Greece expelled from Eurozone. How?

Here is the first article I dug up, mentioning the possibility of Greece being “thrown out of the Euro”. My question is: How?

Presumably there are a lot of euros circulating in Greece. Shopkeepers that accept euros now aren’t going to suddenly start turning down legitimate money just because some politician in Brussels says so. Are the banks supposed to forcibly convert everybody’s currency into drachmas and stop accepting deposits in euros? Does Greece have some power to print or control euros that they will subsequently lose?

I just don’t understand how, when a currency is in widespread use in an economy, people are supposed to just stop. Is there some other meaning of “expelled from Eurozone” that I’m not getting?

Remember that they had to start using the Euro at one point. Switching to something else would be much the same.

The real consequence is not so much that Greek banks would have to convert everyone to a new currency, but that the Greek central bank would be kicked out of the Euro system, so they could no longer directly affect the currency market and valuation. The Greeks could start a new currency and do whatever they want with it (like devalue it to pay their debts and destroy the world.)

Or they could just continue using euros, much like how some Latin American countries just use US dollars. They just wouldn’t have any control over their currency.

I think “kick out” is a euphemism. The ECB can’t unilaterally make Greece stop using Euros.

But they could stop loaning Euros to Greek banks and use other “sticks” to make life difficult for them. It’d be sort of an interesting exercise to see if Greece banks could hobble along without the support of a central bank. On the one hand, given the state of their economy, it’d be hard to find someone else to loan them Euros. On the other hand, its a small country, so its not like they need that many Euros, compared to the number of Euros out there in the rest of the Euro zone.

Right, but that was voluntary and at least ostensibly for their benefit. This would be an involuntary “we’re punishing you so stop using our money” type of thing. How do you get Greek businesses and consumers to sign on to that?

Why couldn’t they keep their central bank? What powers would the central bank lose? They don’t currently print euros, right? My understanding was that, similar to our Fed, central banks affect monetary policy by buying and selling bonds, and adjusting interest rates on loans to member banks. Am I wrong about that in Greece’s case? Which powers of the Greek central bank would Europe be able to revoke or stop?

Greece’s central bank can’t make Euro’s. Generally, that’s how central banks “set” interest rates. They create enough money so that the interest rate drops to the desired level.

As Chronos notes though, if you have a small enough economy you can get by by using someone elses currency, as some third world economies do. You just don’t get to control your own monetary policy in that case. Greece is small enough for that to work, though I think they’d have a problem with getting enough Euros to run their economy (or what’s left of their economy after the Eurozone kicks them out).

Is there any evidence that the Greeks are reverting to scrip/IO type currencies? They dislike paying taxes, so IOUs are a good way to avoid that.

As opposed to now? :smiley:

Right, sometimes not having control over your own currency is a good thing.

The real problem isn’t Greece (or rather, the OP discussion problem); rather, the problem is how banks work. Banks work on trust - I cash a cheque drawn on Barclays at BankAmerica, they get the money from Barclays, I use a TDbank ATM to withdraw BankAmerica money, they get the money from them, etc. Direct deposit paycheques, mortgage payments, credit card bills paid and charges, etc. - all our transactions flow from one bank to another.

Each bank trusts that, based on government oversight, the other banks are not broke and will pay up when it is time to settle.

So Grece wants to pay its civil service paycheques and pensions. It goes to the banks involved. they say, “sorry, you have no money in your account”. If Greece were on its own currency, its central bank could probably just “create” more money. (Create too much, you get inflation…)

If one or more banks that deal with the Greek government decide to ignore this fact and hand out money anyway, eventually the rest of the banks will figure out these banks have no more money, they are bluffing. (Like writing cheques and shuffling money around to “cover” it.) If the other banks, not wanting to be stuck with the hot potato, stop trusting these lying banks, then the whole financial system collapses like a house of cards.

This is what almost happened to teh USA and teh world afew months before Obama’s inauguration. Every bank was worried that every other bank had so much bad mortgage debt, they refused to trust each other. All your banking stops working, since to pay a bill you have to get money, cash, and take it to whoever you pay your bill. They won’t take a cheque drawn on a different bank. They won’t give you a loan, since there’s no guarantee your employer will have the cash to cover it. and so on…

Normally, a bank in a temporary situation goes to the central bank and borrows enough to tide them over until the temporary cash shortage is over. For the USA, they simply guaranteed everything to get confidence going again.

In the case of Greece, if the European central bank is hostile, they are stuck. Eventually, the banks wills top honouring governmet cheques, payroll, pensions. Other banks will stop dealing with the Greek banks if they do not. If you can’t pay anyone for work or for goods, how do you operate? How do your civil servants eat?

Worse than that, if half your workforce is civil servants (plus pensioners) and they can’t pay mortgages or car loans - how long before the banks themselves go belly up? Taking all the local businesses with them, and everyone’s savings, etc.

Greece has to come to a deal with the central bank before that happens. For now, it’s almost like a game of chicken. WOuld the Euro bank let the Greek economy go down the drain, taking a lot of Europe with it?