The drachma could be coming back. And Greek businesses are worried.
Greeks have long dismissed out of hand the possibility of a 'Grexit.' But with the EU framing Sunday's vote as a referendum on the euro, they've had to confront life without the euro.
Athens and London
Ninety-five percent of what Kostas Koinis sells in his family’s orthopedics store, on a once bustling corner of central Athens now surrounded by shuttered storefronts, is imported. The beds come from Germany, the crutches from France, the wheelchairs from Denmark.
Business had been booming over the past several years, as Greece's population has aged. But in the past few days, as Greece imposed capital controls and became the first advanced economy in the world to default to the International Monetary Fund, that business has dried up. And now, Mr. Koinis is faced with the once inconceivable possibility that Greece will ditch the euro for the drachma.
Were that to happen, he fears that his business, in operation for a quarter century, would go belly up. “The products would be too expensive for the average Greek to buy,” he says glumly. And he would not be alone.
Though some 70 percent of Greeks say they want Greece to remain in the eurozone, a majority says it plans to vote against a bailout plan in a referendum Sunday – a result that European leaders say is tantamount to voting for a "Grexit" from the currency union. And while some Greeks and economists argue that the struggling nation will be better off in the long-term outside the euro, most Greeks are afraid that returning to the drachma would cripple businesses, drive up unemployment, and generally make Greece's already bad situation even worse.
It’s a prospect that no one wants to even contemplate.
“This company would be destroyed,” says Leonidas Pourikas, whose family’s business, selling knives and cooking ware off a wealthy plaza in central Athens, has been in operation since 1872.
The cost of a Grexit
Already companies are suffering. Banks were shut down for a week starting Monday, and anyone using a debit card to get money out of the nation’s coffers is limited to 60 euros ($66) a day. While supermarkets and gas stations are full, as a panic mentality sets in over Athens, other stores are essentially empty.
The Greek government is now seeking a new bailout deal, and has reportedly agreed to most of the conditions it rejected before previous talks broke down over the weekend. But Prime Minister Alexis Tsipras vowed in a television address today to push forward with a referendum, telling the public that it does not amount to a vote to leave the eurozone.
No matter what unfolds or how the vote goes, the prospect of a Grexit is on everyone's minds.
Past scenarios indicate a rocky road ahead. After Argentina defaulted in 2001, for example, its peso lost three quarters of its value against the dollar as the government abandoned a 10-year currency peg in January 2002. Imports plunged 50 percent that year, while GDP contracted by 11 percent and unemployment jumped to 22 percent. Soaring exports and a boom in commodity prices helped the economy rebound, with GDP growing more than 7 percent a year, on average, between 2003 and 2011 – but Greece doesn’t have commodities.
Ipek Ozkardeskaya, a market analyst specializing in currencies strategy at London Capital Group, says that a return to the drachma would be as painful. Initial estimates show the drachma could devaluate by 50 percent in relation to the euro under current conditions.
This would hit importers first, and ripple out across an economy in which 25 percent is imports. Mr. Pourikas's family, for example, used to craft their own knives and scissors in the 19th century, selling them to farmers and fishermen. But over time, the cheap costs of imports made their products uncompetitive. Today they import 100 percent of the knives, frying pans, and other cooking goods in their store.
If Greece exited the eurozone, he says he would have to charge his customers, 70 percent of whom are chefs, at least 50 percent more. “That would happen directly overnight," he says.
'The price to pay'
There would be some winners – the tourism industry could offer cheaper prices to foreigners, Greeks with euros abroad would have stronger purchasing power. And some see the long-term gains as the biggest winner.
Michael Kitson, an economist at the University of Cambridge, says that the probability of a euro exit is not high, but it would be the right path for the economy. “At the moment, Greece has no levers to pull to try and generate economic growth. ... It is being asked to put the brake on when what it needs is to press the accelerator,” he says. “Staying in the eurozone may mean very sluggish growth for 15 years and high unemployment. Although there will be a lot of turmoil, I think that is the price to pay.”
Many Greeks, facing unemployment and cuts in salary, agree the price is worth it. Katerina Mitseli, an IT specialist and mother of two who was standing in line to pull out euros from the ATM on a recent day, says she is definitely voting "no" in the referendum on Sunday. “We are not afraid,” she says. “We don’t agree with a plan, it will be a disaster for us. We just want to be free.”
But others think the stress would be too much to bear, and it wouldn’t just impact importers. Michael Arghyrou, an economist at Cardiff Business School, estimates that unemployment under a Grexit could go up ten percentage points, to 35 percent, and shortages of products would become common. The interest rates on loans would go up too, in line with inflation.
A blurry picture
These kinds of doomsday scenarios have given impetus to a new type of protest in Greece – pro-Europe rallies. Thousands gathered in front of the Greek parliament Tuesday, bearing Greek flags in support of staying with the eurozone.
But in the first polling done on the issue, by ProRata and published today, showed that 46 percent of Greeks would vote “no” to accept more austerity in favor of a rescue deal, compared to 37 percent who would say “yes,” though support was much higher before capital controls were implemented on Monday, when it was 57 percent saying they intend to vote "no."
These numbers are hard to decipher, because many people who plan to vote “no” still want to be in the eurozone, and many of those who will vote “yes” still vehemently disagree with the austerity demanded by creditors.
Mr. Koinis, for example, backed Mr. Tsipras’s left-wing Syriza in January, and even backed him in saying “no” to creditors over the weekend, when Tsipras called the snap referendum.
But by the time capital controls were implemented on Monday, and traffic in his own shop dried up – he was unable to import the 15 nursing beds he was supposed to get from Germany on Monday, and shoe sales plummeted from 30 pairs a day to five – he’s done a full U-turn.
“The problem is no one is telling us what will happen if we vote ‘yes’ or ‘no,’” he says. Operating in unknowns, he’s siding with “yes.” “This store has been empty all day. That impacts my thinking, my point of view. Everything has changed.”