European Central Bank officials, and other bankers, are now openly discussing the possibility of Greece quitting the euro. How would it work?
There is no formal procedure by which a state can quit the euro. Probably things would start with money promised to Greece by the ECB not being paid because the Greek government had failed to make required cuts. Then the Greek government would be unable to make its debt payments, including to the ECB.
The ECB would block the Greek government printing more euros. It might demand that the Greek central bank pay the 100 billion euros it currently owes to the intra-eurozone banking system (much of it, to the Bundesbank). One of the tricky things about scenarios is that pivotal political decisions would be taken by the ECB, which is supposed to be “independent” of all politics.
The Greek government would probably have to nationalise all Greek’s big banks, since they would become insolvent with the government stopping debt payments. It would run out of euros for its daily domestic spending, and Greek importers might have trouble fixing payments.
The government would have to coin new money (a restored drachma) to pay wages and so on. How it would do that is unclear: it would take at least three months just to print and distribute the notes, modify the computer systems, and so on.
Wealthy Greeks would whisk their euros abroad even faster than they have done already. The Greek government might feel obliged to impose controls on movements of money, which would put Greece’s EU membership as well as its eurozone membership in question.
Even on the most benign scenario — suggested by those economists who recommend Argentina’s default in 2001 as a model for Greece, though there are reasons to think that Greece would find it much harder to recover after default than Argentina did — there would be a drastic crash in Greece’s economy. A negotiated Greek exit from the euro might involve some EU and ECB aid to soften the crash (and so reduce the reverberations across Europe), but that is hard to predict.
Even if it were a workers’ government in Greece being forced out of the euro, it would face an economic crash: the workers’ government would deal with it by efforts to spread workers’ rule wider across Europe, and by expropriating Greece’s wealthy to ease the sufferings of the majority.
Banks in Italy, Spain, Portugal, and Ireland would suffer from Greece cutting off payments, and the governments would step in to help.
The creditworthiness of those troubled governments would slump further, maybe into a ruinous spiral like Greece’s which would lead to them, too, defaulting.