The Greek Elections: Three Things To Know

June 14, 2012

The Greek Elections: Three Things To Know
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Ahead of parliamentary elections in Greece on June 17, CFR’s Sebastian Mallaby highlights three ramifications of a potential subsequent Greek exit from the euro:

How will a Greek exit impact Greece? While some economists believe that a Greek exit from the euro will be favorable for the Greek economy, Mallaby disagrees. "Leaving the euro would also trigger very high Greek inflation and that would quickly erode any competitiveness benefit that you get from a weaker currency, and along with the inflation there will probably be a lot of civil unrest," he says, which could hurt Greece’s main export sector – tourism.

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What will a Greek exit mean for European banks? If Greece leaves the euro, the devaluation of the drachma may result in bank runs as other Europeans take their money out of national banks in favor of safer Dutch or German banks, Mallaby says. This is already happening slowly, especially in Spain, Mallaby says, "and would accelerate hugely if the Greeks did leave."

What will be the long-term implications for the euro? If European leaders manage a "double act" of letting Greece exit while protecting the rest of the eurozone, Mallaby says the result would nonetheless be "catastrophic" in the long-term. "Now there would be a precedent that a country like Greece can leave and it can be okay for the rest of Europe," he says, adding that there will not be an incentive for rich countries like Germany to bail out peripheral countries in a future crisis.

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