So what would it cost if Greece left the euro?
Continue Reading Below
As European policymakers struggle to reach a deal to keep the country from a bankruptcy, experts are making rough estimates of the potential costs of failure.
Neither side wants Greece to leave the single currency zone. It's all about the conditions for staying: Athens is sick of the budget cuts they're being asked to make in return for 240 billion euros in loans. Greece's new government says a six-year recession shows that the requirements to restrain spending are strangling the economy.
The eurozone creditor countries, however, are refusing to lend it any more money without tough conditions.
Without more money, Greece may default on debts due this spring and summer. Default, or fears of one, could trigger turmoil that would collapse Greece's banks. And that could force it to print its own currency to bail them out.
Analysts say a Greek exit from the euro, or "Grexit," could be chaotic and complex. It would probably involve shutting banks and ATMs to prevent people from withdrawing money before it could be translated into a new, cheaper currency. Bank accounts and mortgages would be switched to the new currency. It could take months to get new bills in circulation, forcing people to use euros for small transactions or resort to non-cash payment.
Continue Reading Below
Here are some back-of-the-envelope calculations of the potential damage.
COSTS TO GREECE
Economists at Commerzbank estimate the economy, which has already shrunk by a quarter since the crisis started, would contract by another 10 percent in the first year after Greece leaves the euro.
The new drachma would plunge by 50 percent or more against the euro as the central bank prints money to keep banks going. That would mean imports such as medicine, autos, and oil and gasoline would skyrocket in price.
On top of that, Greek companies that owe money to suppliers in euros would suddenly find those bills too big to pay, forcing some into bankruptcy. Greek companies that survive might be asked to pay in advance in euros for parts or raw materials, restricting production.
Currency depreciation "would thus seriously lower the Greek standard of living," Commerzbank analysts say.
Locals and foreigners would limit investment amid the uncertainty over the economy's prospects.
Longer term, the picture is less clear. The weak currency would give domestic producers an advantage as imports would be more expensive. Travel to Greece would become much cheaper for eurozone citizens and that could boost demand for hotels and restaurants.
Still, Greece would have lost an important incentive to reform its economy, which is burdened with excessive bureaucracy, regulation and corruption. And its membership in the EU — and its ability to trade with the bloc — might come into question.
COSTS TO THE EUROZONE
Many analysts seem to think the eurozone is now better equipped to handle the departure of one country. It now has a bailout fund and an offer from the European Central Bank to purchase the bonds of countries that come under market pressure.
Some, like Christian Schulz at Berenberg Bank, think Greece, at 2 percent of the entire eurozone's GDP, is just too small to drag down the whole currency union. "For no country in the European is Greece a major export partner," Schulz said.
Stock markets seem to agree. Germany's DAX hit an all-time high this week, despite the Greek rumblings.
Still, the impact is hard to predict, and the stagnating eurozone needs every bit of growth it can get.
And there would be some concrete costs.
First of all, Greece would likely find it impossible to repay its bailout loans. Those losses would be spread to taxpayers in the other 18 countries.
The eurozone bailout fund is owed 142 billion euros ($162 billion), individual countries are owed 53 billion euros, and the European Central Bank holds 20 billion euros in Greek government bonds. Same goes, most likely, for another 50 billion euros owed by the Greek central bank to the ECB and the other national central banks though the eurozone payments system.
Leaders like German Chancellor Angela Merkel surely don't want to explain to voters how they lost that much on Greece.
But it likely wouldn't lead to donor countries' finances being downgraded, said Schulz: "It would be politically extremely inconvenient, but financially would not make a big difference," he said.
The costs in terms of how people think about the euro are harder to predict.
Weaker countries could pay more to borrow, since investors would have to figure in the risk of euro exit and seeing their holdings devalued by being exchanged into a new currency.
Having lost billions in bailout loans might make the richer countries such as Germany even more determined not to share their finances with other eurozone members in the future.
If Greece bounces back in the years after leaving the euro, that could lead some others to think it's better to not be part of the shared currency union.
Yet the initial chaos would likely be terrible enough to discourage such thoughts.
Said Schulz: "If Grexit is as bad as we think it is, there will be few who want to imitate it."