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  Why Greece should leave the Eurozone

Aivaras Bagdonas, VU TSPMI doktorantas
2012 09 03

After evaluating the chances of Greece to leave the Euro zone, at the beginning of May experts of the rating agency Standard & Poorforesaw a Greece exit as to 33,3 percent likely.  The U.S. Bank Citibank increased the probability of a Greek exit of the Eurozone (or Grexit) to 50-70 percent over the next one and a half years; and the most realistic date is 2nd or 3rdquarters of the next year.

These forecasts are quite realistic. Efforts of the international community to save Greek economy and the invested hundreds of millions euros didn’t give the expected result; in July of this year the unemployment rate in Greece has reached 23,1 percent. Pursuant to the press release of Prime Minister Antonis Samara on 24 July, the country’s recession could be much worse than expected (he lowered the economic recession forecast of 4,5 percent of GDP to 7 percent). According to different sources, the stock price index in Greece has plunged 88 since the 2007 peak. This index might drop even more, but it is too early to say that Greek stock market has reached the bottom. Only drastic political decisions of the authorities could change the situation. They might be very painful to population and necessary in order not to be trapped in a deflationary spiral.

However, there is still no evidence that Greeceis inclined to make crucial decisions: according to statements of 19 July, the Government is not going to take any cost-saving measures until the end of the year. Economic situation in Greeceis getting worse and the country might go completely bankrupt. In order to avoid that, Greecemight decide to exit from the Eurozone. This opinion is especially popular among the investors and economy experts.

Hardly could anyone argue that bailout package for the Greek economy is too small. Yet, even after having received more support, Greecewould not be able to restore its economy, and the debt burden would prevent the country from borrowing in foreign markets.

According to Nouriel Roubini, professor of economics and international business of the Stern School of Business (New YorkUniversity), all of the options that might restore competitiveness require real currency depreciation. If the country stays in the Eurozone, this is hardly possible. Sharp euro decline is not likely, as well as rapid decrease in the labor costs for Greeceimplementing reforms which could accelerate the rates of growth in labor productivity. This process might take more than one year, and Greece cannot wait too long. Another way out could be rapid price and wages deflation, i.e. the so called internal devaluation; yet this process would determine long economic depression.

None of the above alternatives is acceptable for Greece, therefore its decision to leave the Eurozone might become nearly the best way to rescue economy. The country returning to the national currency could significantly reduce its value, restore production competitiveness and stimulate economic growth.

According to Mark Weisbrot, Director of the Centre for Economic and Policy Research (Washington), if Greecedecides to exit the Eurozone, the loss would be huge. Yet, it would not be so painful compared to the loss if the country decides to remain in the Eurozone.  Mark Weisbrot compares the situation in Greece with the Argentina’s financial crisis in 2000: the country managed the crisis by devaluing and unpegging the national currency from the U.S. dollar. Such a scenario could be also adopted in rescuing Greece if the country decides to exit the Eurozone.

The increasingly tough rhetoric on state-saving policy could be another stimulus for Greece to leave the Eurozone. On 25 May Chairman of the EU Herman Van Rompui said: if Athens fulfills the commitments, Greece should stay in the Eurozone. President of the U.S. Barack Obama, the Chancellor of Germany Angela Merkel, and the EC Chairman Jose Manuel Barroso and other politicians agreed with this opinion. Yet, the IMF Managing Director Christine Lagarde and other top managers of central Eurozone state banks didn’t reject the possibility of Greek euro exit.

If Greece will not manage to pursue appropriate economic reforms, the so-called “troika” of IMF, ECB and the EU might reduce or even terminate the support to Greece (under the pressure of other political actors); these sanctions could be expected in the near future. Such a decision would leave Greece without funds to cover the wages of state civil servants, pensions and other national costs.

More open statements of the EU officials on possible sanctions if Greece continues to reject relevant fiscal policy reforms might mean that the plan for management of a possible Eurozone split (after Grexit) has already been developed.  If the Greek problem is not addressed, the chaotic disintegration might end in the total downfall of euro and destructive consequences to European and global economy; whereas well-planned process of Grexit from this zone could leave the hope to retain the achievements in developing the single EU market.

Today there is high probability of Greeceleaving the Eurozone. The consequences of such a decision could be challenging for Europe, but hardly this decision would be fatal.  Therefore it is quite possible that Greece’s determination to exit from the European Monetary Union could be partially determined by the purposeful policy of “troika”; for it the rescue of the Greek economy has already become a really expensive burden.

Today Greece has stuck in the spiral of insolvency, non-competitive market, increasing external deficit and growing economic depression. Probably the only way to stop these processes is to start the procedure of the failure to fulfill the commitments to the international community and exit from the Eurozone which could be coordinated by the ECB, the EU and IMF. This could reduce the harm both to Greece and to other countries.

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