Greece has spoken – and the answer is NO. More than 60% of Greeks have voted to reject Eurozone cash-for-reform proposals and it’s warned that a ‘NO’ vote would mean a decision to leave the Eurozone. 

Now, Greece is in default on the repayments owed to the IMF (International Monetary Fund).

The Background

• In 2009, Greece’s then-prime minister George Papandreou introduced a series of tough spending cuts to counter spirally public debt, i.e. austerity measures.
• But these weren’t tough enough and by May 2010, the Eurozone had intervened, offering Greece €10billion in exchange for tighter austerity measures.
• In July 2011, a further €109billion was given to Greece via the European Financial Stability Facility and by October 2012, the country was on its fourth bailout.
• Meanwhile, the Greek public was becoming increasingly agitated.
• Unemployment rates soared, workers were striking and civil unrest became commonplace.
• The so-called ‘troika’ – the European Comission, the IMF, and the European Central Bank (ECB) – believed Greece was making some progress in cutting its spending.
• But when Alexis Tsipras and the Syriza party were elected this year under an anti-austerity banner, that all changed.
• Tsipras argued that the tough spending cuts the country desperately needed to balance its books were not worth the human cost.

Why Greece?

Greece isn’t special or unique when it comes to money, but it does have some unique features that have got it to its current predicament.

When it joined the Eurozone in 2000, it already had a high level of public debt and high inflation. In fact, there have been suggestions that the country’s poor financial situation was downplayed somewhat so it could gain entry. The euro currency gave Greece the opportunity to borrow at a lower rate – 2 or 3 percent, rather than 10-plus – but this borrowed money wasn’t used on the structural reforms the country needed to balance the books. Public sector pay doubled and pensions were increased.

Greece also suffers because of massive tax evasion. It is estimated that more than €20billion in potential taxes is lost as a result. It’s a vicious cycle. Greece needs the tax money to pay its public sector workers, but it needs the public sector workers to crack down on tax evasion.

Greece is less competitive than other countries that have suffered financially in the past decade. For instance, there are laws restricting the number of pharmacies or bakeries in a given area. 

Syriza (literally ‘radical left coalition’) coming to power hasn’t helped the market freedom needed to improve GDP, but as Paul Mason, writing for Channel 4, says rather poetically, ‘the Greeks themselves don’t measure in GDP figures – they measure in extra suicides, a falling birthrate, the migration of 100,000 young people abroad, whole streets full of closed shops.’

The Grexit

This brings us on to the Grexit itself. Greece will have to issue its own currency to pay its bills. It’s beyond the scope of this article, but essentially the currency will be devalued against the euro and the country will able to grow because exports will become cheaper. Holidays in Greece will be very cheap.

The Greece economy will have to improve eventually, however, as the benefits of this devalued currency are limited.

No one can accurately predict what will happen to the rest of us if Greece leaves the Eurozone. What’s certain is that the currency markets will move and support for the Euro will drop, which in turn will likely cause a drop in the value of the currencies, which rely on EU trade. By how much we don’t know.

The debt is high but the Grexit does, however, show that it’s possible for other countries to leave the Eurozone, and the result of that is less confidence in the monetary union as a whole.

That said, there is an argument that a Grexit will be good for the Eurozone in the long-term for the same reason that a business will shut down a branch that’s losing money.

(Main content source: Metro.co.uk by Harry Readhead | Other sources: Forbes, Telegraph, BBC)