No mechanism exists in the Maastricht Treaty, or in the subsequent related treaties, to expel a member state from the Eurozone. Some Greeks take comfort from this, believing that they can remain in the Eurozone as long as they like and regardless of the mess in their public finances. They seem to think that Eurozone membership gives them the right to sign a never-ending stream of blank cheques. How wonderful if it were true!

What they have overlooked is that none of the treaties guarantees that every Eurozone bank deposits will repay legal-tender euro bank notes in full. It is wholly conceivable that Greece will remain in the Eurozone more or less indefinitely (in the sense that euro notes are Greece’s legal tender), while the effective insolvency of the Greek state and banking system means that banks do not pay out ‘old’, pre-default deposits at par.

Below in a pdf is a piece drawing on a 1998 paper of mine which tried to answer the question, ‘is monetary union in Europe viable without political union?’.  The piece (‘Inschadenfreude, not in anger’) consists of the section in the 1998 paper on ‘the chain of security’ behind bank deposits, which is the relevant one in present circumstances. The semi-closure of the Greek banking system and the inability of the Greek government to make payments, except on a hand-to-mouth basis as revenue comes in, would be very bad news for Greece and its citizens, at least for a few initial months of disruption. However, it is far from clear to me that this quite plausible outcome would have any major effects on the rest of the world’s economies. The banks in the leading economies have already sold or written down their claims on Greece, and their capital would not be threatened either by ‘Grexit’ or a default declaration accompanied by continued Eurozone membership. Some further contraction in demand might occur in Greece, a nation which represents about 0.4% of world output, but – willy-nilly – Greece would have to run a current account surplus on its balance of payments, since all external credit had been cut off. Life would go on.

By Prof. Tim Congdon

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