Having given up independent monetary policy Greece could no longer devalue its currency relative to that of Germany. While the German economy benefited from increased exports to Greece, banks, including German banks, benefited from Greek borrowing to finance cheap imported German goods and services. As long as borrowing costs remained relatively cheap and the Greek economy was still growing, such issues continued to be ignored. In , U. As capital began to dry up, Greece faced a liquidity crisis , forcing the government to seek bailout funding, which they eventually received with staunch conditions.
Bailouts from the International Monetary Fund and other European creditors were conditional on Greek budget reforms, specifically, spending cuts and higher tax revenues. These austerity measures created a vicious cycle of recession with unemployment reaching These measures, applied amidst the worst financial crisis since the Great Depression , proved to be one of the largest factors attributing to Greece's economic implosion. Austerity measures also created a humanitarian crisis: homelessness increased, suicides hit record highs , and public health significantly deteriorated.
While Greece had structural issues in the form of corrupt tax evasion practices, Eurozone membership allowed the country to hide from these problems for a time but ultimately created an economic straitjacket and an insurmountable debt crisis evidenced by the country's massive default. International Markets. Your Privacy Rights. To change or withdraw your consent choices for Investopedia. At any time, you can update your settings through the "EU Privacy" link at the bottom of any page. These choices will be signaled globally to our partners and will not affect browsing data.
We and our partners process data to: Actively scan device characteristics for identification. I Accept Show Purposes. In the longer run, Greece's economy should benefit from having a much more competitive exchange rate. But the devaluation would not solve underlying problems in the economy, including poor tax collection and a struggle to control government spending.
There is also a real possibility of a surge in inflation. Tax receipts would probably fall as the economy contracted, so the government might finance spending by printing money. The likely currency depreciation would also be inflationary. It would make imported goods - which in Greece includes a lot of its food and medicine - more expensive. There is a danger that a Greek departure from the euro might do wider economic damage, but the risk is generally thought to be much reduced since , the last time such speculation was rife.
Actions by the European Central Bank are a key element behind this change. First of all, there is the ECB's commitment to do " whatever it takes to preserve the euro ". That promise, made by the ECB's President Mario Draghi in July , was later fleshed out to include a commitment to buy the debts of governments whose borrowing costs were affected by fears of them leaving the euro. The ECB has not acted on that promise, but its existence was enough to calm eurozone financial markets. And the ECB could use this initiative if the fears were to re-emerge in the wake of a Greek exit.
There is also quantitative easing, the programme of buying government debt across the eurozone, announced by the ECB in January. The future feels gloomy, some say, because of the June agreement between Greece and its creditors. The Mediterranean country will have to achieve a 3. Such high surpluses are difficult even for oil-producing countries to achieve for 40 years in a row, said Charalambis.
The accord requires the government to cut spending to reach that ambitious surplus, which could lead officials to cut pensions. While he waits for his pension to arrive in the coming months, he has no other income. The banks that have agreed to write off 50 per cent of the money they are owed could also change tack. All of this would leave Greece unable to pay its bills — in other words, bankrupt. If a bailout does not go ahead, with or without a referendum, Greece would default on its debts.
If this happened in a disorderly way, a banking crisis would follow, with governments and taxpayers forced to shore them up, as they did in Britain in In other words, banks exposed to Greece would have to be recapitalised. Looking at what happened here three years ago, recession could well be the result — at a time many European economies are already struggling.
It would not be a repeat of
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