Existential threat to euro from Greek exit

People queuing outside a cashpoint in Greece Image copyright AP
Image caption A no vote could see Greek banks subject to severe restrictions on cash withdrawals and international transfers for the indefinite future

So whether the Greek government likes it or not, and apparently it doesn't, the President of the European Commission, Jean-Claude Juncker has said that Sunday's referendum is a vote on whether Greece will stay in the euro.

By implication it is also a vote on whether there is any chance of Greek banks re-opening as normal any time soon.

Here is the big point: there is zero chance of the European Central Bank turning Emergency Liquidity Assistance back on - life-saving lending to banks - unless Greeks give an affirmative vote to a bailout proposal from the rest of the eurozone and the IMF, which Juncker sees as a proxy for Greece's monetary future.

As for Athens, most of the Syriza government detests the bailout offer - for the way it pushes up VAT and cuts pensions.

So we will have the bizarre spectacle of a Prime Minister, Alexis Tsipras, arguing both against the bailout and for remaining inside the eurozone - so goodness only knows how he will vote.

And Greek people will be torn between fear and loathing of bailout proposals that will damage the living standards of many of them, and fear and loathing of abandoning the euro and seeing their banks closed sine die.

Given how messy all this is, no-one should be remotely surprised that stock markets have cracked, and that borrowing costs for the eurozone's weaker economies - such as Italy, Spain and Portugal - have all risen.

Image copyright AP
Image caption Global stock markets have fallen sharply

Because Greece is now staring into something of a financial and economic abyss.

A no vote would presumably see Greek banks subject to economy-crushing restrictions on cash withdrawals and international transfers for the indefinite future.

Greece would be careering towards the euro door marked exit, even though such a door was never supposed to exist, let alone be opened.

At that historic juncture, the euro would no longer be a proper single currency for most of Europe.

It would be transformed into a de facto currency peg: the currencies of Spain, Portugal, Italy and the rest might all be called "the euro", but they would once again be perceived as domestic currencies, pegged to the benchmark eurozone currency, the German euro.

And investors would realise that if the going for any weaker eurozone economy got too tough while retaining the euro, well that economy could devalue by abandoning the euro. So at that point, investors would increase what they charge the likes of Spain, Portugal and Italy to borrow, to cover the risk of them crashing out of the euro.

That in turn would undermine the economic convergence so vital to the long-term sustainability of the euro.

To labour this point, a Greek exit would turn the euro into a glorified version of a currency peg, such as the late and not-much-lamented European Exchange Rate Mechanism. And the thing about currency pegs is that they rarely endure.

That is why the drama being played out in Greece could turn into an existential threat to the whole great European monetary and economic adventure.