What happens if Greece leaves the EU?

Talks between finance ministers broke down after barely an hour of discussion on the Greek crisis yesterday, and Greece remains bullish that it will pay salaries ahead of IMF payments when the big deadline arrives on 30 June.

Neither side wants a Grexit, but EU leaders want major pension and labour reform, and the ruling Syriza party was elected on a directly opposing, anti-austerity platform.

There is little room for manoeuvre. If Greece fails to pay the €1.5bn it owes to the IMF and €3.5bn to the European Central Bank, its only option could be leaving the EU.

So what happens in the event of Grexit?

Return to the drachma

Some economists say that a return to the pre-euro currency would be a coup for Greece, allowing it to pay off debts in less valuable drachmas, shrinking unsupportable debt and stiffing its creditors.

Unable to borrow from other European countries, Greece would simply run out of euros. It would have to pay social benefits and public sector wages in IOUs, or not at all, until a new currency is introduced.

No small issue, considering it currently funds pensions for 2.6 million Greeks and some 600,000 civil servant salaries… and wants to re-employ another 4,000 let go by the last government.

Run on the banks

Money is already being withdrawn from Greek banks at dangerously high levels.

Greek depositors have withdrawn more than €3.2bn since Monday, 15 June, including a staggering €1.2bn on 18 June alone, raising fears of a serious run on the banks.

Capital controls would have to be introduced by the government to stop terrified Greeks trying to empty their accounts of their savings in euros before they are transformed into a new currency with an unpredictable value.

Cheap holidays

The drachma would make goods and services cheaper for people paying in other currencies.

A strong pound would certainly make it an attractive holiday destination for Brits, bagging valuable tourists back from cheaper vacation spots such as Croatia and Bulgaria which have grown in popularity in recent years.

Inflation

The flip side of cheap holidays and cheap exports is expensive imports, which in Greece means food and medicine becoming much more expensive.

Tax receipts would probably fall as the economy contracts, so the government might finance spending by printing money.

Political unrest

It might be pretty and have lovely blue seas and great mezze – but bargain holidayers might give Greece a miss if the nation descends into xenophobia and chaos.

If Syriza fail to save Greece, politics could be devastated. Neo-fascist Golden Dawn and the Communists, which currently have a combined 12 per cent of the vote, could thrive if power vacuum emerges.

It is not unthinkable we could see a return to the street riots of recent years.

Collapsing exports

The Greek economy was growing in 2014, but has shrunk as the country’s government continues to negotiate terms with the IMF and euro leaders.

Outside the euro, Greek businesses which sell abroad could benefit from strong currencies elsewhere, but to make their products in the first place they need to buy raw materials from outside Greece.

These will soar in price when businesses try to buy them with a drachma stunting an already struggling export economy.

Undermine the euro altogether

As Simon Derrick, of BNY Mellon, told the Guardian: “If somebody leaves, it’s no longer a single currency, it’s a fixed-peg exchange rate system.

“Next time a country – Portugal, Spain, Italy – gets into trouble, the question would immediately become, will they be the next to leave? It could set up a very, very slow domino effect.”