It is widely accepted that a return to the drachma, involving a major fall in the exchange rate, would, on average, impose heavy costs on ordinary Greeks. This may indeed be widely accepted, but it happens not to be true.

There is a serious lack of understanding of the economics of devaluation – even in some surprisingly high places. What passes for wisdom on the subject is heavily influenced by the experience with fixed exchange rates, which the UK, and most of the world, gave up in 1971-72. In the classic cases, when countries resorted to devaluation it was because of a “balance of payments” crisis, an excess of imports over exports.

Typically, the economy was at full, often over-full, employment. Essentially, there had been a binge, involving rampant spending by governments or consumers, or both. Hence it would only be possible to boost exports and/or reduce imports to shrink the deficit by cutting government spending, investment or consumption. Accordingly, in many cases, including the devaluation of sterling in 1967, the drop of the currency was accompanied by spending cuts, tax rises and credit restrictions.

That undoubtedly resulted in lower average living standards. It had to: fewer resources had to be devoted to providing for domestic citizens so that more resources could be shifted into producing exports.

But Greece is not at full employment. Since 2008, it has suffered a 25pc fall in GDP. Unemployment is at 25pc. A lower exchange rate is not needed to improve the balance of payments. Indeed, last year Greece ran a surplus. The lower exchange rate is needed to boost demand.

How would this work? If a lower exchange rate encouraged increased net exports, as both theory and experience suggest it would, this would generate extra income. The beneficiaries – companies exporting and those producing goods and services competing with imports, and the people employed therein – would increase their spending. Moreover, instead of devaluation being anticipated and feared, once the deed was done, confidence would return. Spending, output and incomes would all increase, drawing in imports to match the increased exports and providing the wherewithal for increased living standards.

Look at it this way: if Greece manages to produce extra GDP as a result of a devaluation, who will enjoy the benefit? The answer is not foreigners. Greece does not need to export more without importing more. It is Greeks who would benefit.

David Fuller's view

I assume Greek’s shipping and tourist industries would benefit from Grexit.  Additionally, a significant amount of cash which has fled the country over the last year or more would most likely return.

I have always maintained that while the Euro remained Europe’s main currency, with additional countries able to join it, some others would inevitably leave.  However, Euroland’s unelected bureaucrats and the leaders of most EU member states appear to regard the possibility of Grexit as a dangerous precedent.  If that public view is also held in private, then some sort of compromise deal to keep Greece in the single currency will be agreed, for better or for worse. 

Euroland’s stock markets have been dragged lower by Grexit uncertainty but would most likely steady following an orderly resolution.    

(See also: World leaders plead with Greece to make bargain as ‘time is very short’, also from The Telegraph.)