The past few weeks have been a nightmare for the Greek economy, which is a bold statement given the near-permanent state of crisis the country’s economy has been in for over a decade now. Greece’s economy began its downward spiral after the country adopted the euro in 2001, but plummeted into severe debt in 2010 when its debt surpassed its economy and the country requested a formal bailout from the EU. Mass protests sprung up in the face of government-imposed austerity measures as the citizens rebelled against higher taxes and cuts to pensions and wages. Yet despite the government’s best efforts at austerity, the nation continued to slide further into debt with unemployment soaring until it was forced to request a second bailout.
The most recent crisis for Greece came with the prospect of extending the current bailout under the newly elected Radical Left party (Syriza). Syriza had promised the Greek electorate an end to austerity and needed the four-month extension to keep their new government afloat.
Drama ensued as new Greek finance minister Yanis Varoufakis refused the terms for extension offered by the other Euro zone members and panicked Greek citizens withdrew money to the point of near-collapse for several banks. Finally, newly elected Greek Prime Minister Alexis Tsipras stepped in, forcing Varoufakis to accept the extension as it was being offered. While the German financial ministry entered negotiations with the intention of preventing a Greek exit from the euro (a “Grexit,” as it has been termed), by the time an agreement was reached on February 20 they were prepared to let Greece go if that was what the country wanted to do.
This is not the first time the Euro zone has considered dropping one of its members. In 2004, Greece was almost forced to leave the euro after the Athens Olympics dealt another crushing blow to the country’s economy. The ten days of negotiations brought this possibility once more to the forefront of discussion, with many articles written in defense of both positions.
Some economists, such as Professor Costas Lapavitsas, a Syriza MP, maintain that the only option to save the Greek economy and “beat austerity” is to withdraw from the euro. He cites falling industrial output, retail sales, and prices as symptoms of “an economy in a deflationary spiral with little or no drive left to it. “Against this background, insisting on austerity and primary balances is vindictive madness,” Lapavitsas says. Greece therefore “must be truly radical.”
Lapavitsas believes strongly in the importance of the public support garnered by Syriza’s promise to relieve some of the enormous pressures on the Greek people caused by austerity. In his opinion, it is more important to maintain the good will and trust of the Greek citizenry and fulfill the promises made upon the party’s election, than it is to maintain good relations with the rest of the Euro zone.
British economist Roger Bootle agrees with the assessment that staying in the euro would cause more harm than good for Greece, although for primarily economic reasons. According to his analysis, IMF strategies of internal deflation for Greece will only lead to more misery because they would reduce the monetary value of the country’s GDP. Traditional strategies of “fiscal tightening with a devaluation of the exchange rate” aren’t feasible in Greece because they share the same currency as the rest of the euro zone and therefore have no exchange rate to devalue. Others, such as former head of the U.S. central bank Alan Greenspan, argue that a “Grexit” is inevitable. In his view, trying to hold the euro zone together at this point “is putting strain on everybody,” a strain he believes the EU would be better off without.
At the same time, none of the other 18 members of the euro zone are willing to bid Greece farewell. A Grexit would do far more than simply save the integrity of Greece’s new ruling party: it would set a precedent for other countries to leave the euro as well.
At this point in time, there are no protocols for leaving the euro zone, as no country has ever attempted it. Many countries are less than satisfied with the single currency, and indeed many were reluctant to adopt it in the first place, but none have attempted to leave yet thanks to “simple inertia,” in the words of economist Tim Worstall.
If Greece were to set a precedent for leaving the euro zone, what would be the result? The countries at highest risk for their own euro exit are known as PIIGS: Portugal, Ireland, Italy, Greece, and Spain. Cypress also represents a high risk, although it is excluded from the acronym. The fear is that if Greece decides to exit the euro, the other PIIGS countries will follow soon behind, which could ultimately spell the end for the euro itself. In such a case, the financial stability of Europe’s healthy economies would suffer severe damage, especially that of Germany. The destruction of the euro would also bring back all the issues of international trade and commerce that the creation of the single currency was meant to resolve.
So should Greece leave the euro zone to protect its own economy, or fight through austerity to preserve the integrity of the European economy as a whole?
My first reaction would be to suggest an immediate Grexit, if only to relieve the terrible financial pressure on the Greek citizens. But there is no guarantee that a return to the drachma would solve Greece’s debt crisis either. Some economists have expressed fears that it would result in severe distrust for the new currency and subsequently an untaxed black market trade that would prevent the government from raising enough revenue to sustain itself. The country’s GDP would plummet even further from where it currently stands, and protestors would take to the streets once more.
This seems to me an overly apocalyptic view of a potential Grexit, but the point remains that nobody can predict how a change in currency will effect Greece’s economy, whether for better or for worse. It also stands that the euro itself is on the rise. Although it has suffered deeply for the past few years, the euro zone is currently on its way towards recovery. To risk breaking it apart now would seem contrary to progress.
Despite the harsh effects of austerity on the Greek populace, at this point, Greece should attempt to wait out the storm. Tsipras’s government deserves the chance to pull Greece out of debt within the euro before more radical measures are taken. If it seems the government will be unable to end austerity and protect their nation while remaining within the euro zone, then a Grexit is the next best option.