Greek banks did not open for business Monday morning. The vast majority of them will stay closed for at least a week, with only a handful opening for pensioners to make withdrawals. This abrupt bank holiday could well be the beginning of the end of Greek membership in Europe’s monetary union. Greece has until 6 pm ET (1 am in Athens) to make a 1.6 billion euro payment to the International Monetary Fund, a deadline that Prime Minister Alexis Tsipras confirmed would not be met. In a desperate attempt to forestall a crisis and end what was an already ongoing bank run, Tsipras ordered a week-long bank closure and instituted significant capital controls – limits on ATM withdrawals and an absolute moratorium on moving deposits out of the country.
On July 5th, the Greek people will vote on a referendum over accepting the terms of the European bailout proposal. A “No” vote, which the ministers of the Greek government are urging citizens to cast, would signal popular refusal to accept more austerity. Though Tsipras claims that “No” could be used to bolster Greece’s negotiation position and achieve better terms from Greece’s creditors, a Greek exit from the eurozone is the expected practical result. The troika of the IMF, the European Central Bank, and the European Commission is unlikely to offer further assistance not accompanied by the preferred means of austerity, and without additional bailout funds Greece cannot pay its debts.
If borrowing money is not an option, then Greece will have to print it. Without a significant capacity to print euro notes, Greece would have to revive the drachma in order to obtain this aspect of monetary policy. Most agree that this would cause the immediate situation to worsen, as Greek unemployment would rise even higher than its current 25.6% and the value of the new currency would plummet. At this point, any hint of consensus among observers is lost. Some look to Iceland as an example of a country that paired fiscal austerity with monetary devaluation to achieve economic recovery after a deep recession, while others think Greece’s current situation is too dire to be alleviated quickly.
Even at this late stage, though, concern over a possible “Grexit” might be premature. The euro remains popular in Greece – even if the austerity that accompanies it isn’t – and betting markets have “Yes” as a slight favorite in Sunday’s vote. A “Yes” victory would almost certainly lead to Prime Minister Tsipras’s resignation and new elections, as the Syriza coalition came into power on a promise to end austerity. Austrian Finance Minister Joerg Schelling raised the specter of a complete divorce if “No” were to prevail, questioning whether Greece could reject the euro and remain in the European Union. So far he remains alone in suggesting this possible outcome, but there are serious strategic implications to Greece’s upcoming decision.
President Barack Obama and Treasury Secretary Jack Lew have each spoken to European leaders about the importance of Greece keeping the euro. President Obama and German Chancellor Angela Merkel “agreed it is critically important to make every effort to return to a path that will allow Greece to resume reforms and growth within the euro zone,” the Washington Post reported. Secretary Lew expressed the US interest in financial stability, even at the price of “potential debt relief.” This echoes earlier statements from a senior NATO official who explained that the Greek debt crisis could not be viewed solely as an economic issue.
Indeed, economic ramifications of a Greek default for the rest of the world may be slight. Global stock markets opened with a drop Monday morning, following the announcement of capital controls and the extended bank holiday, but seem to have leveled off in the time since. Developments have occurred slowly enough that financial institutions enjoyed ample time to limit their exposure to Greek volatility, and the earliest Greek bailout was used to shore up private banks that held large amounts of Greek public debt. Regardless of potentially minor American costs of a Greek default, however, the overriding US economic interest is in a unified and stable eurozone economy that includes Greece as a full member.