Grexit: Will Greece Leave The Euro And What Will Happen If It Does?

Clem Chambers, CONTRIBUTOR

Forbes

Will Greece leave the euro? Surely not. Europe must muddle through. There will be a deal and both sides will claim victory and clasped hands will be raised.

Everyone knows there will be no Grexit, only more grandstanding for the gullible home audiences of Europe.

But wait, what if there is a Greek exit from the euro? Leaving the euro is not leaving Europe. It is not even close. And what happens if Greece stays in, what more misery follows for all?

If Spain gets a whiff that you can renege on your debts they’ll vote in Podemos, the Spanish version of Syriza, and get a pay raise for all the comrades.

How about Portugal and Italy? A triumphant Greece means they would certainly risk bringing down the euro in a heap of communist jubilee democracy. (A jubilee is a day when all debts are reset. It’s a historic oddity, these days purely reserved for the sins of the flesh rather than the legacy of mammon.)

Viva democracy? According to the Greeks, if Greece votes at a general election to have its debt forgotten, then that is the will of the people and must be respected by the other democracies of Europe. We all might agree were it not for the insistence that a resultant catastrophic bankruptcy is not to be a consequence.

Remember ‘moral jeopardy?’ Well, it’s back and it just might be why the Grexit will happen. The whole point of moral jeopardy is if you let one fellow break the rules and get away with it, you have to do it for all. “Why not me, he got one, I want one, it’s not fair.”  So the simple solution to moral jeopardy is to say, “No.” Of course, you can play favorites but that kind of thing is bound to escalate.

A no to Greece from Europe means the birth of the “new drachma.” (I’d like to be short of that right now.) The new drachma will pay wages and pensions in the public sector and likely pay non-secured debts, like hospital drugs bill and anything outstanding without preference. It will settle all government bills and convert 1:1 on the moment of the issue of the new currency.

1 euro = 1 new drachma.

Of course if the drachma tumbles, it will be euro versus Swiss franc this spring, all over again, but bigger.

“Foop,” is a word I’ve heard to describe what happens next. The new drachma collapses. How far? Imagine if Greece got a 50% debt forgiveness. They would be cock-a-hoop. So imagine the drachma halving in short order with Greece in euro debt default.

The new drachma, if it floats, should reach equilibrium roughly where it is worth to pay Greece’s foreign debts at. If it can revitalize its economy being able to print its own cash, it can then slowly retire the euro debt.

Lots of wriggle room spins off from the malfunction of default. It’s the Argentinian solution and it’s grizzly but it won’t look too bad on either side of the economic-political divide. The G-less PIIS (PIIGS) will look on aghast and not want to go the Syriza route. The austere north will tut tut, “told you so.”

So what happens inside Greece on a Grexit?

For one, Syriza can blame all the following problems on everyone but themselves. The right-sizing of public sector overheads is achieved at a stroke. All the hyperinflation that follows can be blamed on Germany and the ECB and the Greek politicians can hide behind the flag. The growth that followed after the violent collapse can be claimed as theirs in a political Munchausen by proxy. Everyone can jostle for pay raises and get them, though by the end of the process they will get what can be afforded. It will be a rough ride but at least better than no ride at all for Syriza caught between self destruction or political annihilation.

That apart, it probably is the case that Greece can’t pay and so the correct option is bankruptcy. Why is a country any different than an individual or a corporation?

Is it better to suffer an acute shock than chronic pain? After all, while acute is more frightening, the chronic can end up more damaging. Is this the case with Greece? This is the question left over from the credit crunch. Is it better to take it on the chin or be bowed down by a long pummeling to the solar plexus?

Is the cure worse than the poison?

As a poorer America looks to the future, a Grexit may throw up some broader lessons.

Clem Chambers is the CEO of leading private investors Web site ADVFN.com and author of Be Rich, The Game in Wall Street and Letters to my Broker.