da nomura:
Logic dictates that Greece should stay in the eurozone
There another important “big-picture” consideration that suggests Greece is unlikely to end up in a state of disorderly default and, ultimately, out of the eurozone. Neither Greece nor its European partners will be better off if Greece leaves the euro.
Greece itself has little to gain by exiting the eurozone and a lot to lose. Replacing the euro with a significantly undervalued new currency would mean that both the public and the private sector would default on most, if not all, their euro-denominated obligations. A run on the banks would very likely follow such a decision, while the interruption of credit lines with Greek businesses by (presumably) both foreign and domestic counterparts would bring economic activity to a halt. Greece‟s current account and primary deficits would close violently, implying shortages of essential imported products (fuel, energy, and food), a sharp rise in unemployment, and serious social and political instability. With capital markets closed for years for both public and private entities, it is highly doubtful that Greece‟s growth potential could be realized within a reasonable time-span. In fact, even the alleged benefits in competitiveness due to currency devaluation seem to be based on a naïve “all-other-things-being-equal” type of argument that is inapplicable here. Tourism, Greece‟s main exporting industry would hardly stand to gain from the likely breakout of social tensions. An instructive example is Egypt, where tourist arrivals fell by as much as 80% y-o-y in February 2011, after violence broke out in the country, and remain 30% down y-o-y as of June 2011 (the last available data point). Furthermore, transactions in shipping, the country‟s second largest exporting industry, are done in US dollars; therefore, no benefits from leaving the eurozone are to be expected there. Finally, the devalued new currency would hardly offer any protection against imported inflation that would work as yet another drag on growth. For these reasons we doubt Greece would leave the eurozone voluntarily.