On July 5 2015, the Greek people took to the polls to vote on the economic future of their country. 61% of participants voted to reject the bailout conditions proposed by the European Commission, the International Monetary Fund, and the European Central Bank, also colloquially known as the Troika. There was 62.5% voter turnout. As a result, Greece and the European Union (EU) must come back to the negotiating table, or Greece will have to leave the Eurozone and adopt a new currency. The referendum was just the latest symptom of the European debt crisis afflicting the EU, which itself is an offshoot of the 2007 global financial crisis that rocked all corners of the financial world, and that we are still recovering from today.
The Greek debt crisis began in 2009, after the newly elected Greek government revealed that previous governments dating back to the early 2000s had used a variety of creative accounting techniques to underreport their annual national deficits and debt levels. Having already been weakened by the American housing bubble collapse and the subsequent global financial crisis, investor confidence in Greece plummeted, and Greece found itself in a position where its debt was unsustainable and that it would eventually default on its loans. In the ensuing chaos, the Troika put together a substantial bailout package for Greece to ensure it did not default on its loans. This bailout was conditional on austerity measures to be implemented by Greece to control its deficit level. Since the original package was delivered in 2010, there have been four additional bailout packages that have been given to Greece.
Greece alone does not make up a large portion of the Eurozone’s economy; it has a relatively small population and GDP compared to the rest of the Eurozone. However, Greece is also not the only country in the Eurozone that was suffering from high debt and deficit levels. In 2010, Ireland, Portugal, and Spain in particular also had debt levels that were close to default risk. Italy was also dealing with high debt, but was in better economic shape than the other countries. The worst case scenario for the EU was Spain defaulting on its debt, as Spain actually makes up a significant portion of the EU’s economy, with a relatively large population and GDP. The Troika ended up bailing out all of the most at risk countries to some extent.
A large reason why economically weak Eurozone countries are at risk of default is that they use the Euro as their currency. If each country had a national currency, they would have more control over their currency and the money supply. If their debt got too high, they would have additional tools to combat it, such as devaluing their currency or raising inflation. While these are economically harmful, the national debt would remain manageable. However, Eurozone countries do not have these controls, and thus are much more restricted in what they are able to do to manage their economies.
Today, the debt crisis has largely passed. Ireland and Portugal have successfully gone through their austerity measures, and Spain has passed the risk of default. Greece remains the most pressing threat at this point. However, though the spectre of sovereign default has diminished, the EU is not out of the woods yet. The decisions surrounding Greece can still have far reaching consequences for the rest of the EU.
There are two main choices regarding the relationship between Greece and the EU right now. Either another bailout package is negotiated and Greece remains in the EU—at the cost of more austerity measures—or Greece leaves the Eurozone, abandons the Euro, and adopts a new currency or, more likely, returns to their previous currency, the Drachma.
If a new bailout package is negotiated, the world returns to the status quo, and Greece will continue to try to reduce their deficits. However, this has proven to be a long process, and while Greek economic health has improved in the last five years, it is still a far cry from being able to stand on its own. A new bailout package signifies that the EU will accept Greece as an economic drag for years, possibly decades to come. However, Greece will remain in the EU, and continue to use the Euro.
If an agreement cannot be reached, then Greece will most likely exit the Eurozone, an unprecedented move. Greece would move to its own currency, which it will have control over and be able to pay its debts by heavily devaluing their new currency. This brings its own risks, such as hyperinflation, but at least Greece would not be at risk of default and would have more control over its own economic future. Additionally, the rest of the Eurozone would no longer be committed to bailing out Greece from its own crushing debt, and the economies of other Eurozone countries would improve.
However, the EU does not want Greece to leave the Eurozone for several reasons. First of all, it sets a bad precedent for other countries who might also be inclined to leave, and it’s possible that the EU would become less unified and integrated, eventually collapsing. The Euro would lose strength as more countries stop using it as a common currency.
Germany also would not want Greece to leave the EU. Germany is one of the strongest national economies in the world, and is the primary economic engine behind the EU. The way the EU is currently structured, Germany benefits from being a member by the power it holds over the other members and also by having access to easy foreign markets in the form of the other countries. Losing Greece would mean losing access to an export market which would hurt the German economy.
There are two main decisions for Greece and the EU to choose from: either Greece accepts another bailout package and additional austerity measures, or Greece rejects it and most likely leaves the Eurozone, taking control of its economic future. No matter which decision is reached, only one thing is certain: Greece faces an immediate future marked with hardship. It will only get worse before it gets better.
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