Please Note: Blog posts are not selected, edited or screened by Seeking Alpha editors.

Possible Implications Of A Greek Exit From The Eurozone

After causing much uncertainty in the global economy when they initially failed to form a government, Greece has elected a pro bailout parliament. Despite the somewhat ease of market tension, the European Union and the rest of the world are waiting with baited breath for what will happen next in the sovereign debt crisis. Many are not optimistic about the outlook for Greece, who have taken multiple loan packages from the European Central Bank and implemented painful and unpopular austerity measures to put their fiscal house in order. Furthermore, the defeat of Nicolas Sarkozy in France and several members of Merkel's Christian Democratic Union party in some provincial elections have placed the European Council's plans to deal with the liquidity crisis in some question. As many Eurozone members' domestic electorate lose their taste for fiscal discipline and austerity, as evidenced by the election of many socialistic opposition parties, it seems as if the European populace has lost the political will to deal with these pressing debt issues. Instead of seeking consensus to keep the Greeks in the Union, perhaps European leaders should prepare for the Greek exit from the Eurozone. This article intends to illustrate what could happen if the Greeks leave the Eurozone, some possible effects on Greece domestically, and the outlook for the Union as well.

The Maastricht Treaty doesn't actually provide a mechanism for expelling a country from the Union, even a fiscally irresponsible one, so it will either have to be rewritten or significant pressure placed on the Greeks to leave. The more likely course of action is that the Greeks will leave of their own accord. Despite a recent poll saying the majority of Greek citizens saying that they want to remain in the Union, they are sliding deeper into recession and domestic unrest has almost reached critical mass. The massive pension cuts and layoffs are extremely unpopular and nearly one fifth of the country is unemployed. Conventional economics asserts the fastest way to grow out of a fiscal crisis is to devalue currency, making exports cheaper and increasing demand, but that can't be done with a common currency. This crisis has shown the weakness of the Maastricht Treaty, in that it has provided for a monetary union but does not allow for fiscal controls on public debt of member states.

So the next logical question is what happens to Greece itself if it leaves the Eurozone voluntarily? While seemingly the best course of action for the embattled nation, leaving the euro could be potentially disastrous for the Greek economy. First, in order to benefit from a currency devaluation as conventional economics suggests, a country must have an export-driven manufacturing base. The Greeks do not have that base; most of their economy was built on tourism and services so a currency devaluation would not have as much positive impact as one would think. If they leave the euro and go to something like the drachma, devaluations would be massive, probably in the range of 40 to 50 percent. Second, most industries in Greece have their loans denominated in euros and with such a stark devaluation most of those businesses will default further exacerbating the recession. Third, any banks on other countries that are heavily invested in Greek bonds and loans to Greek companies will be the immediate international victims of a Greek exit. Foreign direct investment may increase if Greece leaves the Union. However, the Greeks have severely damaged their credibility within the international community, both politically and economically so investors are unlikely to take such a hefty risk. Even if foreign direct investment came it would not payoff in the short term, which would be desperately needed during the uncertainty that would follow a devaluation, whether controlled or uncontrolled. Lastly, from a tactical and logistic perspective producing and introducing a new currency takes months and requires a strong state apparatus or political will to do so. That's something the Greeks just don't have and probably will not for the foreseeable future.

If Greece leaves the European Union, the Union itself will also suffer, given that Spain and Italy are also in dire fiscal straits. They also present a much larger threat than the initial Greek problem because their economies are much larger and their banking systems are more intertwined in the financial system of the Union. A country has never left the Eurozone so the territory is largely uncharted. There will likely be massive shock, especially in France, Germany, and Cyprus who have been largely exposed to the Greeks, but have been able to divest some of the assets in a more orderly fashion due to the bailouts. The most pressing concern is the contagion effect on the other economies. The ECB and the IMF will have to inject much more liquidity into the Spanish and Italian economies than they did in Greece, and they may not have to funds to do so or the political will to manage it. If Greece leaves the euro, it will take a major initial hit and cause a panic, taking down everyone who holds Euros in a vicious cycle. In short, it won't be pretty. Policymakers are preparing for contingency plans in either direction even though pro bailout parties have won in elections. The fact that there is talk of a 'grexit' even occurring shows that they are attempting to hedge against the pain.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.