A more probable outcome is the imposition of capital controls with the discontinuation of ELA. These capital controls would provide ample time for the Greek government to chart its path and for the Greek people to definitely decide their future inside or outside the euro. More likely, capital controls could end up being long-lasting in the case of Greece.
Capital controls would be less costly for Greece than Grexit. Moreover, capital controls would isolate the Greek system and impose a minimal cost to the creditors as compared to the potential negative consequences of Grexit. The latter two points imply that the Greek government might have less leverage in the negotiations than they appear to think. Unless they were willing to put the Grexit option in a referendum and then prepared to denounce debt upon exit. However, since the latter would have greater cost for Greece than capital controls, it would be unlikely for Greece to go through with this in a rational game setting.
If negotiations fail and Greece has to place capital controls, then they might want to opt for a tax-based form as opposed to quantity controls. That is, rather than imposing absolute capital controls on the quantity of capital outflows Greece could place a tax on capital outflows. This would bring in valuable revenue for the Government. It would also have the advantage of a smoother gradual abolition of capital controls as these tax decreased overtime.
This tax would apply to capital outflows unrelated to the trade account, and it could be designed so as to offer incentives (1) to delay outflows and (2) to bring back outflows within a fixed time limit, say a year, once people feel secure enough.
For example, a 50 percent tax could be announced along with a commitment that this rate will only go down in the future. The initial level of taxation would be key. This should be high enough in order to avoid huge capital outflows and to make it credible to commit to only lower it over time, perhaps at a pre-arranged (but somewhat flexible) pace. In addition, any funds that flow out but are returned, say, within a year, could get a reimbursement of, say, 50% of this tax.
A more flexible design could even allow firms whose business relates to short term movement of funds back and forth, not to be affected. The exact level of taxation, time, and flexibility that is desirable should be decided by the Greek government based on the best available information and with technical help from the ECB and the IMF. Additional complications include its monitoring and the potential for the trade account to be used as a loophole in any case.
The above scenario would offer Greece the time it needs to make up its mind while providing the Greek government with an important source of precious revenue in the meantime. This would not be a first best, but both Greece and the rest of the Eurozone would be better off under this scenario as compared to the Grexit scenario.
*Marios Zachariadis is an associate professor of economics at the University of Cyprus and a member of the country’s National Economic Council. You can follow Marios on Twitter: @MariosZachariad