Grexit

In late January of this year the Greek people elected a new government. The Syriza party under prime minister Tsipras has opposed austerity policies and even promised the Greek population that half of the Greek debt will be written off if Syriza is elected.  With a quarter of the Greek labor force unemployed and a debt 174% of GDP, it seems rational for the Greek people to elect a government with such ambitious promises. But can these promises come to fruition?

Over the past week the Greek finance minister Yanis Vaoufakis has been touring Europe in order to re-negotiate the terms of repayment of Greek debt. The international bailout agreement for the Greeks involves a 240 billion euro loan from the European Central Bank, the European Union and International Monetary Fund under the condition that the Greeks adopt budget cuts and economic reform. The budget cuts have led to continual unemployment and falling living standards in Greece. The new Greek government wants payments to be tied to Greek economic growth. In that scenario the Greeks would pay higher interest on debt as their economy grows. Another proposal has been the idea of a debt swap whereby the current debt is swapped for debt tied to nominal GDP, reflecting the Greek’s ability to pay their debt. Currently, tax revenues are enough to cover government spending but not enough to repay Greece’s debt. The new government has placed emphasis on the well being of the Greek people, pushing for an end to austerity. The Syriza coalition believes that decreasing austerity will lead to more employment and growth in Greece. For that reason the Greek government has already began to rollback austerity measures (cuts in the budget).

There is a real possibility that the new Greek government will refuse a new set of bailout funding from its lenders if conditions to its repayments aren’t re-negotiated. In this case the European Central Bank has indicated it might offer cash directly to Greek banks if the country refuses to accept it. However, if the Greek government allows budget expansion and refuses to continue decreasing the deficit, the European Central Bank may stop lending to Greece all together. In that case a national crisis will occur as Greek banks are low on deposits. With the ongoing financial crisis in Greece, citizens have stopped depositing their money in banks which makes it harder for banks to make loans. So, Greek banks need the European Central Bank loans if they want to keep operating.

With the ongoing talks the plausibility of Greece leaving the European Union has increased from 0 to 20%. If the European Central Bank stops lending to Greece then the country would be forced to leave the eurozone and re-introduce its own currency. Leaving the eurozone would also mean leaving the European Union.

 While German officials have made it clear that their priority remains to keep the European Union intact it has become obvious that Germany and other European lenders are apprehensive to make concessions for Greece. There is a fear that if Greek demands for restructuring debt are met other debtor nations might ask to be accommodated as well.

So, while the Syriza party’s platform seems benevolent it is highly unlikely to come to fruition. So far, the European lending countries have been apprehensive to listen to the demands of the Greeks. And with the way things are going the likelihood of Greece leaving the European Union increases by the day. But perhaps that might be the best step to economic recovery.

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