Greece; Euro or Drachma?

There has been a lot of speculation surrounding the future of Greece remaining in the Eurozone. Many economists have different views on whether they should stay or return to the Drachma.

Greece leaving the Eurozone could cause a number of fatal consequences, for themselves, but also for the Eurozone and potentially the world.

It could cause a recession, as it would cause a huge lack of confidence, leading to a lower level of investment and spending as a whole, which could affect the world market. It could cause a meltdown in Greece as the Drachma would plummet in value making it near impossible for them to be competitive, causing them a huge rise in import costs, thus leading to less access to food and medicine for the Greeks. It is likely that it would lead to Bank Runs, meaning that the Greeks would take out all of their savings in order to prevent their money from being frozen and then converted into Drachma, as it would lead to their savings depreciating in value. This in turn could lead to depositors moving their money from countries that are at risk of leaving the Euro (Greece, Spain, Italy) into German banks to protect themselves. This therefore, may potentially lead to another banking crisis of similar magnitude to the 2008 global crisis. These are only some of the consequences that could occur if Greece leaves the Eurozone.

From this information one would assume that it is best for Greece to remain within the Eurozone. However, many economists such as Paul Krugman, believe that it is inevitable that they will leave, and has just been delayed by the pro-bailout coalition coming into power in the last month. A reason why it is evitable is that Greece cannot sustain increased borrowing as they have no way of paying it back whilst being in the Eurozone, so although many bad consequences could arise as a result of them leaving, it could be even more severe if they remain within the Eurozone.

There may be a lot of doom and gloom that arises as a result of Greece leaving the Eurozone, but in the long term it is likely to be the most beneficial option for all countries involved. It would enable Greece and the Eurozone to become more competitive and would increase confidence in the Euro, having positive knock on effects for many countries.

It seems that there will be some short to medium term hardship whatever happens to Greece, therefore I believe that Greece must leave the Eurozone to enable a successful financial recovery to take place.

What caused the Eurozone crisis?

There are many different opinions and theories explaining why the Eurozone is in crisis. I have looked at some of these and have decided to share the most probable causes, along with another reason I have come up with.

In 1999, the Eurozone introduced a Fiscal Compact to ensure that total borrowing was limited to a maximum of 3%. The problem that occured was that some of the countries did not keep to this rule. Italy was the worst offender as it regularly broke the rule and Germany were the first to break the rule. This gradually increased the Government debt.

Another problem was with the increased amounts of private debt accumulating. Spain didn’t break the Fiscal Compact until 2008, but they increased their private borrowing by 96% between 2000 and 2010. This was also a big problem for Italy and France.

Greece regularly broke the Fiscal Compact and increased their private borrowing, giving rise to the huge crisis they are having to deal with. No-one wants to lend to anyone, especially not Greece.

This increase in Government and Private debt as a result has caused a massive lack of confidence within the Eurozone. Greece are a major impact on the state of the Eurozone, along with Spain who are to be bailed out (€100bn).

Fundamentally, the accumulation of both private and Government debt is a major cause, which has been increasing at a faster rate since 2008. The PIIGS (Portugal, Italy, Ireland, Greece, Spain) are also a major cause. They are the countries within the Eurozone with the weakest economies, which is a reason why all but one have been bailed out (Greece, Spain, Ireland, Portugal). They are all overly debt-ridden which is having a major impact on the Eurozone.