Question

Q- Grexit or Not?

When the euro was introduced in 1999, Greece was conspicuously absent from the list of the EU member countries adopting the common currency. The country was not ready. In a few short years, however, European leaders, probably motivated by their political agenda, allowed Greece to join the euro club in 2001 although it was not entirely clear if the country satisfied the entry conditions. In any case, joining the euro club allowed the Greek government, households, and firms to gain easy access to plentiful funds at historically low interest rates, ushering in a period of robust credit growth. For a while, Greeks enjoyed what seemed to be the fruits of becoming a full-fledged member of Europe. In December 2009, however, the new Greek government revealed that the government budget deficit would be 12.7 percent for 2009, not 3.7 percent as previously announced by the outgoing government, far exceeding the EU’s convergence guideline of keeping the budget deficit below 3.0 percent of the GDP. As the true picture of the government finance became known, the prices of Greek government bonds began to fall sharply, prompting panic selling among international investors, threatening the sovereign defaults.

Several years into the crisis, the Greek government debt stands at around 180 percent of GDP and the jobless rate among youth is above 50 percent. The country’s GDP declined by about 25 percent. Severe austerity measures, such as sharply raised taxes and much reduced pension benefits, were imposed on Greece as conditions for the bail- outs arranged by the EU, IMF, and the European Central Bank. In addition, people were allowed to have only restricted access to their bank deposits, to prevent bank runs. Opinion polls indicate that the majority of people in Germany, the main creditor nation for Greece, prefer the Greek exit from the euro zone, popularly called Grexit, while some people in Greece are demanding Grexit themselves and restoration of the national currency, the drachma.

Discuss the following points: COULD YOU EXPLAIN IT

Comment

1. What were the socioeconomic issues that caused the economic crisis in Greece in 2010?
2. Through the 2010 crisis, what do you think were the costs and benefits of staying in the euro zone for Greece?
3. What would be the measures that need to be taken to keep Greece in the euro zone in the long run?
4. Would you advise Grexit or not? Why or why not?

Answer 1

1. The Greek crisis was primarily caused by factors that inter alia include-

A. Corrupt political system- The national government concealed the real debt to GDP ratio position in order to obtain loans and cheap credit in Euro.

B. Unproductive expenditure- The government in the Greece spent a large amount of its loan to provide regular pensions and best compensation to government employees. This was apparently done at the cost of productive expenditure such as investment in infrastructure.

C. Depriciation in the value of drachma- The easy loans in Euro terms initially provided a boost to the economic activity. Moreover, beyond a point they added less and less value to the real output and only worked in the direction of price rise; leading to currency devaluation and associated problems of higher costs of loan servicing in foreign currency.

D. Tax evasion- Compelling people to pay taxes has been difficult for government in the Greece. Especially, the wealthier people who have evaded taxes more often. This reduced revenues for the government and in effect meant greater debts.

2. The costs associated with staying in eurozone may be as follows-

A. The national government would have no liberty to decide majority of its expenditure.

B. The socio-economic crisis of joblessness may further deepen with a strict austerity programme in place.

C. The social security system of Greece may collapse as a result of government austerities.

While the benefits of staying in the eurozone are as follows-

A. It provides a well charted path to come out of the crisis.

B. Drachma is not a valued currency due to the deep crisis, hence it will find not much value in exchange rates system. Whereas, Euro is still a robust currency, providing advantage to Greece to trade in it.

C. The eurozone provides a range of economic and diplomatic benefits to Greece.

3. Measures needed to keep Greece in eurozone in the long run-

A. Providing avenues for profitable terms of trade for Greece.

B. Providing policy instructions and overhoverhaul of economic system to build resilience to withstand future shocks.

C. Opening up the avenues for business and jobs for Greek people in the eurozone area.

4. I would not advice grexit for the following reasons-

A. Staying in eurozone provides opportunities for Greece to embark on a path of course correction and getting out of this crisis.

B. As part of the eurozone it has the advantages of access to financial help which would not have been available otherwise.

C. The structural reforms mandated by eurozone are in the long run interest of the Greek economy as they overhaul economic system and build resilience in the economy.