Update: Luxembourg now admits that there was a meeting last Friday-though the meeting was not as serious as what Spiegel Online reported: Link
According to Spiegel Online, Greek government officials are considering the abandonment of the Euro in favor of a return to its national currency: the drachma. Spiegel Online also reports that European Union officials, including Euro-zone finance ministers, have gathered for an emergency crisis meeting in Luxembourg to discuss the matter.
- After the report came out a Greek government spokesman denied that Greece is considering an abandonment of the Euro and characterized the possibility as “out of the question”: Link
- There are conflicting reports about whether there is actually an emergency meeting in Luxembourg. However, the BBC reports that there is indeed a meeting involving Germany, France, Finland, and the Netherlands in Luxembourg: Link
I do not know if Greek government officials have seriously considered dropping the Euro or if there is actually an emergency meeting taking place in Luxembourg to discuss the matter. However, I find Spiegel Online’s article interesting because it mentions some of the things that could happen if Greece actually drops the Euro and reverts back to the drachma.
- The value of Greece’s national debt (much of it is denominated in Euros) would rise dramatically because the drachma is expected to be valued as low as half the value of the Euro. This sharp rise in Greece’s national debt would effectively render Greece bankrupt.
- Greece’s banking system could collapse and threaten the stability of other European banks that have exposure to Greek banks (and Greek debt).
- The Euro would likely experience a dramatic crisis of confidence. International investors would wonder whether other heavily-indebted European countries like Portugal and Ireland would also abandon the Euro if/when they face difficultly repaying their substantial debts. (We saw significant financial turmoil across the globe last spring when investors began to question the Euro's long-term viability during the Greek crisis, so a dramatic crisis of confidence for the Euro could easily lead to another round of significant, global financial turmoil).
Given these negative consequences, what could motivate Greek officials to possibly consider a return to the drachma?
- By returning to the drachma, the Greek government would regain the ability to devalue its currency, which they cannot do as a Euro-zone member. This would give the Greek government the ability to lower the value of its currency so it can help Greece become more competitive in international trade (right now Greece is really struggling to compete). In addition, the Greek government would not have to cutback as much on its spending since it could pay for its spending with money printing (many Greeks have protested against cutbacks in government spending recently).
Spiegel Online reports that legal experts are unsure whether Greece can abandon the Euro without also having to leave the European Union all together. Given the potential disastrous consequences for the Euro if Greece abandons the Euro, one can imagine that the European Union will do whatever it can to prevent Greece or any other Euro-zone member country from abandoning the Euro.
I expect European Union officials to find a way to persuade Greek officials to maintain the Euro for the time being (it’s possible that Greece could still drop the Euro in the future). However, I am only making an educated guess based on what I’ve read…
- Therefore, this situation merits monitoring because of the potential for a financial crisis to take place if Greece abruptly decides to abandon the Euro...
- In addition, this situation merits monitoring for the potential of becoming a catalyst that pushes European Union officials to finally take steps to create fiscal union so they can better deal with E.U. member countries’ debt problems (fiscal union would be one step before political union and a step that would help the E.U. transform into an entity that more resembles the entity that it may be in the End Times). European Union officials could see this Greek situation as a “wake-up call” for them to act before other heavily-indebted member countries like Ireland and Portugal consider abandoning the Euro as well.
Again, the likeliest outcome is for European Union officials to calm the fears about a potential Greek exit from the Euro. However, the possibility for some unsettling outcome to take place cannot be completely ruled out...
