At the Camp David G8 meeting last weekend, lip service was paid to keeping Greece in the euro zone. But economists who watch the continuing financial crisis in Europe are increasingly coming to two conclusions: Greece is likely to abandon the common euro currency now used by 17 European countries. And when it does, perhaps within a matter of months, there will be a damaging domino effect throughout much of Europe. Not all domino effects are created equal, however. And there are two possible consequences if Greece leaves the euro zone that few observers seem to have considered.
The scenario everyone recognizes is based on Greece reviving its traditional drachma currency. What this means is that salaries and prices within Greece would be converted from euros to drachmas, and then the drachma currency would be allowed to depreciate to make the Greek economy more competitive. The problem comes with debts that are denominated in euros, especially if the lenders are outside of Greece. These lenders would naturally resist being repaid with less valuable drachmas. However, if Greek borrowers have to repay the loans with euros, the debt would become more expensive for them to pay off after the drachma is devalued.