Bloomberg
Editors
May 16, 2012
A Greek exit from the euro area has the potential to be the European Union’s most economically and politically destructive event of a generation. Unfortunately, Europe has reached the point where it must prepare for such an outcome.
Whether Greeks want it or not, circumstances could soon force their country to return to the drachma. Europe’s leaders, as Luxembourg Prime Minister Jean-Claude Juncker hinted, might extend Greece’s deadlines to meet the budget targets required for rescue money, but they won’t provide emergency financing to a government that refuses austerity measures. Without Europe’s help, Greece’s government (whoever ends up leading it) faces a dilemma: Cut spending even more than under the austerity program, or default on its debts and print a new currency to pay its bills.
A return to the drachma would be painful. The currency would immediately be worth a fraction of a euro, and would depreciate further if the government printed money to finance deficit spending. Bank depositors would get devalued drachmas, if they got anything at all. Businesses would be starved of credit. Prices and wages would probably rise to compensate for the currency’s loss of value, eroding the benefit of a cheap currency to Greek exporters.
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