The European flag flies in front of the Parthenon in Greece – but for how much longer? Photograph: Louisa Gouliamaki/AFP/Getty Images
Julia Kollewe, The Observer, 13/5/12
Two years ago, the prospect of a state falling out of the single currency area was unthinkable. But as the Greek electorate turns against austerity, it is becoming all too easy to picture how breakup might happen.
Mass unemployment in Greece, inflation at 50%, a devastating recession and Greeks heading for the borders – that's the apocalyptic scenario being painted by some economists in the increasingly likely event that Greece leaves the eurozone in coming months.
Greece is small in economic terms: it contributes only 2.2% of eurozone GDP. But withdrawal from the single currency would unleash chaos in the country, and have potentially severe knock-on effects on other euro nations.
US bank Citigroup now reckons there is a 75% chance that Greece will pull out of the single currency within the next 18 months. This would set a precedent, and the eurozone could quickly unravel if other vulnerable members like Spain and Italy were to follow suit.
The fallout from a Greek exit would quickly wipe 20% off Greece's GDP, send inflation soaring to 40%-50%, and see Greece's debt-to-GDP ratio soaring over 200%, say analysts at French bank BNP Paribas.
Such predictions are obviously estimates – the actual outcome would depend on how large a devaluation Greece would take if it reverted to the drachma. Dawn Holland at UK thinktank the National Institute of Economic and Social Research expects a 50% fall in the value of the currency. By comparison, the Argentinian peso lost 70% in value after the country's bankruptcy a decade ago.
The practicalities of unpicking the eurozone are mind-boggling. Philip Shaw, chief economist at Investec, says: "It was bad enough putting the euro together, but splitting it apart, or a little bit of it, would be more complex still. One issue would be what is denominated in euro and what in, say, drachma. Not easy."
But it may be that, however challenging, that scenario will have to be faced. The warning signs are already clear: it is not difficult to envisage a sequence of events over the coming months that would leave Greece no choice but to break away.
