On 2 May 2010, the Eurozone countries and the International Monetary Fund (IMF) agreed on a €110 billion bailout loan for Greece to help stabilize the country’s economy. However, this was insufficient to help reduce Greece’s debt and in October of 2011, Eurozone leaders agreed to offer a second €130 billion bailout loan for Greece.

Recently it has become clear that this second bailout is also insufficient and that if a third bailout is not given to Greece then it will default on the conditions of its loans. Reports have indicated that Germany, as the main contributor to the bailouts, and the IMF have signaled that they will not take part in any additional financing for Greece.  If an additional bailout is not given, Greece will be forced into bankruptcy and possibly forced to be removed from the Eurozone. This exit of Greece from the Eurozone has come to be known as “Grexit.”

Although the Eurozone has no legal mechanism for removing member countries, the Eurozone may have an indirect way of forcing Greece’s removal. The European Central Bank (ECB) controls the monetary policy of the Eurozone and would have the ability to cut off Greek banks from the liquidity provided by the ECB. This would mean that the euros held by Greek banks would become separated from the euros in the rest of the Eurozone and over time would turn into a separate currency. Because the Greek banks are entirely reliant on the ECB for liquidity, they would become insolvent as soon as the money stopped flowing. The Greek government would have no choice but to create new banks, with substantial government involvement.

But this may not be the best result for the Eurozone. First, a Greek exit from the Eurozone would deny any chance that the IMF and supporting countries of ever recouping the monies they have invested in the Greek economy. Second, would be erosion of any type of trade relation with Greece and Eurozone member states. Third, could be the direct effects that an exit will have on remaining Eurozone members. The United Nations International Labor Organization (ILO) has published a study showing the effects a Greek exit from Eurozone would have on Germany, which include a jump in unemployment from the current 6.8 percent to 9 percent in 2014, according to Ekkehard Ernst who heads the ILO’s Employment Trends Unit. Finally, a Greek exit may have severe political implications. Portugal, Italy and Spain have also been experiencing similar economic problems. How would a Greek expulsion affect them? A Greek expulsion will leave these troubled Countries in a state of unrest and fear as to whether or not they will share the same fate as Greece if they are unable to pay back its loans. Macroeconomist  Andreas Sachs has stated “A Greek exit would be accompanied by significant uncertainty in financial markets,” he said, adding that such a scenario would again raise the question whether Italy or Portugal would also leave the shared European currency. “That means the sale of government bonds from these states would become a problem, leading to renewed austerity measures in these countries which, in turn, would almost certainly strangle their economies. l An expulsion of Greece may lead to instability in the Eurozone as a whole, which might lead to dire consequences to all members.

Greece may also decide to voluntarily withdraw from the Eurozone. This would require them to print their own money and establish new banks to support their currency.   The fact that Greece does not export substantial amount of raw materials and finished products will result in a devaluation of the currency as a medium for international trade. The largest industries in Greece are the service and tourism industries will take severe financial damage as skilled service members will flee the country and the cost of tourism will significantly drop.  Furthermore, foreign investment will significantly decline. A Greek exit from the Eurozone might have dire consequences for Greece in both the long and short term.

It is clear that a Greek exit from the Eurozone will probably have a negative impact on all those involved. The question is whether or not there is a viable solution to allowing Greece to declare bankruptcy short of their removal from the Eurozone. Greece must have some type of sanction for not meeting their financial obligations but not at the cost of destroying the solidarity that the Eurozone was created to build.

 

 

 

 

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