Should I Stay or Should I Go? Greece and the Eurozone

Simon Pugh and Signe Norberg examine whether Greece should leave or stay within the Eurozone.

With the current uncertainty over Greece’s role in the Eurozone, Simon Pugh and Signe Norberg examine whether Greece should leave or stay within the Eurozone.

5 reasons Greece should leave the Eurozone

With the No camp winning 61.3 per cent of the vote over the weekend, rejecting the terms of bailout package, Greece’s exit from the Eurozone is looking increasingly likely. While an exit may be costly for both Greece and the European Union, and paint an uncertain future for the Euro as a currency, there are reasons why Greece should leave the euro behind.

  1. By exiting from the Eurozone, Greece can start working to rebuild its economy without the burden of European Central Bank’s (ECB) demands for emergency liquidity assistance (ELA). After all, commentators have noted that throughout the negotiation period much of the demands put on the Greek government look more like an ideological objection to the government than to the details of the measures themselves. Removing the Troika’s demand for austerity measures, Syriza/Independent Greeks can break the cycle that has kept the Greek debt growing for years.
  2. Instead of adopting fiscal and monetary policies that generally presuppose the strength and structures of Northern European countries, Greece would be able to manage policies that are more reflective of their national needs and the platform upon which Syriza was elected. This also opens the door for the government to begin take more responsibility for its own policies instead of pointing to the Eurozone as the sole cause of their economic hardship. It would signal a break with the cyclical conditions that have arguably lead to political and civic indifference to boosting its own economy due to systemic pressures. This is supported by the IMF report that reinforces several of Syriza’s claims that the Greek debt would not be sufficiently addressed by the proposed package. Even if the package were to be implemented, the report found that “debt would remain very high for decades and highly vulnerable to shocks”.
  3. Similarly, despite undeniable initial hardships, exiting the Euro can foster competitiveness in the long-run. No longer tied to the euro, Greece can regain control of several important areas of economic revenue to redirect its earnings to suit the needs of the Greek economy and benefit the Greek people. This is, after all, a standard critique against the European Union more generally – British eurosceptics often cite the need to reform the system to make it suit the needs of the country to generate more jobs for the domestic population.
  4. After an initial tumultuous phase the Eurozone would recover. Financial markets inherently prefer status quo, but should Greece leave the euro behind, markets would eventually stabilise if the political will and commitment remains steadfast.
  5. By having a strong vote rejecting the current offer on the table, Syriza can return to the negotiating table and work out a deal that is better suited to the Greek people’s will. If a new deal cannot be struck, exiting the Eurozone may then be the only option left for the government. Democratic legitimacy is a core component of modern democracy and should be upheld in order to preserve societal structures and civic virtues. Should it become a bargaining chip between the financial institutions and the Greek government, the Greek government should then leave the Eurozone.

All of reasons point to one crucial fact about the current situation over the Grexit discussions that is not always reflected by financial analysts – the debate on whether to exit from the Eurozone or stay in it does not only come down to economics, but also social and political values. The failure to find solutions to the latter is arguably one of the crucial reasons ‘No’ won the referendum this weekend.

5 (plus one) reasons that Greece should stay in the Eurozone

The general legal and economic consensus seems to favour Greece’s exit from the Eurozone or even imply that it is inevitable. The ‘No’ vote, however, does not guarantee a ‘Grexit’ and there are still a minority of commentators suggesting that in the long-term Greece would be better off as part of the single currency. Here are five reasons why:

  1. If Greece leaves the Eurozone then it will have to introduce a new version of the Drachma. When the Euro was introduced the Drachma was fixed at an exchange rate of 340 to one Euro. A new Drachma would start on parity with the Euro and need to be devalued quickly and significantly, leading to inflation and weaker import purchasing power. This, combined with additional administration costs, would be dangerous for a country that imports 48% of its food and 80% of its energy.
  2. As Robert Peston reports, Greece has almost no foreign currency reserves and therefore has no way of paying for its sustained reliance on imports. Swapping to a new currency with no credit rating on international markets means that lenders are unlikely to support this.
  3. Devaluation has worked for countries with strong manufacturing industries as it makes exports more competitive. Greece, however, does not have this accolade and the best it could hope for is that a weak Drachma encourages tourism which generally only creates low-paid, seasonal jobs.
  4. Like any stable economy, once this crisis is resolved, Greece will need to continue to borrow money. Removing itself from the purview of the ECB would increase borrowing costs, thereby making a longer-term recovery harder.
  5. Greece desperately needs to improve its productivity and international competiveness. Remaining within the Euro, and the trading benefits that brings, is the most effective way to do this.
  6. Apparently, there are no available machines to print the Drachma, anyway!