Greece Should Not Exit The Euro Zone

In recent years, there has been an ongoing debate over whether Greece should exit the Eurozone or not. The reasons are the seemingly current inability of Greece to compete within the euro currency, its tremendously high amounts of government debt which is on the verge of default, the inability to pull through with the anticipated austerity measures and the acceleration of the downward spiral of the Greek economy. Up to now, a so-called Grexit has not taken place due to repeated bailouts by the EU, represented by the European Financial Stability Facility (EFSF) and the European Central Bank (ECB) as well as the International Monetary Fund (IMF). The debate whether a Grexit should happen in the future is one of importance, as it would not only have many implications on the country itself, but also on the remaining countries in the EU and on the global economy. Many of these implications would affect Greece as well as a majority of other countries negatively and thus the Grexit should be one to prevent. The key points in this context are that firstly, that Greece would suffer greatly from the reintroduction of the drachma due to an immense depreciation and resulting decreasing value of the currency, which would lead to business closures and essentially an increase in poverty. Secondly, the global economy would be affected negatively by a Grexit due to a potential global credit crunch as well as the debt default. Thirdly, there are still measures that can be taken to bring the Greek economy back on track within the Eurozone and these should not be wasted. There are reasons as to why a Grexit would be beneficial, such as long term prosperity of the country, but it will become clear throughout this paper that a Grexit may in fact be very harmful.

As mentioned earlier, a Greek exit from the Eurozone would have tremendously negative effects on Greece itself. Such an act would require Greece to go back to its former currency, the Drachma, expecting devaluation in order to become competitive again. However its not as simple as that; if the drachma is reintroduced it would be heavily devaluated against the euro (M. Arghyrou, 2012) and thus loose its value drastically. The repercussions of this would be imported inflation, ending in double-digit values and in addition, interest rates would increase potentially beyond a level, which would prevent Greece from going back to the international financial market. Many Greek firms rely on foreign imports (M. Arghyrou, 2012). So if the drachma is reintroduced, we can expect to see costs of these imports and loans of foreign currency soar sky high. This in turn would lead to an increase in business closures and thus unemployment. Consequently a supply of basic goods – oil, medicine, foodstuffs, etc. – would fall short and poverty would increase to an even more dramatic level (A. Papadatos, 2015). Furthermore, forcing Greece to leave the Eurozone would mean denying it its only center of reference and stability, being the EMU status (M. Arghyrou, 2012). Accordingly an isolated Greece would arise, lacking policy and institutional credibility, which would wipe out foreign investment completely (which is well necessary for a reform of the Greek economy). As a result of all these impacts, the output/GDP would suffer even more than it already does.

The second main argument as to why Greece should stay in the Eurozone is concerned with the implications for the rest of the world. Firstly and most importantly, a Grexit would create the risk of a contagion of economic instability to other countries such as Portugal, Ireland, Spain and potentially Italy. Greece exiting the Eurozone “will bring chaos, anxiety, and uncertainty as it will scare the markets; and southern Europe will be under pressure” (S. Rehman, 2012). This could lead to a major global recession, driven by two aspects. Firstly, there would be a new credit crunch: the international banking system is largely exposed to European bonds and a collapse of the bond market in the EMU periphery might result in serious balance-sheet losses for all involved financial institutions (M. Arghyrou, 2012), be them states including their tax payers, banks, insurance companies or private investors. Secondly, international trade would suffer: the Eurozone is one of the largest economies and if it enters into a recession, international trade will be suppressed (M. Arghyrou, 2012). This will have huge effects on growth in developed and emerging countries. In fact, in 2014, Greece had a government debt of over 300 billion euros as shown on National Debt Clocks. If Greece is now expelled from the Eurozone, it would have significant effects on the Greek debt that is still to be paid back. If the drachma is reintroduced, the devaluation would take place the very second it is hitting the market and thus Greece would have a debt of around double the amount (in drachma, assuming a devaluation of approx. 50%) than before. As Greece would not have the money (euro) to pay back in the first place, a reintroduction of the drachma will only worsen the situation. Lastly, not all the blame can be brought on Greece. International leaders could and should have been more attentive, but as other countries that joined the Eurozone did not meet standards for debt and deficits, Greece was also allowed to join. Inhumaniarian actions such as the expulsion of Greece would motivate the country to orient itself toward nations such as Russia and China – two nations that seem to have more of a hegemonic point of view towards power, than for example countries in the EU. The aftermath of this motivation is not clear, but it does not seem to be an attractive expectation for the European Union to have one their members beginning a love affair with one of the two mentioned nations (S.O. Staff, 2015).

