It all started in the mid 90s. In the days when the sun was shinier, and everybody was busy making hay. All the big guys had money and everybody had enough saved up for winter and extra to lend. It was a time when Europe was still a continent and nothing more. In fact, Europe as a collective entity never had an identity of its own, all it was a collection of distinct and non-fraternized nations. In those days, big guys like Germany and France wanted some bonhomie going on in the neighbourhood. Thus was born an elite club of economies – Eurozone.
Today, the Eurozone is a monetary union of 19 of the 28 European Union (EU) member states that have adopted the euro (€) as their common currency.
But the Eurozone had one major fallacy – the member nations have fiscal policies under their control, but the financial or economic policies will only be drafted by the European Central Bank or ECB. Overlooking this, Greece desperately wanted to join the Eurozone, and the reason is not difficult to understand in hindsight.
By joining the Eurozone, Greece had access to loans from all member nations at a discounted rate that was almost 1/4th of the previous. Greece found it as a channel to fill the holes that were created by the populist measures of the government. The holes that were created by the Greek government from the mid 80s from the extreme populist measures such as lavish pension schemes, extremely low taxes and the free-run of corruption in bureaucracy.
But there is a limit to which you can rob Paul to pay Peter.
The 2008 sub-prime loan crisis of the United States broke open the cracks in the economic bubble of the world. Every country wanted its funds back in their safe hands.
When lenders chased Greece for their money, the mismatch between the picture painted by Greece and the reality was exposed. Greece’s Debt to GDP ratio in 2009 scared at 129.7% that soared to 148.9% in 2010. As a result, the rating agencies downgraded Greece’s bonds to junk bonds, making it impossible for Greece to accumulate money from the lending market.
In 2012, the Greek government had the largest sovereign debt default in history. A few recession quarters and bailouts later – On June 30, 2015, Greece became the first developed country to fail to make an IMF loan repayment.
Grexit: The Climax
Grexit is nothing but a ‘cool’ term especially coined for Greece exiting the Eurozone. Almost no one wants the Grexit to happen because Greece is not alone. In fact, the Eurozone is in the anticipation of a domino effect with Spain, Portugal, Italy and Ireland joining the suit in foreseeable future. That will implode the Eurozone.
Countless meetings have already been held, and more are sure to come, but the talks between Greece and its creditors continue to look stalled. With the Greece government for the time being has agreed to the bailout and the austerity terms that come with it.
Austerity is one way of life which has always been unknown to the Greeks.
The austerity measures dictated by the Troika (EU, IMF and ECB) encompass higher taxes, privatisation and reforms on pensions and other populist government policies.
Doubts surrounding the austerity measures are big. The public can’t pay higher taxes because of low or no income and no belief in the economy anymore. A slash down in pensions in possible but would be detrimental to the ruling party in the next elections.
The Sequel: Grexit and its effect on Euro
According to the experts and others (including me), Grexit is more a question of when than if -this raises a whole number of complicated questions. But one interesting question to pose is whether Greece leaving the Eurozone would strength or weaken the Euro.
For the Euro, Grexit has both pros and cons. For pros, removal of the weakest member will strengthen the group while sending a warning of sorts to the other European governments to cut short their populist measures. The cons are pretty obvious; a socio-eco-political turmoil is never conducive for investments.
The Queen is stern, the Rook is patient, the Knights are watching. Every step in the game of economies bears a result, we all will taste. The suspense lies in the sweetness or bitterness of it.
What do you think is the way forward? A storm similar to 2009 is knocking again or is it just another tide?