Talks of a 'Grexit,' or Greek exit from the euro, have gained head with officials telling members of the eurozone to have contingency plans in place if Greece decides to exit the monetary union.
George Magnus, senior economic adviser at UBS, says there are only two ways for Greece to leave the euro.
One way is the 'disorderly' exit and Magnus explains why this must be avoided:
"The Greek banking system would shut down, be nationalized and require urgent recapitalization. Capital controls, which would not be legal if applied to other European countries, would have to be implemented immediately. The depression in the economy would deepen, and social and political chaos would be rife.
Bank runs would extend to other countries, including Spain, Portugal, Italy, possibly France. Self- fulfilling sovereign default risks would rise in many countries. There would be a catastrophic decline in output throughout Europe. And because Europe remains such a large part of global trade and commerce, the consequences for the global system would be enormous, not least for China and other emerging markets, upon which Europe and the US depend for growth in these fractious times. "
The better option is an 'orderly' exit which could happen with the "reluctant blessing of its eurozone partners" and which would have to be accompanied by two major sets of initiatives which could help keep Greece in the wider EU:
- The ECB would have to lend freely to avoid a collapse of the Greek banking system and be ready to support the sovereign bond markets of other vulnerable countries like Spain and Italy if necessary.
- Finance ministers have to be prepared to restructure Greek debt or offer relief / debt forgiveness.
Magnus says, "a Greek exit, strictly speaking, should be seen as the plague under all circumstances." An orderly exit is the only viable option and eurozone leaders need to act before Greek voters have their say.Don't Miss: This Is What Happens If Greece Exits The Euro >
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