Greek withdrawal from the eurozone

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"Grexit" redirects here. For the software, see GrexIt (software).

The Greek withdrawal from the eurozone is the potential withdrawal of Greece from the Eurozone. This is also known as the "Grexit", a portmanteau combining the words "Greek exit". The term was introduced by Citigroup's Chief Analysts Willem H. Buiter and Ebrahim Rahbari on 6 February 2012.[1][2]


In mid-May 2012, the financial crisis in Greece and the impossibility of forming a new government after elections[3] led to strong speculation that Greece would leave the Eurozone shortly.[4][5][6][7] This phenomenon had already become known as "Grexit" and started to govern international market behaviour. Economists have expressed concern that the phenomenon may well become a self-fulfilling prophecy.[8]

Economists who favour this radical approach to solve the Greek debt crisis typically argue that a default is unavoidable for Greece in the long term, and that a delay in organising an orderly default (by lending Greece more money throughout a few more years), would just wind up hurting EU lenders and neighbouring European countries even more.[9] Fiscal austerity or a euro exit is the alternative to accepting differentiated government bond yields within the Euro Area. If Greece remains in the euro while accepting higher bond yields, reflecting its high government deficit, then high interest rates would dampen demand, raise savings and slow the economy. An improved trade performance and less reliance on foreign capital would be the result.[citation needed]

The implementation of Grexit would have to occur "within days or even hours of the decision being made"[10][11] due to the high volatility that would result. It would have to be timed at one of the public holidays in Greece.[12]

Plan Z[edit]

"Plan Z" is the name given to a plan to enable Greece to withdraw from the Eurozone in the event of Greek bank collapse.[13] It was drawn up by small teams totalling approximately two dozen officials at the European Commission (Brussels), the European Central Bank (Frankfurt) and the IMF (Washington).[13] Those officials were headed by Jörg Asmussen (ECB), Thomas Wieser (Euro working group), Poul Thomsen (IMF) and Marco Buti (European Commission).[13] To prevent premature disclosure no single document was created, no emails were exchanged, and no Greece officials were informed.[13] The plan was based on the 2003 introduction of new dinars into Iraq by the Americans[13] and would have required rebuilding the Greek economy and banking system ab initio, including isolating Greek banks by disconnecting them from the TARGET2 system, closing ATMs and imposing capital and currency controls.[13]


The prospect of Greece leaving the euro and dealing with a devalued drachma has already prompted many people to start withdrawing their euros out of the country's banks.[14] In the nine months through March 2012 deposits in Greek banks had already fallen 13% to 160 billion.[11]

A victory for anti-bailout lawmakers in the 17 June election would likely trigger an even bigger bank run, said Dimitris Mardas, associate professor of economics at the University of Thessaloniki. Greek authorities, Mardas predicts, would respond by imposing controls on the movement of money for as long as it takes for the panic to subside.[14]

A grexit needs to be prepared, for example with capacity for banknote stamping or printing a stock of new banknotes. However, information leaking out on such preparation would lead to negative dynamic effects, like bank runs.

In the event of a new currency being introduced, all banks would close for several days while old currency (Euros) were stamped to denote they were now drachmas, and/or a newly printed currency was distributed to bank branches for distribution to the public when banks reopened. The British money printing company De La Rue was according to rumours on 18 May 2012 preparing to print new drachma notes based on old moulds, which De La Rue refused to confirm.[11] The time between an order for a new currency is placed and the delivery of the paper is about six months.[15]

Wolfson economics prize

In July 2012, the Wolfson economics prize, a prize for the "best proposal for a country to leave the European Monetary Union," was awarded to a Capital Economics team led by Roger Bootle, for their submission titled "Leaving the Euro: A Practical Guide."[16] The winning proposal argued that a member wishing to exit should introduce a new currency and default on a large part of its debts. The net effect, the proposal claimed, would be positive for growth and prosperity. It also called for keeping the euro for small transactions and for a short period of time after the exit from the Eurozone, along with a strict regime of inflation-targeting and tough fiscal rules monitored by "independent experts."

The Roger Bootle/Capital Economics plan also suggested that "key officials" should meet "in secret" one month before the exit is publicly announced, and that Eurozone partners and international organisations should be informed "three days before." The judges of the Wolfson economics prize found that the winning plan was the "most credible solution" to the question of a member state leaving the Eurozone.

Immediate economic fallout inside Greece[edit]

The theory behind the readoption of an independent Greek national currency is that such a currency, freely floating on the international markets, would be able to depreciate in value and thus Greek exports and shipping services would become more competitively priced on the world market. Imports would be correspondingly more expensive, encouraging domestic production in Greece. However, persuading the Greeks and their businesses to replace their euros with a currency intended to collapse in value would be more than somewhat challenging, and current Greek debts would remain denominated in euros.

