Greece exiting the euro? Not so fast
Simply because Greece defaults on its debt doesn't necessarily mean it will immediately leave the euro zone. In fact, according to this Reuters article, there is no mechanism in the EU charter that would allow member states to force another to leave.
In short, Greece would have to opt out on its own - something that 80% of the country (at least in opinion polls) says they don't want to do.
Article 50 of the Lisbon Treaty is the relevant piece of legislation dealing with a country that wants to leave. (tiny.cc/eotaew)
In essence it says that if such a decision is taken, an agreement would have to be drawn up with the other 26 member states setting out the arrangements for withdrawal. That would have to be approved by a qualified majority of EU countries and backed by the European Parliament.
The rules would appear to leave the decision largely in the hands of the departing country. But when asked if that were the case during a meeting in Brussels last week, German Finance Minister Wolfgang Schaeuble said it was not necessarily so.
According to a source present at the meeting, Schaeuble said contingency plans were being drawn up and indicated that life could be made so unpleasant for Greece that it would be left with no other option but to ask to leave.
That could involve shutting off all Greece's official financing, not just from the euro zone's EFSF bailout fund but from the European Central Bank too. Already there are signs of that sort of pressure being applied to Athens.
Last week, the EFSF agreed to disburse the latest tranche of aid to Greece, a 5.2 billion euro payment, but retained 1.0 billion of the total, saying it wasn't immediately necessary.
Diplomats and policymakers are worried, however, that all the loose talk about Greece leaving the euro or the EU is merely increasingly the likelihood of such an eventuality, without taking into account what it would really mean for Europe.
There are other aspects to the situation that must be considered as well. Just how does Greece return to the Drachma? The nightmare scenario - and one that is guaranteed to cause continent-wide panic - would be for Greek citizens to wake up one morning and realize that their savings that are denominated in euros are now denominated as Drachmas. The Greek currency will almost certainly be worth a lot less than the euro - perhaps as much as 30%. Everything they buy, however - from food to paying the electric bill - will still be in euros. Those who export to Greece will have a devil of a time with the conversion which probably means a massive drop in sales of oil, food, and other basic necessities that Greece imports from abroad.
There is a real danger that if Greece returns to the drachma, the resulting chaos could spill over into Spain, Italy, Portugal, and other nations on the brink, causing huge bank runs as citizens would fear the same thing happening to them as happened to the Greeks.
There will be no orderly transition away from the euro for Greece. Alexis Tsipras, head of the radical socialist Syriaz party, is counting on this reality to "call the bluff" of Berlin and Brussels who he thinks could be convinced to accept a Greek default but keep the bailout payments coming.
He is dreaming. The EU has been preparing for a Greek exit for two years and have strengthened emergency measures that could prop up tottering banks, buy debt from other nations who might see the interst on government bonds skyrocket temporarily, and quiet an investor panic that would almost certainly occur.
Whether Greece asks to go or not, go they will. And how the resulting chaos is managed by Germany, the IMF, and the European Central Bank will tell the tale of whether the euro zone will survive the shock.