Greece to leave the euro?: thinking the unthinkable

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A year or two ago, the official line from policymakers and economists in the EU was that Greece would stay in the Eurozone forever. It was thought conceptually and practically impossible for them to depart. However, commentators are now starting to talk about how, not whether Greece with leave the Eurozone.

At their recent general election, the Greek people have punished parties that agreed to the austerity measures which were the conditions of the bailout the troubled country received from the IMF and the EU.

The austerity measures were certainly swingeing and provoked civil unrest. They amounted to cuts equivalent to 1.5% of GDP, slashing public sector jobs and radically reducing benefit pay outs and holiday bonuses. The dealmakers also put pressure on the Greeks to reform their labour laws to make it easier to hire and fire.

As part of the bailout package, private sector lenders had to take a haircut of over 50%, which means that there is little appetite for any further private sector lending to Greece.

The people may have voted against austerity, but the reality is that they have no choice. Refusal to follow the current programme would mean that there would be no further help from the EU, which in turn may lead to the country’s exit from the Eurozone.

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How does a country leave the Eurozone?

This is a good question – to which there is no simple answer. It has been widely reported that there is no way out of the Eurozone unless a Member State also leaves the EU. Quitting the Eurozone is simply not provided for in its legal set up.

What would happen to Greece?

The short term effect on Greece would be chaos. Deals would need to be done on existing arrangements like mortgages and long term commercial contracts. Inflation would rise while the value of its new currency would plummet. Assets held in Greece would fall in value.

Departure from the EU would not solve the cultural issues that have led to the country’s demise. Any government that seeks to tackle the country’s widespread tax avoidance, a workforce too reliant on the public sector and an artificially high minimum wage and low retirement age would soon be as unpopular as the fellow Europeans who imposed the austerity measures.

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