On 29 May 2012 the National Bank of Greece warned that "[a]n exit from the euro would lead to a significant decline in the living standards of Greek citizens." According to the announcement, per capita income would fall by 55%, the new national currency depreciate by 65% vis-à-vis the euro, and the recession which Greece has been in for five years would deepen to 22%. Furthermore, unemployment would rise from its current 22% to 34% of the work force, and the inflation, which is currently at 2% would soar to 30%.[17]

According to the Greek think-tank Foundation for Economic and Industrial Research (IOBE), a new drachma would lose half or more of its value relative to the euro.[14] This would drive up inflation, and reduce the purchasing power of the average Greek. At the same time, the country's economic output would drop, putting more people out of work where one in five is already unemployed. The prices of imported goods would skyrocket, putting them out of reach for many.[14]

Analyst Vangelis Agapitos has estimated that inflation under the new drachma would quickly reach 40 to 50 per cent to catch up with the fall in the new currency's value.[14] To stop the falling value of the drachma, interest rates would have to be increased to as high as 30 to 40 per cent, according to Agapitos.[14] People would then be unable to pay off their loans and mortgages and the country's banks would have to be nationalised to stop them from going under, he predicted.[14]

On January 3, 2015, at the American Economic Association's annual meeting, economist Barry Eichengreen warned that the move may trigger a run on Greece's banks, and also on its stock market.[18]

IOBE head of research Aggelos Tsakanikas foresees an increase in crime as people struggle to pay bills. "We won’t see tanks in the streets and violence, we won’t see people starving in the streets, but crime could very well rise".[14]

Political opinion[edit]

Of all the political parties which won seats in the parliamentary election in May, only the Communist KKE and the Neo-Nazi Golden Dawn have expressed support for leaving the euro, and indeed for leaving the European Union.[19]

The centre-right New Democracy party has accused the leftist SYRIZA of supporting withdrawal from the euro. However, SYRIZA's leader, Alexis Tsipras, has stated that Greece should not leave the Eurozone, and return to the drachma because "...we will have poor people, who have drachmas, and rich people, who will buy everything with euros."[20]

2015 Grexit speculation[edit]

In January 2015, speculation about a Greek exit from Eurozone was revived when Michael Fuchs, who is deputy leader of the center-right CDU/CSU faction in the German Bundestag, was quoted on 31 December 2014: "The time when we had to rescue Greece is over. There is no more blackmail potential. Greece is not systemically relevant for the euro." A following article in the weekly Spiegel citing sources from Wolfgang Schäuble's ministry of finance further spurred these speculations. Both German and international media widely interpreted this as the Merkel government semi-officially warning Greek voters from voting for SYRIZA in the upcoming legislative election of 25 January 2015.[21]

German largest selling tabloid, the right-wing populist Bild raised further anger when it compared Greece to an unfair footballer: "What happens to a footballer who breaks the rules and does a crude foul? – He leaves the pitch. He is sent off as a punishment. No question."[22]

The German government's interference in the upcoming elections in Greece was strongly criticized by leaders of European Parliament groups including Socialists & Democrats (S&D), the liberal ALDE and the Greens/EFA group, when S&D president Gianni Pittella said, "German right-wing forces trying to act like a sheriff in Greece or any other member states is not only unacceptable but above all wrong."[23] It has also been criticized by German oppositional parties with the German Greens' speaker Simone Peter calling the debate over a Grexit "highly irresponsible".[22]

Economists of German Commerzbank said that preventing a Greek exit was still desirable for Germany, since a Greek exit would wipe out billions of euros in European taxpayer money, and “it would be much easier politically to renegotiate a compromise with Greece, albeit a lame one, and thus maintain the fiction that Greece will pay back its loans at some point in time.”[24]

FTSE "considers Grexit following the election to be highly unlikely...".[25]

International financial shockwaves[edit]

Claudia Panseri, head of equity strategy at Societe Generale, speculated in late May 2012 that Eurozone stocks could plummet up to 50 percent in value if Greece makes a disorderly exit from the euro zone.[26] Bond yields in other European nations could widen 100 basis points to 200 basis points, negatively affecting their ability to service their own sovereign debts.[26]

Effect upon the world economy[edit]

Europe in 2010 accounted for 25 percent of world trade, according to Deutsche Bank.[26] Europe also is the biggest trading partner for China and the United States.[26] Economic depression within the European economy would ripple worldwide and slow global growth.[26]


A working paper published by the European Central Bank concluded:[27]

… that negotiated withdrawal from the EU would not be legally impossible even prior to the ratification of the Lisbon Treaty, and that unilateral withdrawal would undoubtedly be legally controversial; that, while permissible, a recently enacted exit clause is, prima facie, not in harmony with the rationale of the European unification project and is otherwise problematic, mainly from a legal perspective; that a Member State's exit from EMU, without a parallel withdrawal from the EU, would be legally inconceivable; and that, while perhaps feasible through indirect means, a Member State's expulsion from the EU or EMU, would be legally next to impossible. … with a reminder that while, institutionally, a Member State's membership of the euro area would not survive the discontinuation of its membership of the EU, the same need not be true of the former Member State's use of the euro.

