Should Greece Leave the Eurozone?

Résumé du document

Since late 2009 and the worldwide recession resulting from the American financial crisis, the Eurozone has faced a major sovereign debt crisis. Public debt-to-GDP and public deficit-to GDP ratios have increased sharply and are well over the limit fixed by the Stability and Growth Pact. However, among all European countries, Greece is definitely the worst affected. In 2011, the Greek real GDP fell by 7, decreasing for the fourth consecutive year and returning to its 2005 level. Industrial production is now comparable to its level prior to 1993. Naturally, unemployment exploded and reached about 25. Greece has also the highest current account deficit in the Eurozone (approximately 10% of GDP).

Moreover, Greece depends on bailout plans financed by the IMF and the Eurozone countries to meet its financial obligations and to service its unbearable debt burden. Its macroeconomic policy to cope with the crisis so far can basically be summed up in drastic austerity measures imposed by the so-called Troika in return for the bailouts. In spite of raising taxes and cutting the government spending, Greece's public debt has continued to increase. Consequently, many argue that austerity has proved to be unable to restore Greece's solvency in addition to having deepened the recession by declining demand.

Extraits

[...] Ngai What Form Will the Eurozone Emerge from the Crisis?” August 20 - Buiter, W., and E. Rahbari “Global Economics View. Rising Risks of Greek Euro Area Exit” Citigroup Global Markets, February 6 - Fitoussi, J-P., and J. Le Cacheux Report on the State of the European Union, volume 3 Crisis in the EU Economic Governance, Palgrave - Krugman, P “Eurodämmerung”, The New York Times, The Conscience of a Liberal. May 13 - Kuger, M Business Impact of a Greek Euro-zone Exit.” D&B Special Report, D&B Country Risk Services. [...]

[...] Greece cannot afford to leave the Eurozone without defaulting on government bonds. It desperately needs to reduce its debt-to-GDP ratio and slash interest-rate payments. The default could free up more money to revitalize the economy instead of repaying private creditors. For instance, Greece could invest in education or infrastructure in order to increase its long-term growth potential. Finally, additional considerations prove that the grexit could not become the decisive factor for the collapse of the other threatened Eurozone countries. First of all, regardless of whether Greece leaves the Eurozone or not, some countries - typically Portugal and Ireland might turn out to be not illiquid but insolvent, in spite of reforms, fiscal austerity and cuts in government spending. [...]

[...] The only option left if Greece stays in the Eurozone is to undertake an internal devaluation. An internal devaluation would imply a rapid and considerable deflation in prices and wages. That solution would exacerbate an already tensed social context owing to the recession that would surely accompany the first years of deflation to mention it is politically hazardous as recession and deflation could reinforce extreme populist parties. In addition it would make Greece even more insolvent because deflation increases the real value of debt. [...]

[...] If Greece leaves the Eurozone, the collateral damage of exit will become observable. Of course assuming that leaving the Eurozone will have the same effects on any country is nonsense in an economic scientific perspective. Nonetheless, the grexit may be the opportunity to assess more precisely the pros and cons of leaving the Eurozone. States like Portugal and Ireland would be able to see and decide for themselves if they want to remain in a monetary union or to follow the path of Greece which would cynically serve as a guinea pig. [...]

[...] Having said that, it should be noted that in the short-term, leaving the Eurozone will not necessarily restore Greek's solvency and have a positive impact on Greek public finances. The opposite can actually be considered quite likely to happen. The grexit would probably end the vital financial aid of the Troika. Greece would also lose access to capital markets in the case of a default on its sovereign debt (an almost certain scenario if Greece was to leave the Eurozone) so the grexit would not necessarily enable Greece to stop the austerity measures that kill growth. [...]