Is Drachma reintroduction imminent?

An article the Financial Post in February 2015 ( original article here ) suggested that the scenario for Greece leaving the Euro and returning to the Drachma would be as follows:

  1. Greek banks would clandestinely get word the country is abandoning the eurozone
  2. The newly pressed drachmas would arrive at various locations of the Greek central bank
  3. After three or four days of closures to convert the euros, Greek banks would reopen for business.

“It would happen, boom, like that,” according to Mr. Alex Jurshevski, who worked to restructure New Zealand’s debt in the 1990s and consulted with Iceland during its 2010 crisis.

Capital flight is the most pressing threat to Greece, and it’s already taking place. The closure of the banks this week with only tiny withdrawals allowed looks like a last-ditch attempt to stop everyday savers withdrawing their money.  Paul Donovan, a global economist at UBS AG, said in an interview: “People just pull their money out of the banks and you get a collapse in the banking system and that then spreads to different components of the monetary union.”

If Greece switches currency, any euros left in Greek bank accounts would be converted to drachmas – which would cost account holders dearly, as analysts estimate the drachma would depreciate by 50% to 60% in a matter of days.

However with the results of the referendum not due for several days, there is little else the Greek government can do for the time being. Much also depends on the European Central Bank – and whether it believes it can still allow funds to flow, to prevent banks in Greece from collapsing.

How to Leave the Euro

There simply is no mechanism to leave the euro currently. Why?

It was never envisaged by the bright-eyed politicians who created the impetus for the currency, which debuted in 1999.

“The treaties indeed confirm what we have been saying here: the treaty doesn’t foresee an exit from the eurozone without exiting the EU,” said a European Commission spokeswoman this week.

The treaties she is referring to are the Maastricht treaty from 1992, which led to the creation of the euro, and its successor, the Lisbon treaty in 2007.

So under its current obligations, for Greece to exit the euro, it would have to leave the EU. This option was only added in Article 50 of the Lisbon treaty.

Goodbye Euro, goodbye EU.

Leaving is straightforward; it involves a member state notifying the European Council – that is, the heads of state of the EU – that it wants to go. Greece would then be free to reintroduce the Drachma, it’s previous national currency.

The European Council should  then agree the terms of the exit via a qualified majority.

Would leaving the EU cause Greece’s crisis to get worse?

The key part of Article 50 involves “setting out the arrangements for its withdrawal, taking account of the framework for its future relationship with the Union”.

Should Greece leave the EU?

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