I’ve no qualification to blog about the crisis in Greece beyond regularly reading about Economics, but here are my uncertified thoughts anyway.
I think Greece leaving the Euro would be a big mistake. I’m not going to write all the things that would have to be done to make sure that Greece can successfully stay in the Euro as this would then be a very long blog; but Greece leaving the Euro would be a mistake.
If the Greeks returned to the Drachma and the Greeks know it’s going to happen, then they’ll probably start taking their Euros out of the banks. It’d be the sensible thing to do. The value of the new Drachma is going to collapse when compared to the value of the Euro: will it be worth 50% less? 60%? 80%? No one knows. Because the Drachma will collapse this means that the debts will increase overnight. So, a 100 Euro debt will suddenly become a 150 Euro debt; 160 Euro debt or 180 Euro debt plus interest. You get the picture.
How is Greece, and more importantly Greeks, supposed to pay that back? It already can’t pay its debts. And default could mean a major bank collapse across Europe as European banks that have leant to Greece incur further losses. This would mean further emergency action by governments, more spending cuts across the continent, increased bank costs and less funding for businesses: less jobs, less spending.
Ok. The Drachma’s dirt cheap. That’s good! Why? It means that Greece can boom on being a cheap tourist destination, becoming the place to do business because you can sell so cheaply and having cheap Greek labour (passing note: this is the model of many Third World countries). This will allow Greece to boom on the back of a cheap currency that makes its products less expensive.
There are a couple of responses to this. It all depends on what a Greek exit looks like. Is Greece leaving the EU? Or is it just leaving the Euro?
If Greece leaves only the Euro. Then Greece becomes the cheapest place in Euro town and it will boom, sort of. People will go to Greece for unbelieveably affordable holidays and business, especially European businesses, will be able to produce goods which they can sell cheaply because of the cheap Drachma. Yet there’s a price. Greece leaving the Euro isn’t going to take Europe out of recession, in fact it will probably tip it further in to recession.
The Euro will become stronger and this means European goods, especially German goods will become more expensive so the export boom that Germany’s been enjoying because of this prolonged Euro-crisis making high-quality German goods more affordable will dry-up. Less money, less jobs.
If Greece suddenly becomes the cheap place to do business, then what Greece produces so cheaply is going to effect other countries e.g. Greek olive oil, cheapest on the market, will start hurting the Italian olive oil producers, harming that country’s economy. And it will be the same over a range of products. These countries, especially Italy and Spain, don’t need their export markets hit as they struggle with their own debts.
Why would Greek workers stay in Greece? They can go anywhere in Europe and get better wages and since their debts are going to be in Euros why not get paid in Euros to at least have a chance of paying them back? Greece’s economic future will be bleaker as young people leave and…
Greece has a tax problem – people don’t pay the taxes they’re obliged to pay. When people flood out of Greece, they’ll have a bigger tax problem: no one to pay taxes! As for the impact on Europe, Greeks will be a cheap labour market adding downward pressure on wages across Europe and probably contributing to further job insecurity and less spending i.e. pushing Europe further in to recession.
If Greece leaves the Euro and European Union. Overnight not only will Greek debts shoot-up; they’ll also be paying more to access their major markets for their products. (Europe’s trade barriers will increase the costs of their products) Business will not flock to Greece; they’ll continue on their death-spiral with their debts continuing to rise. They’ll be crushed. A Third World country will have been created at the edge of Europe.
Years of European funding down the drain, never mind the suffering of Greek people as they have to wait for their economy to pick-up, if it ever does, after exit. And always, like the Sword of Damocles, the crushing burden of their debts above them.
When this happens, who’s to say what the political outcome may be? Greece is already being polarised between right and left political parties. The likelihood of this increasing as people’s suffering increases is certain.
This blog’s long enough, so my thoughts about what should be done to keep Greece in the Euro will have to wait, but my final point is probably the most important.
Europe is heading for debt-deflation at this rate which means absolute catastrophe. Greece is the thin end of that wedge and once Greece goes, Portugal, Ireland, Spain, and Italy are next. If Greece is allowed to go, then how can any of the others be saved? And the terrible consequences that Greek exit can potentially cause, increase massively for the likes of Spain and Italy.
The simple solution of Greece leaving and dealing with its problems is the most worst option.