Neither is a new idea. They’ve been bandied about across the political spectrum, but events may now move in this direction. The present extortionate bailouts are not seen as sustainable - neither by the eurozone powers who want to see further loans tied to even deeper reductions in Greek labour and benefit costs as well the wholesale transfer of Greek assets to private investors, nor by the mass of working class Greeks whose living standards have been ravaged by austerity and who are steadfastly refusing to capitulate further. Allowing the euro to circulate for external transactions would presumably qualify Greece for continued participation in the Eurosystem and the continuation of an essential supply of euros from the European Central Bank.
Aside from geopolitical concerns - the NATO powers need an economically and politically stable Greece strategically situated on Europe’s southeastern flank - the Europeans are still vulnerable to a Greek default, albeit not as heavily as a few years ago when Europe’s exposed private banks had to be bailed out.
"Official loans to Greece from the rest of the euro area are close to €185 billion ($204 billion); they would have to be written off. The Bank of Greece owes the European Central Bank (ECB) over €125 billion borrowed to finance capital outflows (“TARGET 2” debt) and to issue extra cash, according to Barclays, a bank. And then there’s €27 billion of Greek sovereign debt held by the ECB. The tally would be close to €340 billion, over 3% of euro-zone GDP”, the Economist notes. “If the Greek central bank remained part of the Eurosystem its debts to the ECB could simply stay on the books… potential losses could be fudged.”
“A full exit looks bad enough for both Greece and the rest of the euro area that the search is on for alternatives.”
Gradations of Grexit The Economist July 11 2015
ACCORDING to IMF estimates made in 2012, any currency with which Greece replaced the euro would quickly halve in value. Greece would lose a prompt 8% of GDP and see inflation surge to 35% as the cost of imports rocketed. Confidence would be battered and confusion would reign, exacerbated by the months it would take for the new currency to come into circulation. This is all probably as true now as it was then.
For the rest of the euro zone the direct effect would be much less—but still appreciable. Official loans to Greece from the rest of the euro area are close to €185 billion ($204 billion); they would have to be written off. The Bank of Greece owes the European Central Bank (ECB) over €125 billion borrowed to finance capital outflows (“TARGET 2” debt) and to issue extra cash, according to Barclays, a bank. And then there’s €27 billion of Greek sovereign debt held by the ECB. The tally would be close to €340 billion, over 3% of euro-zone GDP.
A full exit looks bad enough for both Greece and the rest of the euro area that the search is on for alternatives. Wolfgang Schäuble, Germany’s finance minister, suggested in a recent interview that a “temporary” exit from the euro zone might be Greece’s best option. One way to do this, though not necessarily one Mr Schäuble would approve of, would be for all domestic assets and liabilities, including those of the banks, to be redenominated in “new drachmas” while external obligations remained in euros. If the new drachma were temporary, or simply treated as such, Greece might be able to stay in the euro area under such a dispensation.
By continuing as part of the Eurosystem through which the ECB and national central banks manage the euro zone’s affairs, the Bank of Greece might retain credibility which it would otherwise lack. That would strengthen its hand in the fight against spiralling inflation which would surely follow redenomination. The Greek economy might not slump as far as it would otherwise, and the drachma might keep more of its value. The prospect of eventually returning to the euro proper—the Greeks may miss what they have forsaken—might give the government an extra incentive to control its finances and introduce growth-enhancing reforms.
Doing things this way would also render moot worries about Greece falling out of the EU altogether and thus losing access to the single market and regional development funds. There is no legal path for leaving the euro zone and not the EU, and some lawyers see such an out-yet-still-in exit as impossible. In practice there may be ways round this adamant attitude—some are being explored in Brussels. But if Greece were to remain part of the euro zone they would not be needed, which would be one less thing to worry about.
There would be advantages for the creditor nations, too. They would be spared, at least in the short term, the recriminations that would follow if Greece was expelled. Moreover, a temporary or merely notionally temporary exit would mean that potential losses could be fudged. The debt would remain unpayable. But none of the principal on the official loans has to be repaid until the early 2020s anyway. If the Greek central bank remained part of the Eurosystem its debts to the ECB could simply stay on the books.
The EU knows that Grexit will require it to offer humanitarian aid to Greece to cover the costs of essential supplies, including vital drugs. Back-of-the-envelope calculations suggest that around €15 billion would be necessary to help Greece this way to deal with its very short-term needs. If a halfway-house approach makes Greece more stable that bill might be reduced—or the amount of help the same amount of money could bring might be increased. In addition to this help the euro area would probably have to provide more general balance-of-payment support to Greece. Again the amount required may be relatively limited; the Greek current account was in surplus in 2013 and 2014, a huge improvement from the 10% of GDP deficit that Greece was running in 2010, when it was first bailed out.
The complexity and lack of credibility inherent in such an attempt to soften the blow of Grexit may make it unfeasible. It would look like, and might indeed prove, a way of postponing, not avoiding, the pain. But attempts to postpone the worst are not hard to find in kick-the-can history of the Greek debt crisis. Nor is such postponing essentially ignoble.