Greek Eurozone Exit

By Kevin Chambers

Some recent headlines indicate continued problems in Greece, so let’s review the current situation and possible outcomes.

The 2008 crash of the stock market in the United States affected economies around the world. In Europe, Greece was the first casualty of the 2008 crash and the epicenter of the crisis in Europe. After a major election in 2009, the new Greek government realized they had a “black hole” in their accounts, and their budget deficit was double what the previous government reported.

During the depth of the crisis, Greece had a deficit of -15.7% of GDP and an unemployment rate of over 27%. The Eurozone leadership agreed to bail out Greece with €110 billion worth of loans, which then grew to €240. Germany, the economic powerhouse of the European Union, was the most important actor throughout the bailout decisions. One of Germany’s requirements for their support of the bailout packages for other countries was a stipulation that austerity measures be enacted in countries receiving aid. In Greece, the government was required to cut its spending by 1.5% across the board and institute a new property tax. Austerity measures were very unpopular in Greece.

Political turmoil plagued Greece throughout 2013 and 2014. Germany stuck to their mantra of “austerity for bailout money.” As Greek politicians tried to work with the Eurozone, austerity became increasingly unpopular with the Greek people. Then on December 29^th, 2014, Greece’s Parliament was unable to elect a president, forcing an early snap election on January 25^th, 2015. This announcement caused the Greek stock market to plummet and yields on their government bonds to skyrocket.

The reason for investor fears was that the presumptive election winners would be the Syriza party. Syriza is a far left, populist, and anti-austerity party led by a man named Alexis Tsipras. If his party were to win, many feared a Greece separation with the euro was imminent. Tsipras did lead his party to victory and was signed in as the youngest Greek Prime Minister in history.

After the election, fears of Greece leaving the euro intensified. The new left-wing government was elected on promises of a radical shake-up of Greek and Eurozone relations. The price of the euro collapsed against the dollar to its lowest level in decades. If Greece were to leave the EU, they would re-establish their former currency: the drachma. This would cause many people to pull their money out of Greece, in Euros, before their money switched to drachmas, anticipating a sharp decline in the drachma’s value as soon as it is reinstated. The Greek government would probably employ capital controls to stem the tide of capital outflows, causing massive inflation in Greece. The spillover effect into Europe would be dramatic. European banks could face another crisis, and the billions of Euros used to prop up Greece’s economy for the last few years would be gone. The Economist called a Greek exit “Europe’s Lehman moment.” Although an exit from the Euro would devastate the Greek economy in the short term, they would once again have control over their fiscal and monetary policy and not be kept in Germany’s economic grasp.

However, it looks as though the probability of Greece exiting the Eurozone is lower, for now. As of March 3^rd, 2015, the Greek government under Tsipras produced a plan that the Eurozone and the International Monetary Fund accepted. The plan allowed for granting Greece a loan extension until June, averting Greek bankruptcy. Greece owes a lot of money, about €142 billion, which is the largest hurdle Tsipras will face. This extension gives the Greeks a 17-week extension on the roughly €30 billion due. Greece has been able to raise some money through some short-term debt issuances, but things do not look good going forward. This graph shows what Greece owes and when. Tsipras is adamant about dismantling the bailout program and finding a path for Greece that gives them more independence. Leaving the EU is still a possible course of action. It will be an interesting summer for European politics.