Exiting the euro would entail a dramatic decline in Greece’s gross domestic product, a fearsome increase in prices and a temporary improvement in the country’s competitiveness that would quickly evaporate, a report by the International Monetary Fund warns.
The IMF analysis suggests that a return to the drachma would signal an abrupt change to the lives of ordinary Greeks. Notably, the downward shift for the economy by the end of the decade would be considerably worse than what is expected after the application of the memorandum that Athens has signed with its international creditors.
With the drachma, the country would suffer a crash landing before slowly working its way up in the future. By contrast, Greece will have better results through a gradual fiscal adjustment if it stays in the eurozone, the Fund believes.
The IMF report is an appendix to the new memorandum that Greece has signed with its creditors and estimates that an exit from the euro would reduce the real exchange rate by 50 percent within 2012. It also forecasts that such a scenario would also lead other countries out of the eurozone and inflict a serious blow to the bloc’s banking system.
Leaving the euro would also see the Greek debt swell considerably, as part of it would remain in the strong euro and would have to be served by a weak national currency.