult week, and so soon… really nightmare for traders. Yohay pls comment as soon as possible, we are all waiting for your opinion.

  14. Greece PM now comes and rules out that there is no such thing called Greece exiting Euro. Another shocker.. can news be so ridiculous?

  15. Michael the Cypriot on

    I wonder when it will be understood that Greece is “played” by the Germans and the ECB, as their only tool to fight the manipulations by FED to downslight the dollar.

    The more the dollar drops (for the shortsided benefit of the USA economy) the higher the value of the Euro ( causing substantial export losses to the German- French machines and greater deficits for the countries of the European North).

    Greece and Ireland are just the “canaries” in the underground fight of strength between the Dollar, the Euro and the hidden youan.

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