What would happen if Greece exited the eurozone?

Odysseus, hero of Greek mythology, once had to navigate his ship between two horrible monsters. Rather than risking the loss of his the entire vessel to Charybdis, he sailed past Scylla and sacrificed part of his crew.

Modern-day Greeks face a similar dilemma. Should they endure the austerity measures demanded by the European Union and the International Monetary Fund (IMF) in exchange for bailout funds that will be used to pay bank debts and allow the country to stay in the eurozone? Or should they reject the spending cuts and lose the bailout, requiring that they leave the currency union and return to the drachma they so happily abandoned in 2001 (at an exchange of 340.75 drachmas for each euro).

With a re-do of national elections scheduled for June, and anti-bailout parties enjoying substantial popular support, there’s a real possibility that Greece could rebel against the deep spending cuts demanded by Germany  – which makes it a possibility that Greece’s days in the euro could be numbered.

What are the mechanics of a country leaving the euro?

Thanassis Stavrakis/AP
A European Union flag flies outside the Stock Exchange in Athens on Friday, May 25.

The EU founders did not anticipate an exit by any member states, so there are no legal procedures for such a case. Given the immense significance of the common currency – it is seen as the most important symbol for Europe's political unity – considering a Greek exit was anathema in European capitals until very recently.

At their first meeting in Berlin on May 15, the new French President Francois Hollande andGerman Chancellor Angela Merkel both stuck to that line, proclaiming a common will to keep Greece in the eurozone. But on the same day, IMF chief Christine Lagarde warned that if Greece did not honor its budgetary commitments, Europe should be prepared for a Greek exit, “which must be orderly.”

It is unlikely that the eurozone will directly kick Greece out, both because there is no legal basis for it and because it would send the wrong signal. "Solidarity" is a term Chancellor Merkel has used often when referring to Greece. But Europe can create conditions that practically force Greece to exit on its own. 

A large majority of Greeks – including those who reject the conditions of the bailout – oppose leaving the eurozone, according to recent polls.

It’s possible that, after June elections, a new Greek government will refuse to comply with requirements for receiving the bailout, ending payments to Greece and prompting the European Central Bank to stop the recapitalization of Greek banks.

To prevent its banking system from collapsing, Greece would have to leave the euro, switching to its new-old currency to provide funds for its banking system. If this happened, it's unlikely Greece would ever pay back its debt.

“Leaving the euro means we have to default first,” says Nicholas Theocarakis, economist at the National University of Athens. “There is no way we can pay back debts made in euros in any other currency, say the drachma.”

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