Wednesday, May 9, 2012

Will Greek Exit From Euro Lead to Tourism Limiting Riots

It seems inevitable that Greece will exit the Euro. The kicking the can down the road is coming to an end with there seemingly being little likelihood that a government willing to agree to the Troika imposed austerity measures is electable. It also seems unlikely that the Germans will compromise on making changes to the bailout package. Thus, without a bailout, Greece will run out of money within a few months. This default will lead to converting back to the Drachma .

Conventional wisdom seems to suggest that about a 50% devaluation of the Drachma versus the Euro will  ultimately be the result. However, since Greece is not self sufficient in energy or food supplies, this will result in higher costs, with a doubling of the price of some imported goods. It would not be terribly surprising if the higher cost for food and energy led to civil unrest.

A huge potential benefit to the Greek economy of a devalued Drachma is that it makes traveling in Greece cheaper. Greece could benefit from a huge tourism boom due to exiting the Euro. However, if the consequences of exiting the Euro are turmoil and chaos, tourists will stay away. Thus, in this worst case scenario, Greece would not achieve much of a bump in tourism, but would incur higher costs for imported goods. The assumption that a devalued Drachma would lead to a tourism boosting economic revival may turn out to be wishful thinking. The downward spiral of the Greek economy may continue without much help from the tourism industry.

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