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As it is Spain’s turn to receive EU aid, the Greek situation is attracting a bit less attention in the media these days. However, the elections this Sunday, June 17th, may well put it again under the spotlight, bringing the eurozone crisis to the next level.
A Greek exit from the euro is indeed judged as an increasingly plausible scenario. Standard & Poor's now believes that there would be "one-in-three chance" of Greece exiting the eurozone. Preparations to face such a scenario are underway across Europe. Bloomberg has recently conducted tests with a new code for the Greek drachma (XGD) that traders were able to see on their screens.
Clearly, the idea of Greece abandoning the euro seems widely anticipated, especially if Greece rejects the ECB's bailout and austerity measures, as the left-wing party Syriza and its leader Alexis Tsipras – who could very well come to power after next weekend’s election – are promising.
Paradoxically, the idea of Greece leaving the euro is apparently "not an option" for Tsipras. In fact, most of the Greek population also seems not to believe the threat of euro exclusion is real.
But how could the Greeks and Tsipras hope to stay in the eurozone while international aid and credit has stopped and the ECB has refused to give more funds without more concessions?
It is possible, contrary to consensus, that Tsipras does have in mind to keep Greece in the eurozone despite other member countries’ attempts to exclude it. After all, such exclusion has no legal grounds in EU treaty texts. The big question becomes: What then would prevent Greece – facing a refusal of EU aid and clashing with the ECB – to begin simply printing euros, while rejecting the austerity, and possibly even defaulting on its debt? Why would an extreme leftist such as Tsipras bother switching to drachmas – with the disastrous consequences for the Greek population and his own political future – when Greece already has the capacities to simply print euros?
Certainly, the idea seems unlikely in normal times and goes against the current European rules and agreements. However, this is a crisis, and it is theoretically very possible. Why?
First, because in case of a clash between Greece and the EU/ECB, the respect of EU rules by Greek politicians may really not be the priority. Especially in a situation of increasing chaos in a country where, for example, a shortage of medicine is taking shape and power cuts are being discussed.
Second, because Greece has the physical means to create any amount of euros it wants. Indeed, by dint of repeating that Greece cannot print its own currency, the politicians and media seem to have been forgotten that the National Bank of Greece does have its own euro printing press – and this in two ways:
On one hand, it can create euros in a few "clicks" under the cover of the opaque Emergency Liquidity Assistance (ELA) program. Greece is already estimated to have created up to 96 billion euros to help its banks using the ELA.
On the other hand, the Greek central bank is able to turn on the printing press the old-fashioned way. As per the EU constitutional texts, printing euro banknotes (and manufacturing coins) has been physically delegated to the national central banks, including the National Bank of Greece. The Mint of Greece (IETA) thus already prints euro banknotes. It has the latest state-of the art printing presses – it just has to keep running them when no one is looking.
Remember, Greece already lied to Europe on the state of its public finances: once in order to enter the eurozone and then again in 2009, triggering the suspicions of investors. Why not lie again about the amount of euros it is creating? The stakes are certainly higher today.
Such illegal money creation recalls what happened in Yugoslavia in the early 1990s, during one of the worst hyperinflations in history when prices increased by the astounding 5 quadrillion percent between October 1993 and January 1994. The Yugoslav equivalent of the ECB at the time had completely lost control over money creation, while central banks in Serbia, Montenegro, Vojvodina, and Kosovo – in a position similar to that of the Bank of Greece – were heavily printing new quantities of Yugoslav currency.
Turning on the euro printing presses in Greece in a similar way would be less painful for the new leftist government than going back to the drachma, as the main effect would be felt abroad. Instead of the government's massive debt balance being paid with Greek savings, it would dilute the purchasing power of the entire eurozone. Although it is impossible to be certain if this is Tsipras' true strategy, it is a risk of which euro investors should be aware.
Valentin Petkantchin is an economic and financial analyst. He holds a PhD in Economics from the University of Aix-Marseille III (France) and is most recently the founder of the Economic Education Initiative (www.economic-education.org), a project aimed at publicizing sound economic thinking through comic books and cartoons.