Greek Eurozone Withdrawal Could Cause Worldwide Repercussions
There is a heightening possibility that the Greek government could soon withdraw from its use of the single European currency, due to the country’s bleak financial outlook within the eurozone and the pressure from its citizens to reconsider the continuing austerity plans.
Such a scenario could send further shockwaves throughout the European and global markets, especially increasing uncertainty for the eurozone futures of other peripheral economies, such as Italy and Spain, if Greece gives up the euro for its former currency, the drachma.
The Organisation for Economic Cooperation and Development, on Tuesday, stated that the ongoing financial situation in the eurozone is the single largest threat to the world economy.
‘The crisis in the eurozone remains the single biggest downside risk facing the global outlook,’ said OECD chief economist Pier Carlo Padoan.
‘Failure to act today could lead to a worsening of the European crisis and spillovers beyond the euro area, with serious consequences for the global economy.’
Growing speculation though suggests Greece cannot look forward to growth until it leaves the eurozone, with critics stating that businesses are unwilling to invest within the country amid persisting fears of default and further potential crises.
This uncertainty and risk is ‘stifling the growth’ Greece needs to get ‘out of debt’, comments Eamonn Butler, the director of the Adam Smith Institute.
‘To keep Greece in the single currency, European taxpayers would have to write off around €60bn of the bailout loans they have made so far, pump in around €200bn to cut Greece's €274bn debt to a sustainable size, and carry on subsidising its chronic overspending to the tune of €20bn a year in perpetuity,’ Mr Butler added.
‘Better, surely, to get the pain over with so that people can at last invest confidently in the future.’
Greece, who now has a weaker economy than in 2010, had previously lied about its borrowing figures in order to gain euro membership. Low interest rates subsequently prompted a large spending spree by the then Greek government, with the costs for the 2004 Olympics in Athens greatly overshooting the proposed budget. When the financial crisis of 2008 hit, it became apparent that Greece’s debt levels had far exceeded the requirement set by the eurozone. This was matched by an inadequate Greek tax system, which had led to large-scale tax evasion and a reason for poor government revenue.
Despite this, there is still a desire to try and keep Greece within the eurozone to prevent further market turmoil. However, the popularity of austerity packages throughout the European Union intending to offer a resolution to Greece’s economic woes, especially championed by German Chancellor Angela Merkel, has increasingly led to Greek social distress and further financial uncertainty.
Alongside this, the EU and European Monetary Union are at the heart of widespread criticism after appointing entire governments, including prime ministers, based on the influence of the bond markets and large fiscal institutions.
Greek citizens now stand on the brink of their country defaulting, and face the prospect of losing all their savings, enduring more cuts, and the likelihood of many businesses going bankrupt.
If Greece does default and leave the eurozone, a wave of uncertainty about the future of the euro will make businesses and investors uneasy about lending to other faltering eurozone countries. This could mean the governments of Spain and Italy will struggle to receive the sort money needed to boost their economies, and may also end up needing their economies bailing out.
While the Greek economy only adds up as small percentage of the whole eurozone, Spain and Italy both account for 28% of it. This far surpasses the total EU bailout fund, which would certainly fail to prop up these economies. This scenario would heavily affect the larger economies of the eurozone, notably France and Germany, with the French government vulnerable to serious economic trouble if it needed to bail out its large banking sector if confidence fell and lending stopped. All this could plunge the eurozone back into a deep recession.
The flipside is that the euro currency would devalue, making eurozone exports more competitive on the world market. However, this could also mean the rest of the world will become less competitive, weakening the already fragile economies of the US, UK and Japan. There are even concerns that the Chinese economy could fall into a recession, which is currenctly suffering from sharp reductions in growth.
It is clear that Greece’s eurozone departure cannot be carried out in isolation from the world market. What global economic fallout could occur remains unpredictable – and this is doing nothing to ease the nerves of financial and political institutions.