What if Spain and Greece did leave the euro?

According to Greece’s former prime minister Lucas Papedemos, we better get used to calling the it a 16-nation eurozone, or even the 15 nation, since Greece is already making preparations to leave the currency. 

So what would a slimmed-down version of the euro look like, how would it function and what would happen to the countries that leave? Obviously there is a chance that it stays intact, but in this article we look at what Greece and Spain could look like if they were to untangle 60 years of history and leave the world’s most famous currency union.

To be or not to be in the eurozone...

First things first we need to discuss how a country untangles itself from the enormous web that is the currency bloc.

There has been a lot of speculation about whether or not a country can even leave. When the original Treaty was written there was no get out clause. However, that was altered in 2007 with the Treaty of Lisbon, which added a clause that gave a member state the right to withdraw if they had the support from the majority of other members.

That’s a green light for Greece to leave, if it wants to. Added to that Vienna Convention of the Law of Treaties, which came into force in 1980, says that if conditions change to such an extent that abiding with the Treaty causes social damage then it is legally possible to withdraw. It could definitely be invoked in Greece’s case.

[Related feature: How to leave the euro]

Eurozone-lite

But both of these demand that the member states in question actually want to leave and we know that more than 75% of Greeks and a similar number of Spaniards want to remain in the eurozone.

As we have seen in recent weeks countries such as Germany seem to have lost patience with Greece, and have suggested that its upcoming elections should be a referendum on euro membership. So if Greece doesn’t want to leave then how can a country like Germany “force” them out in the hope it would be cheaper for them in the long run and avoid future costly bailouts?

There is no easy answer, but one way would be to negotiate Greece or Spain leaving the eurozone, while planning for it to maintain in the European Union with all of the trade and labour privileges membership includes.

The UK and the Scandinavian countries have managed it and Switzerland’s largest trading partner is the eurozone even though it still has the franc. Thus, a Greece or Spain that returns to the drachma or the peseta need not cut its ties to Europe completely.

[Related link: Free guide - How to trade currencies]

Drachmageddon?

Looking at Greece first, what would it look like outside of the eurozone? The negative impact of a return to the drachma is that it may fall in value versus the euro to the tune of 50% over the first five years of leaving the currency bloc, according to some predictions.

This would push up inflation making necessities like food, energy products and even medicine expensive, as well as potentially out of the grasp of ordinary Greeks who could suffer years of high levels of unemployment.

Even tourism, which accounts for 15% of the Greek economy, would suffer as potential tourists may be turned off by rising levels of social discord that would no doubt follow as living standards drop even further than they already have.

Some have warned that Greece could return to the status of a developing country, and its likely inflation rates and unemployment levels would certainly make it feel like one during this period.

[Related story: Nightmare foretold if Greece leaves the euro]

Greece’s cultural advantage

But, if Greece could get over the initial inflation shock and if the government could implement a fair and efficient tax collection system then it could target public sector spending at the tourism industry. Greece has a gorgeous coastline and some of the world’s most rare and interesting artefacts.

Around the world people still learn about Greek mythology and history at school so there will always be a huge number of people who want t to visit the country. Preserving its coastline, artefacts, building new airports, hotels, business and leisure centres doesn’t cost too much and can reap dividends in a fairly short amount of time.

If the government can use its “cultural” advantage then it could set Greece onto the right track especially with some savvy marketing to the fast-growing middle classes in India, China, Brazil and other fast developing nations.

Shipping is a major industry for the Greeks since ancient times. Ironically, if Greece were to leave the eurozone it could bring stability to financial markets and help to foster global growth thus boosting world trade. This is something the Greek shipping industry could jump on the back of. So leaving the eurozone may have some upside benefits in the short-term.

[Related feature: Greece embraces new myths about the euro]

Coping with the de-valued peseta

So what about Spain? The adjustment process might not be as bad, although the peseta needs to fall in value and remain weak, it does not need to fall to the same extent as the drachma.

The price of Spain’s imports would rise and inflation would shoot up probably causing more unemployment, but Spain could negotiate contracts for energy with countries it already has close ties with in Latin America and produce commodities to try and lessen the blow from a de-valued peseta.

The banks in Spain...

Spain’s biggest problem is its banking sector, which is crippled by bad loans from its property bust. Right now the markets are trying to figure out just how large the liabilities are and if the Spanish government is going to end up on the hook for them, possibly to the tune of €200billion according to some estimates (we won’t know for sure until the government conducts its latest review later this summer).

Inside the eurozone, Spain could potentially get official help to deal with these liabilities, but outside of it, even as a member of the EU, this may be harder to achieve.

[Related story: Spanish banks need €100bn in aid to survive]

No banks, no problem

If you removed the banking sector, then Spain could do well outside of the eurozone with a weaker currency as its exports are worth approximately €250billion a year and its largest export partners are France and Germany.

Added to that, its tourist industry is well developed and in 2007 it was the second most visited country in the world after France. It generated €60billion from tourism in 2010, according to the World Travel and Tourism council, and a weaker currency could see this grow even more.

However, until we know the true extent of its banking crisis it is hard to see how Spain could cope without help from its eurozone neighbours to support its flagging banking sector.

One thing is for sure, leaving the eurozone is not an “easy” option, as Greece may find out, although it the long term it could reap benefits and put the economy on a more stable footing.

However, for Spain, until it sorts out its banking sector, it may find it pays dividends to remain on Germany’s good side.

[Related feature: It’s all happened before – the lessons from when Argentina ditched the dollar]