The Lessons for Greece’s Economy From 70 Currency Union Breakups

Greek Economy

Wallets decorated with euro and US dollar banknote designs hang from a street vendor's store in Athens.

Photographer: Kostas Tsironis/Bloomberg

The hardliners in Athens may have a point.

History suggests Greece leaving the euro wouldn’t make catastrophe inevitable, says Adam Slater, lead economist at Oxford Economics Ltd.

More than 70 countries and territories have quit currency unions since 1945 and yet only a small minority have then suffered large losses in output, he said in a recent study. Most of these, such as in the former Yugoslavia, can be explained by other shocks like civil war.

While Greece’s gross domestic product could still slump about 10 percent, the decline could be limited and the economy may have undetected advantages that allow a decent recovery.

“The most likely outcome if it leaves is that there will be a significant initial drop in GDP, but the evidence from the past suggests there could be a strong rebound,” said Slater. “A lot depends of how the transition is managed.”

Czechoslovakia, for example, dissolved its monetary union in 1993 over the span of just five weeks. The output of Slovakia fell less than 4 percent that year and by 1995 was 10 percent higher than it had been in 1992.

Growth Impact

Slater’s calculations show that in economies changing currency unions, median growth averaged 2.7 percent in the year of the breakup and 3.2 percent from the year before cessation to the year after it.

Overall, growth was positive in about two-thirds of the exits and negative in about a third for the year it occurred. Very negative outcomes with output crashing 20 percent or more occurred just 8 percent of the time. Latvia suffered the most when it went solo from the Soviet Union. Oman fared the best.

“Output can be surprisingly resilient in the face of currency union exits and the severe financial crises that sometimes accompany them,” said Slater.

So how would Greece fare? Slater reckons it would benefit as a weaker exchange rate spurs exports and monetary conditions loosen.

By defaulting, the government could also find fiscal space to recapitalize banks and any stock slide is unlikely to hurt households given just 2 percent of their financial assets are in equities. Once the shock of Grexit has passed, markets could even rally.

Such an argument gives support to those Greeks who argue they could walk from the euro with little long-term cost to their economy.

“There is an upside risk -- if reasonably well organized, historical experiences suggest Grexit might see a much smaller initial drop,” said Slater. “There could also be some upside in financial markets.”

For more, read this QuickTake: Greece's Fiscal Odyssey