Weighing a Greek departure from the Eurozone

Reporting from London —  Unhappy Germans want them out. Plenty of Greeks themselves would be glad to oblige, relieved to quit a currency club that they feel is more curse than blessing.

Suddenly, a growing number of voices are asking whether the only way to quell the raging European debt crisis is for Greece to leave the Eurozone, the currency union that was supposed to stitch the continent into a unified economic powerhouse.

Financial commentators floating the once-unthinkable suggestion have been joined in recent days by members of the ruling German coalition, alarmed at the prospect of German taxpayers being on the hook for the profligate spending of Greeks, and by Dutch Prime Minister Mark Rutte, who said heavily indebted countries should be forced to choose between handing control over their budgets to their European partners or exiting the Eurozone.

The heightened talk of a Greek bankruptcy or even being forced to quit the euro prompted German Chancellor Angela Merkel to chastise her own partners in government Tuesday, warning them that loose chatter was destroying market confidence and only increasing the eventual cost of restoring Greece to financial health.

“Everybody should very carefully weigh their words,” Merkel told German radio. “What we don’t need is unrest in the financial markets; the uncertainties are already big enough.” Everything, she warned, “must be done to keep the euro area together.”

The architects of the euro never envisioned anyone leaving. The pact establishing the common currency, which debuted nine years ago, contains no provisions for either expulsion or voluntary withdrawal of a country.

“Nothing is set in place for anybody to leave the euro,” said Howard Wheeldon, senior strategist at financial firm BGC Partners in London. “There’s just no get-out clause available.”

But neither did the authors of Europe’s most ambitious integration project envision the debt-fueled conflagration, sparked by Greece, sweeping through the region’s economies. And the history of the euro is replete with rules ignored and conventions improvised as the project proceeds.

As stock markets plunge over the debt crisis, the increasingly vocal advocates of kicking Athens out of the Eurozone say it’s time to consider drastic measures.

Booting Greece, they say, offers the best way to keep the debt crisis from devouring bigger countries like Italy or Spain and threatening the euro’s very survival. Whether the founding treaty specifically made allowance for such a step is irrelevant.

“The fact that a mechanism hasn’t been worked out in advance is a smoke screen. Stuff happens,” said David Marsh, a historian of the euro. “It all depends on whether it’s more painful to go on or more painful to leave.”

Critics of a putative Greek exit from the Eurozone are convinced of the latter. They contend that the costs of such a move, regardless of its legality, would be catastrophic for both Greece and the rest of the 17 nations that use the euro.

The announcement of an imminent restoration of the old currency, the drachma, would probably trigger a run on the banks in Greece, as depositors rushed to take out their euros and squirrel them away under mattresses or in offshore funds before the conversion took place.

Greece’s badly depleted banks could no longer look to the European Central Bank for relief; some would no doubt collapse. Many Greek residents and companies would still be saddled with expensive foreign loans denominated in euros, which their deeply discounted drachmas would be hard-pressed to pay off.

Elsewhere, banks in France, Germany and other countries with major holdings of Greek debt would probably suffer steep losses, incurring the wrath of investors and putting many of them to flight.

“If Greece were suddenly to say, ‘We are leaving the euro tomorrow,’ there will be an initial cheer, and then all of a sudden there’ll be, ‘Goodness gracious me, we’ve lent a lot of money to Greece, haven’t we, and are we going to get it back?’” Wheeldon said. “And the markets would be left to take care of it in their own way.”

Greek exports would suddenly be cheaper and more competitive. But creditors would be leery of doing business with Greece, which would also have to shell out billions of dollars to print new bills, mint new coins, rewire ATMs and the like.

In a recent report, Swiss banking giant UBS estimated that a debt-laden Eurozone country such as Greece or Portugal would take a staggering hit equal to about half its annual national income if it dropped the euro. Even a rich nation like Germany, if it decided to go it alone, would suffer losses ranging from 20% to 25%.

That’s why currency breakups, though not unheard of, usually happen only after a cataclysmic event — say, a civil war. It’s also why few experts believe a Greek departure from the euro, willing or forced, is imminent, despite investor speculation and recent threats by politicians in Germany and the Netherlands to evict Athens from the Eurozone.

Some Greeks grumble that leaving the euro would enable them to slip out from under the yoke of the European Union and the International Monetary Fund, and of the extremely painful austerity measures demanded of their country.

But no serious economists in Greece have suggested that course of action. In a speech this past weekend, Prime Minister George Papandreou dismissed such talk as unrealistic, dangerous and no solution to his country’s fiscal problems.

“If any country leaves the euro because of a sovereign financial crisis, it will create a domino effect, pressuring other countries as well,” he said. “It will leave a wound in Europe. It will mark the start of the end of the zone.”

Not everyone agrees. Some analysts say that, with enough foresight and planning, the fallout could be contained. For example, controls could be put in place to prevent Greeks from withdrawing their money from local banks and sending it abroad.

To shore up other vulnerable Eurozone countries that might come under market attack, the European Union’s rescue fund could step in with emergency loans. It could also bolster struggling banks with cash infusions.

There has been widespread speculation that Germany, Europe’s paymaster, is fed up with propping up Greece with bailout funds and is considering how the Mediterranean nation might default on its debts in an orderly, well-managed fashion that would mitigate the effect on markets and other Eurozone countries. Although leaving the currency union altogether would be a big step beyond default, some of the preparation would be the same.

For its part, the European Commission maintains that membership in the euro remains “irrevocable,” regardless of the increased chatter.

Daniel Gros, director of the Center for European Policy Studies in Brussels, said that such a radical step was still extremely unlikely, although it could not be totally ruled out because Europe’s leaders have dithered and failed to come up with a convincing answer to the debt crisis. Throwing Greece out of the Eurozone would probably be a last resort.

“This could only happen at the end of a long series of miscalculations and errors,” Gros said. “It’s a very long way away.

“But,” he added, “we’re getting closer.”

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