It has been four years since the sovereign debt-crisis struck the Greek economy. EU and IMF officials struck a deal with Syriza, the left-wing government that led Greece at the time, on the condition that they enact deep fiscal cuts and fundamental regulatory reforms. This betrayed the manifesto they were elected on.
Last year, Brussels struck a debt-relief deal, allowing Greece to exit its final bailout, despite a public debt burden of 180 per cent. It required Athens to continue its reforms while meeting ambitious targets for the primary budget surplus of 3.5 per cent until 2022, and then 2.2 per cent on average, by 2060. In return, it offered some interest rate relief and extended the maturity of some loans.
Greek Prime Minister Kyriakos Mitsotakis, who leads a centre-right government consisting of New Democracy, took over from Syriza in July. They are preparing a draft budget to parliament on 7th October. According to The Economist, the good news is that a primary surplus of 3.5 per cent this year is achievable. Hellinkon airport has become a symbol of Greece’s economic recovery, with €8 billion being invested to transform the old airport into homes, hotels and a casino. On September 26th, the IMF realised the damage austerity had on public investment and social spending, and approved of lower fiscal targets. The Government intends to initiate tax cuts next year and negotiate some leniency with the IMF.
Some argue that Grexit, or a Greek exit from the eurozone, will not aid this country’s economic recovery. The London School of Economics produced a paper arguing that Grexit would be ‘no pain for no gain.’ Though it acknowledges that there would be competitive gains from devaluation and that a restrictive policy stance would prevent the perpetuation of an inflationary spiral, the political and media elites and the interest groups would not support it. The paper credits the EU for Greece’s stabilisation policy of the 1990s and the reforms of the Greek banking and telecommunication sectors.
But Greece accounts for less than 2 per cent of the EU’s output. Writing off part of its debts or easing the repayment terms is simple. The last nine years has proved that eurozone countries pay a heavy price for the lack of a common system of transferring resources from one part of a single currency area to another without a fiscal union. Former finance minister Yanis Varoufakis pleaded with the Germans to soften their policy approach in 2015, but Berlin has always used the European Central Bank as a means to force countries to implement structural reforms to make themselves more competitive. Furthermore, Merkel always thought she behaved reasonably in 2015 when her government provided Athens with two bailouts. Larry Elliott of The Guardian argued at the time that Greece could either quit the eurozone or Germany could throw them out, because if neither outcome happened, the eurozone would just muddle through its economic crisis.
Grexit would instantly restore competitiveness by external devaluation, which would enable Greek exporters to compete in global markets, significantly increase tourism and lead to a higher consumption of domestic products. FXCM said Greece’s economy would dip as the immediate effects could be worse than what they are experiencing now, but the economy would then recover by trading with emerging market currencies. During the 1990s Argentina tied its currency’s value to the dollar, and later experienced a recession that forced the IMF to rescue them. But in 2001 and early 2002, the country defaulted on its loans and let the peso fall in value, which led to an economic recovery.
Grexit will be economically painful in the short-term. Savings could be wiped out and credit controls may be imposed to prevent Greek money from flooding other European banks. But whilst Greece remains in the euro, its economy will continue to struggle. Investment is still 60 per cent below its 2007 peak. A Greek exit from the eurozone was delayed in 2015, but it could soon become inevitable in the near future.