Greece and the €urozone Crisis: Time to cut off the foot?
Following 2 years of turmoil in both Greece and the Eurozone, with the former’s inability to form a coalition government resulting in another election due to occur on June 17th, the world is yet again preparing for the possibility Greece’s exit from the Eurozone.
The Greece national debt currently stands at €355.6 billion (Around 160% of GDP); its economy has shrunk by 27% and the Greek people have withdrawn €72 billion from its banks, in what is being called the silent run. The European Central Bank (ECB) had to lend Greek banks €120 billion in January of this year just to cover this withdrawal in deposit.
Variation in greek GDP and production '04-'12 Source: Reuters
In the last 2 years there have been repeated bailouts and loans. The aims of which have been to prop up the Greek economy and to halt the spread of its toxic assets to larger economies such as Italy, Spain and Ireland. These bailouts have failed at most of their goals with fragility. The bailouts seem to be nothing but paint over a ship plagued with rust.
In fact, the Greek economy is a gangrenous wound which has infected the patient’s foot (Europe’s economy). With the use of loans and bailouts the ECB have tried to restore blood supply so the body can fight the infection and save the foot. However, the doctors must now be considering amputation; so as to halt the spread of the infection to larger economies too large to bail out. David Cameron compared the Greek’s relationship to Europe to a bad marriage stating, “It either has to make-up or it is looking to a potential break-up”.
The objective in leaving the Euro and re-introducing the Drachma, thereby defaulting on its debt, would be to allow its currency to devalue. This would raise import prices, and allow living standards to fall due to economics, rather than politicians’ indecisiveness or austerity measures. Devaluation would also allow Greek manufacturing to be competitive with a drop in export prices. This could allow the Greek economy a way out in the long term. The next step would be for Greece to pass welfare reform, labour market reform (i.e. reduction of union powers similar to Thatcher’s in the 80’s) and cuts, cuts and more cuts to its obese government spending.
This is no short term fix, but this may allow the Greek economy a new start; it could (theoretically) restore its economy within a generation.
In the event of a Greek default, The ECB, UK and IMF would have to secure banks that have significant liability to Greek debt. Also, the ECB and especially Germany, would have to use bailout money originally directed at Greece to re-finance the economies of Spain, Italy and Ireland.
The alternative is for Greece to vote in a new coalition, agree to a new (by no means the last) round of austerity measures to secure the next bailout from Europe and the IMF. Then it must seek major reforms to modernise its economy, whilst finally praying that the German people fail to punish the politicians that have agreed to send their taxes to Athens and not to their local school or hospital.
Something tells me that it won’t be as easy as that.
David Tanner
About the Author
TAY Article with significant contribution from multiple TAY contributors. See 'Browse by author' tab in the top right for the individual contributors. From the 'about us': 'TAY is an independent organisation entirely staffed by young, able and motivated contributors'.
Related Posts
Four More Years. Hopefully Not… →
Why military justice is key to the UK’s defence →
A government beyond the law? →