A third argument that supports the prevention of a Grexit is concerned with the possibilities that are still running, to reform Greece’s economy within the Eurozone. Greek economic and political leadership should take the opportunity to rebuild civic culture that will support stable finances and long-term growth. Greece could implement capital controls approved by the European Commission in order to keep money of foreign investors within Greece (S.O. Staff, 2015) as well as the money of more affluent Greek nationals. Such controls were implemented by Cyprus approximately five years ago, and this measure helped to prevent Cyprus’ exit from the Eurozone (S.O. Staff, 2015). With the planned austerity measures, European growth emphasis should be speedily applied to Greece as the country needs the European effort and solidarity to stimulate growth and the creation of new investments within Greece. Furthermore, the European Union should stand by what it was created for and “prove that peace and prosperity are its future, an future that includes Greece” (K. Hughes, 2012).

However, there are also pressing arguments as to why the Grexit should be executed, the main being that Greece will simply not recover if it stays in the Eurozone due to the current governance of the country. There exists not enough political will and governance capacity to push through the austerity program which would be vital for the bailouts as this is the only way the EU can give even more money to Greece (E. Langenbacher, 2012). Therefore, the austerity policy should not be based on wishful thinking, but instead on correct analysis and real facts. And as of right now, Greece simply is not willing to fulfill the austerity measures because more savings, higher taxes, lower pensions, extreme unemployment and others, are very harmful at least in the short run. But its governance of fiscal behavior, as it is now, is simply unsustainable and thus staying in the Eurozone will not fix any problems, it will just delay the inevitable (M. McTigue, 2012), unless Greece decides to change this behavior. Furthermore, there is a view that Greece should never have been part of the Eurozone in the first place. The reasons for entrance were purely political, rather than economic (which they should have been) and even now it is not the economists who do not agree with the Grexit, but rather the politicians and journalists (A. Papadatos, 2015).

Another important aspect to consider is that Greece’s financial situation could potentially only improve if the drachma is reintroduced. Greece needs the flexibility of its own currency and exchange rate allowing for a devaluation and competitiveness in the exports market (E. Langenbacher, 2012). Of course the fallout would be devastating in the short run, yet in the medium and long run this change may prove to be very prosperous. This is due to the fact that the euro (a strong currency) offers one main advantage and one main disadvantage (A. Papadatos, 2015. The disadvantage is that a country’s exported goods become much more expensive when it introduces the euro and therefore exports of the given country decrease. Imported goods on the other hand become cheaper for the given country and thus consumption of imported goods increases, potentially causing a trade deficit. The advantage of a strong currency is that it tends to attract foreign investment. Investors from abroad want to invest only in strong currencies, achieving satisfactory return on investment. When looking at Greece, we can see that the disadvantage of the euro hit them hard as the country’s citizens were more and more keen on receiving imports, while the advantage was not very prosperous within Greece due to the fact that the euro was an overvalued currency which destroyed exports, foreign investments, tourism and other industries, leaving its economy devastated. Many a view is that the only resolution to the problem is to stop watering a dead flower and let Greece break through the deflationary and austerity spiral. Greece could gradually earn back its position, its growth and its wealth.

In light of the above arguments, I would like to make my point and say that a Grexit would be absolutely devastating to Greece. It may be true that current governance of the country does not make a recovery within the Eurozone easy, but if the right austerity measures are finally executed, the country has a better chance to reform than if it were expelled. The likelihood of recuperation would further increase particularly if somehow, the austerity measures would be supported by additional funding (possible from the EU) to foster economic recovery and therefore GDP growth, e.g. by providing funds for public investments and/or taxation relief for foreign investors. Because reasons for Greece to enter the Eurozone were political rather than economic, the economic side cannot simply recuperate the situation. It is true that through reintroducing the Drachma and thus devaluation a potential competitiveness in the exports market would follow, however it would also mean that Greece is initially “locked out of the global private capital markets or paying such high prices to borrow that economic growth will be a distant memory” (S, Rehman, 2012). Furthermore the firewalls that Europe has build could prevent a major contagion, however a Grexit would have an effect on the global economy regardless due to the potential credit crunch, an influence on trade and over 300b euros of debt default as well as new world dynamics with Greece potentially orienting itself towards Russia and China.

The before mentioned arguments have supported both views albeit the former – a prevention of the Grexit – seems to overtake the latter as it would be devastating to Greece leaving in poverty and devastation. The wishful thinking that was done before Greece entered the Eurozone should not be repeated and thus assuming the reintroduction of the drachma will solve all problems in the medium and long term should be carefully re-evaluated and turned down. However as Greece might possibly run into a liquidity trap by June this year and therefore could fall into an accidental Grexit soon as warned by German finance minister Wolfgang Schäuble on May 9th (Wirtschaft, 2015) – a thrilling story to be continued.

References
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Kallianiotis, John. 'If Greece Stays In The Eurozone, It Has No Future - US News'. US News & World Report. N.p., 2012. Web. 10 May 2015.
Langenbacher, Eric. 'Greece Should Never Have Been A Part Of The Euro - US News'. US News & World Report. N.p., 2012. Web. 10 May 2015.
McTigue, Maurice. 'Greece's Influence On The Eurozone Is Ludicrous - US News'. US News & World Report. N.p., 2012. Web. 10 May 2015.
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