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Dr. Jim Leontiades
Cyprus International Institute of Management
The main opposition parties in both Cyprus and Greece have pressed for major changes regarding Eurozone policies. They complain that not only is growth in the Eurozone lacking but that Eurozone policies conducive to growth are also lacking. Dissatisfaction has reached the point where leaving the common currency has been a serious suggestion advanced by the main opposition parties in both of these countries.
Reasons for dissatisfaction with membership in the Eurozone are not hard to find. Cyprus and Greece are experiencing depressed economic activity and record levels of unemployment. National debt is at such levels (174% of GDP for Greece and for Cyprus 105% and rising ) that it will be years before they can pay it down to acceptable levels. Even then, government expenditures will be limited so as to stay within Eurozone imposed debt limits. So, why not leave the Euro?
EXIT REPERCUSSIONS
When Cyprus adopted the Euro, the change was from one relatively stable currency, the Cyprus pound, to another strong currency. The situation today of an economically weak, heavily indebted, Cyprus is not comparable. Any hint that a member of the Eurozone was preparing for a unilateral exit, to drop the Euro and adopt a new currency would have widespread financial and political repercussions. The idea that this could be done quickly and with little outside attention is completely unrealistic.
The necessary planning for such an exit could hardly be kept secret. There would be debates in parliament. Plans would have to be made for a new currency, i.e. new banknotes. When Cyprus replaced the pound with the Euro, months of preparation were required, including the reprogramming of bank computers, changing ATM machines and all coin operated machines, distribution of new notes to literally thousands of outlets. In short, the mere intention to exit would be communicated to all well in advance.
The international rating agencies, reacting to even a hint of a possible exit from the Euro on the part of a heavily indebted member country emerging from bankruptcy, would rush to downgrade that country’s credit rating to junk, if not already at that level . With no access to Eurozone credit and international markets closed to us, devaluation of the new currency would inevitably follow.
Citizens of an exiting country would quickly realise that that the devaluation of the new currency was highly probable. There would be a rush to withdraw money from the banks. Euro banknotes, or nearly any foreign currency, would be eagerly accumulated and stored or preferably sent abroad. A thriving black market in foreign currency and Euros would appear almost overnight. The prices of all imports, cars, household goods, petrol, medicine, even many food items, would soar. Our own tariffs would have to be adjusted (upwards) to take into account the island’s more limited ability to pay with a devalued currency.
POLITICAL ISSUES
Even more important would be the political consequences. Any unilateral exit from the Eurozone would by met with hostility by the remaining member countries. A unilateral exit, or even an attempt at a negotiated exit, would trigger a crisis throughout the Eurozone as doubts about the whole single currency project hit financial markets. If one country leaves, will others follow? An already none too successful common currency union would lose credibility. The Euro itself would plunge raising the price of oil and many other imports to the remaining members of the common currency.
These remaining Euro countries would be anything but well disposed toward the exiting country. Expulsion from the European Union itself would be a virtual certainty. In the case of Cyprus, a small island nation would be isolated in one of the most volatile and dangerous regions of the world.
The political parties (both Cyprus and Greece) proposing a Euro exit have been silent on how they would deal with the likely adverse consequences of such an exit, only some of which are included in the above scenario.
