A Greek Exit From The Euro Could Be Bad, But Necessary

Greece has always been a thorn in the side of the European Union since the 2008 recession. Greek public debt has grown to over 160 percent in 2011 according to the IMF, the second highest debt-to-GDP ratio of any country in the world. It is also the worst off of the so-called PIIGS countries. Along with Portugal, Ireland, Italy, and Spain, the PIIGS represent the most volatile economies within the European Union. While all these countries were affected by the 2008 recession and have required bailouts, Greece has constantly required the most attention in the form of bailouts and austerity measures. And yet, as of 2011 Greece’s deficit spending still remains one of the EU’s highest at 9.1% of the country’s GDP. While this is an improvement of the high mark of a deficit that was 15.6% of Greece’s GDP, Greece’s budget imbalance still isn’t being dealt with despite the austerity measures being put in place. In fact, the austerity measures may be making the situation worse. Since 2008, Greece’s GDP has been consistently shrinking over the past four years. Meanwhile, Portugal, Ireland, Italy, and Spain have all had at least some years with positive GDP growth since the recession.

So far, the path offered by the European Union and Angela Merkel in particular has been to repeatedly give bailouts to Greece and enforce austerity measures. However, this path is flawed, and has arguably only made the situation in Greece worse. First off, spending cuts during a recession is a big no-no according to mainstream economics, especially in this particular recession with low inflation and high unemployment. By greatly reducing government spending during a recession, Greece is reducing the amount of investments in the country and reducing economic growth. Since these cuts are likely to come from social programs such as pensions, the austerity measures are also reducing consumer spending capabilities and discouraging people from finding work, thus further reducing the potential economic growth. This puts Greece in a precarious position with its government debt. If the debt level continues to increase, Greece is in danger of defaulting. A Greek default under current circumstances would be terrible for the global economy since Greece is tied to the euro. Greece defaulting would be similar to the Latin American debt crisis of 1982 when Mexico defaulted on its government debt, leading to 27 other developing countries defaulting as well, and a large devaluation of a number of Latin American currencies. Now, take that and move its effects to Europe. With a hypothetical Greek default, investors would be wary of the other countries in the PIIGS and could stop investing in them. This could cause them to default, leading to a massive devaluation of the euro plunging the entire European Union and global economy even further into a depression. Because of this, you can see why Germany and France have been eager to prop up these economies with bailouts in order to keep them from defaulting.

However, this is only one method to solve the Greek debt crisis, and it might not work. The EU bailouts and the conditions of austerity measures along with them have met with fierce resistance from the Greek people. In 2012, Greece has already held two parliamentary elections in May and June after the governing coalitions collapsed over the bailout conditions. Additionally, the leftist SYRIZA party has replaced the centre-left PASOK party as the second largest party in the Greek parliament. While the June government formation between the centre-right New Democracy, PASOK, and the Democratic Left has lasted until now on the basis of forming a pro-euro consensus, the coalition is shaky with PASOK and the Democratic Left saying they do not want too much participation in the new government. Meanwhile, more extremist anti-EU parties have gained ground in Greece. Most notably, the far-right nationalist Golden Dawn party has achieved ten percent in polls last week, which if the election were held now would make them the third largest party in the Greek parliament. Clearly the bailouts have made the Greek political system more volatile and the new government is still shaky. But what other option is there? One option is for Greece to leave the euro.

Leaving the euro has been much discussed as a possibility, but most of the talk is as a worst case scenario. Those who are pro-European Union of course dread any such idea, because it would go against the ideal of a central, united Europe. However it may be a necessary step to minimize the impact a Greek default would have on the rest of the continent. The claim that bailouts can fix the Greek economic crisis is a noble one, but it is flawed. Simple bailouts are only throwing money endlessly at the problem and postponing an inveitable default. And Greece’s economic problems may be more complex than simply the government overspending. With such longstanding financial issues in Greece, it is looking like the case is more a structural problem in the Greek economy. Out of Greek government spending, 25 to 30 percent of it goes to pay public sector employees, which comprising a very high 14 percent of all employed persons in Greece. It could even a cultural problem of corruption and an aversion to paying any taxes at all. If this is the case, then a Greek exit from the euro would be the ideal solution. The European Union can focus on the salvageable economies such as Spain and Italy, while leaving Greece to default. This may sound like cutting off one’s nose to spite their face, but in this case, but if the case of Greece is this bad, then an amputation might be necessary.

PIIGS debt and deficit data for 2008-2011 gathered from Eurostat.
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