See also[edit]


  1. ^ "Grexit – What does Grexit mean?". 10 April 2012. Retrieved 16 May 2012. 
  2. ^ Buiter, Willem. "Rising Risks of Greek Euro Area Exit" (PDF). Willem Buiter. Archived from the original on 30 May 2012. Retrieved 17 May 2012. 
  3. ^ Xypolia, Ilia (May 2012). "Sorry, folks..the wake is ove". London Progressive Journal. Retrieved 15 October 2012. 
  4. ^ "Huge Sense of Doom Among 'Grexit' Predictions". CNBC. Retrieved 17 May 2012. 
  5. ^ Ross, Alice. "Grexit and the euro: an exercise in guesswork". Financial Times. Retrieved 16 May 2012. 
  6. ^ Boot, Alexander (14 May 2012). "From 'Grexit' to 'Spain in the neck': It's time for puns, neologisms and break-ups". Daily Mail (London). Retrieved 16 May 2012. 
  7. ^ "Grexit Greek Exit From The Euro". Retrieved 16 May 2012. 
  8. ^ Heath, Allister. "Grexit will happen much more quickly than politicians think". City A.M. Retrieved 16 May 2012. 
  9. ^ Louise Armitstead (23 June 2011). "EU accused of 'head in sand' attitude to Greek debt crisis". The Telegraph (London). Retrieved 24 September 2011. 
  10. ^ Apps, Peter (20 May 2012). "Birth of new Greek drachma would be pained, rushed". Reuters. Archived from the original on 30 May 2012. Retrieved 30 May 2012. 
  11. ^ a b c Randow, Jana; Thesing, Gabi (23 May 2012). "War-Gaming Greek Euro Exit Shows Hazards in 46-Hour Weekend". Bloomberg News. Archived from the original on 30 May 2012. Retrieved 30 May 2012. 
  12. ^ "Who, What, Why: How would Greece switch currencies?". BBC News. 11 June 2012. 
  13. ^ a b c d e f 14 May 2014 6:30 pm Inside Europe’s Plan Z, By Peter Spiegel, London Financial Times
  14. ^ a b c d e f g h Hadjicostis, Menelaos (25 May 2012). "Greece's euro exit a recipe for hardship". The Hamilton Spectator. Archived from the original on 30 May 2012. Retrieved 30 May 2012. 
  15. ^ Wallop, Harry (29 May 2012). "De La Rue silent on deal to print Drachma". The Daily Telegraph (London). Archived from the original on 31 May 2012. Retrieved 31 May 2012. 
  16. ^ "Leaving the Euro: A Practical Guide" full text
  17. ^ Tagaris, Karolina (29 May 2012). "Biggest Greek bank warns of dire euro exit fallout". Reuters. Archived from the original on 30 May 2012. Retrieved 30 May 2012. 
  18. ^ "Greek Exit Could Cause Pain For Economy". Birch Gold Group. 9 Jan 2015. Retrieved 9 Jan 2015. 
  19. ^ BBC News report 15 June 2012 – Greek election: Parties make final push for votes
  20. ^
  21. ^ "Germany Does Care About a Greek Exit". 2015-01-05. Retrieved 2015-01-06. 
  22. ^ a b Wagstyl, Stefan (2015-01-05). "Angela Merkel faces growing dilemma over Greece". Financial Times. Retrieved 2015-01-07. 
  23. ^ O'Brien, James (2015-01-05). "MEPs criticise German 'interference' in Greek elections". The Parliament Magazine. Retrieved 2015-01-07. 
  24. ^ Alderman, Liz (2015-01-05). "Euro Countries Take Tough Line Toward Greece". New York Times. Retrieved 2015-01-07. 
  25. ^
  26. ^ a b c d e Barnato, Katy (25 May 2012). "Greek Exit Could Trigger 50% Fall in Euro Stocks: Analyst". CNBC. Archived from the original on 30 May 2012. Retrieved 30 May 2012. 
  27. ^ Athanassiou, Phoebus (December 2009), Withdrawal and Expulsion from the EU and EMU: Some Reflections, European Central Bank, p. 4, SSRN 1517760 

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