Should Greece Leave The Euro?

Readers Question: Should Greece Leave the Euro?

Arguments for and against Greece leaving the Euro.

One thing is clear, the Greek situation is dire. Government debt is very high, yet extremely harsh austerity  measures have only succeeded in pushing the economy back into recession and leading to much higher unemployment. Within the Eurozone, Greece is hopeless uncompetitive, reflected in a current account deficit of 10% of GDP (5 * bigger than UK’s current account deficit) For more see: Greece Recession

Reasons to Leave The Euro

  1. Leaving the Euro will enable the Greeks to benefit from a devaluation in exchange rate (could be upto 30%). This will help restore competitiveness and reduce their current account deficit 10% of GDP.
  2. It will enable an independent monetary policy, rather than pursuing deflationary policies
  3. To stay in the Euro, Greece is being asked to implement further austerity policies, but these are proving counter-productive to the long term future of the economy; the scale of the spending cuts is also precipitating civil unrest. A few months after initial austerity policies, the Greek debt burden is just as high as it was, and interest rates continue to rise.
  4. The ECB state that Greece need to restore competitiveness through reducing wage costs, but this could entail many years of deflation, high unemployment and low growth. (see: problem of two speed Europe)
  5. There is a lack of political cohesion in bailing out Greece. The Eurozone members are reluctant to fully commit to dealing with scale of Greek losses. There is a sense that EU leaders are only reluctantly agreeing to help Greece and that is after insisting on more strict austerity measures.
  6. Greece should never have been allowed in to the Eurozone. There economy is not harmonised with the core Eurozone economies. Debt, interest rates and unit labour costs are far too high.
  7. Iceland has shown stronger recovery from its financial crisis despite bank defaults and large depreciation.

Problems of Leaving the Euro

  1. It is difficult to leave the Euro, it could lead to capital flight as Greeks move savings and currency offshore into the Eurozone to protect value of currency. See: Could you exit the Euro?
  2. A debt default and decision to abandon the Euro, would be a serious blow to reputation of Greek economy, it could make it difficult to borrow in future (though you may argue that their reputation is already damaged and really  markets are pricing in a partial default)
  3. A Greek exit may put greater pressure on other Eurozone economies who are struggling to raise finance on bond markets.

Conclusion

It is not a time to worry about issues of prestige. The Greek economy is in desperate measures and on the current course it can only get worse. At the moment the strategy seems to be to ‘strangle the economy’ (austerity policies) hoping this will solve the problem of potential debt default. But, it hasn’t worked and I can’t see how another round of austerity will do anything other than cause higher unemployment and lower economic growth.

It’s one thing to say Greece would be better off outside Euro, that is surely undeniable. But, it is more difficult to actually leave. I’m not entirely sure what would happen if Greece left (no one really fully knows as it is unprecedented) However, it may well be Greece’s least worst option.

This post is just a start there may be other issues to consider later.

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