ForexNewsNow – In recent weeks, there has been much talk of the possibility of Greece leaving the euro area if it is not able to meet its financial obligations as the EU debt crisis continues to intensify. It’s ironic to think that such a concept was anathema only a few weeks ago, but as rumors swell of a potential Greek default, it appears that more options are being laid out on the euro zone operating table.
Such an unprecedented decision would represent a major wound to euro zone solidarity, and it would be very costly as well. According to UBS analysts, this scenario would cost between 9,500 and 11,500 euros per Greek national, the equivalent of a 40% to 50% decline in Greek GDP.
The collapse of both the banking system (French banks, for example, are deeply involved in the Greek bailout plan) and international trade would plunge the country into a recession that would most likely last for several years.
The restoration of the former Greek currency, the drachma, would be accompanied by a sharp devaluation of Greece’s “old-new” currency. But if this devaluation were to reach more than 50% of the value of the EU’s single currency, all the benefits of the transfer of currencies could be lost because of the potential for runaway inflation.
Beyond the actual financial costs, the political cost of such a scenario could also be disastrous in a country already dealing with a tense relationship between its citizens and the political class.
European influence in international institutions (such as IMF, WTO…) would be permanently affected. “No modern monetary union has ever exploded except because of an authoritative decision of a government, an army, or following a civil war,” a UBS economist noted.
New measures on Wednesday?
Nevertheless, progress is being made and this should be confirmed imminently, Athens has indicated. The Greek government will make an announcement later on Wednesday on new austerity measures it has discussed with international investors, said an official spokesman for Greek Prime Minister George Papandreou’s government.
“As part of our ongoing negotiations, announcements will be made today in the afternoon,” Angelos Tolka said on public television. “We are close to an agreement with the troika,” assured a person familiar with the issue.
Beyond today’s announcement from Athens, currency trading is also likely to be impacted by news from the US Federal Open Market Committee meeting on what steps it may take to give a boost to the flailing American economy.