A Year in Review: Greece and the Eurozone Crisis

Back in 2009, Greece was on the verge of what would become far more than a local calamity. Globalization of finances, coupled with the ever increasing debt levels, led analysts and economists worldwide to speculate on whether or not the nation was on the brink of economic collapse. Credit swaps and loan defaults became central issues, and risk insurance premiums rose as investor confidence pummeled. At the time, all of this was at a level of pure speculation, without any repercussion locally. Looking three years forward to the present reveals an entirely different story. Following a credit collapse, nationwide default, demotion of the status of government commodities to junk bonds, and multiple rounds of bailout loans worth hundreds of billions of euros apiece, Greece finds itself in a state of economic turmoil. Unemployment is at a staggering 25.1% and at a far greater number among the youth population, causing notorious riots and strikes to flood and spread throughout Athens and other major central cities.

Police clash with a man protesting austerity measures in Greece in 2011. Source: ggia

Highly regarded credit rating agencies have downgraded Greece severely as seen in the cases of Moody’s and Standard and Poor’s. All of these occurrences have led seemingly hopeless victims and outsiders to ask: what is Greece’s future? Amidst the €110 billion first round of funding in May of 2010, and the additional €130 billion added to the fund between July 2011 and April of this year, it is clear that massive economic efforts have been carried out by major European banks, treasuries, and associated economic sources. However, despite these initiatives on behalf of the E.U., as well as individual private investors in the European economy who fear widespread repercussions from expansions of the problem, Greece has maintained significant economic downturn in the aftermath of the default. With maintained levels of debt to GDP (gross domestic product, or spending power) ratios, and high levels of accepted face value loss on Greek government bonds hovering over 53%, economists over the year of 2012 have been pondering over an entirely alternative solution to save the European economy. This solution lies in getting Greece back on its feet: allowing the country to leave the Eurozone entirely. This so-called “Grexit” would not only require the allocation of fewer E.U. euros to the effort, but would allow for more flexible debt restructuring on behalf of the government, and a newfound prospect and motivation for domestic production, due to the effects of the depreciation of the newly reintroduced Greek currency; the drachma.

While analysts acknowledge that the “Grexit” would result in greater levels of domestic export potential and competitiveness on the international market due to competitive pricing with an undervalued currency, the benefits are far outweighed by the potential detriments. For one, banks would experience massive withdrawal of the euro due to its stability and lack of short term fluctuation. In turn, banks would either shut down or cap withdrawal rates, leading to widespread conflict and crisis. Furthermore, the “Grexit” may lead to significant inflation and in turn drop the value of the drachma to less than half of that of the euro. As a result, this would lead to a massive decrease of the per capita income of the middle class citizen of Greece by over 55%. Because of this, economists point to a third and final round of funding to address the issue at hand. By providing Greece a five year window to make significant and comprehensive progress, the government can ensure that Greece is maintaining low levels of debt escalation, and can mitigate collateral damage upon other member nations and the international stage as a whole. Time will tell what course of action Greece and the E.U. will take, but the fact remains that either decision will prove to have wider, significant outcomes.

Leave a Reply

Your email address will not be published.

You may use these HTML tags and attributes: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <strike> <strong>