Crisis in Greece: what would a Grexit do?

On 30^th June the Greek government must repay €1.6bn to the IMF. Failure to honour this debt could bankrupt Greece and potentially neutralise the possibility of Greece securing future loans or bailouts.

The current Greek economic crisis is a clash between economics and politics. The Eurozone’s indomitable commitment to the irreversibility of the Euro project is opposed by the domestic requirements of Greece’s left-wing Syriza party, whose recent election victory rested on the promise of correcting the widespread social damage inflicted by the Greek financial crisis.

Greece currently owes the Troika (the European Central Bank, the International Monetary Fund and the European Commission) an estimated €320bn. In 2010 the Troika loaned Greece €110bn to prevent its bankruptcy in the aftermath of the 2009 European debt crisis. A second bailout of €143bn followed. In exchange, Greece agreed to implement a national austerity program through lowering government spending, raising additional funds by increasing taxes and tackling tax evasion. Though some of this debt has been written off, Greece struggles to make regular loan repayments and has consistently delayed making all the changes required in the loan conditions.

German magazine Der Spiegel has reported that the ECB has rehearsed emergency plans for a synchronised European response to a Grexit (as a Greek exit from the Eurozone is known).

So, what would a Grexit look like?

It is legally impossible for Greece to be kicked out of the Eurozone. Greece can leave the Eurozone voluntarily, but only by simultaneously abandoning its practical participation in the European Union. As Douglas Elliot, an economic analyst for the Brookings Institution, has pointed out, Greece would lose far more than it would gain by pulling out of the EU.

Assessing the likely aftermath of a Grexit, Elliot forecast that upon exiting the EU Greece would regain control of its exchange rate and interest rate policies, but it would suffer an almost immediate currency devaluation. External funding and investment would evaporate. If Greece returned to the drachma, local banks, facing panicked savers and investors withdrawing their Euros, would restrict withdrawals and potentially pay depositors with promissory notes. Bank transactions could freeze, amplifying the existing distortions within the Greek economy. A deeper recession would follow. With 25 per cent of the Greek workforce unemployed and the Greek commerce confederation reporting that 59 companies fold each day, all this would be a disaster.

Additionally, Elliot outlined, a Grexit might profoundly impact the internal politics of Spain, Ireland and Italy by demonstrating that countries can exit the EU. New international trade agreements would be required and Greek citizens would no longer be able to move freely within the EU. Greece would also lose its ability to veto EU actions – a powerful international negotiating chip. To mitigate this, Greece could move, in a geopolitical sense, closer to Russia.

Ultimately, a Grexit is unlikely. Though, to paraphrase Margaret Thatcher, one question will haunt the Troika: just when will Greece run out of other people’s money?

Chris Gilroy