By Jeffrey Fung '17

Of all the nations that were struggling throughout the Eurozone crisis, Greece was most noticeably hit the hardest. As a rule of thumb, Eurozone debt for a nation is not to exceed the debt-to-GDP ratio threshold of 60%. By late 2009, Greek debt had breached the limit and reached 113% of GDP and the Eurozone members responded by providing two bailouts to alleviate Greece’s problems.

In late January 2015, Greece appointed a new Prime Minister, Alexis Tsipras, who promised citizens of his nation that he would fight for an extension of existing funds and to get rid of the austerity measures that were negatively affecting the poor, foreign immigrants, and the overall social structure of Greece. This first promise–ending austerity–worried many around the world as anticipation of further conflict and the inability for Germany and Greece to reach a resolution. David Cameron, Prime Minister of the UK, said at the time, “What the Greek election will show is that there are warning signs…in the Eurozone [and] less rapid growth…” Many feared a “Grexit” was now truly a realistic possibility to end the tension since relations between Germany and Greece were initially at a standstill. However, by late February 2015, Tsipras had softened his stance and the Troika (namely the International Monetary Fund, European Commission, and European Central Bank) and Greece were able to agree on a four-month extension of Greece’s second bailout. In addition, Germany remained firm in its stance to prevent a third bailout and also forced Greece to introduce, and adhere to, additional measures, such as cracking down on tax evasion and reforming the pension and savings system.

Throughout all this, one thing is for certain. Germany and Greece should do their utmost to prevent the Eurozone from splitting up. A breakup would lead to huge ramifications, a loss of credibility, and price instability. In addition, China’s slowing growth and America’s fragile recovering economy would be prone to the contagion impacts and could easily spark off another global crisis that would take years to recover from. From the Eurozone’s perspective, a Greek default would have severe repercussions. A Grexit would set a precedent for other similar-minded nations like Spain and Italy, which are both borrowing funds of their own from the Eurozone, to pull back on austerity measures and create further unnecessary chaos in Europe. Germany would not benefit at all, especially in the short run, being a large provider of the loans to Greece. From Greece’s point of view, a Grexit may seem attractive to patriots who do not believe their nation should suffer economically and socially in order to adhere to Germany’s requests. Greece living within its own means involves a huge adjustment and can cause even more economic and political turmoil in the nation. Greece’s disappointing GDP performance and astounding 25% unemployment rate completely overshadow the primary budget surplus that it has recently achieved.

Furthermore, relieving onerous requirements would give Greece breathing space for recovery. While Greece should still be obligated to work towards acceptable and prudent debt-to-GDP ratios, Germany’s demands for severe austerity only results in further friction. Additional demands for a long-term primary surplus of around 7% to aid in the reduction of debt are also unrealistic for an economy that is struggling to tackle mountains of debts and soaring unemployment, amongst other problems. Germany should focus on measures that will spur economic growth. For instance, investment by Eurozone nations into other member economies (like the struggling ones) would be beneficial to everyone in the long run. Though this may go against the instinct of the healthier individual countries, in a union, each country heavily depends on the performance of the other union members. As such, the short-term costs of investing can have long-term gains in growth, GDP, and economic stability for the entirety of Europe.

Sources:

http://www.cnbc.com/id/102471533

http://www.eisneramper.com/observations-greek-election-european-central-bank-3-personal-wealth-blog-0115.aspx