BreakingModern — Greece is in some deep financial trouble. Its economy has relied on loans from the European Central Bank (ECB, the euro’s main bank) and the International Monetary Fund (IMF) since the financial meltdown of the late-2000s.
The Greek Crisis
On June 30, the ECB was set to send Greece more bailout money, a neat package of $8.1 billion. Greece needed that bailout badly — its banks barely had enough money to continue running. But when the ECB asked Greece to enact austerity measures in order to get the loan (meaning the country would have to make major budget cuts to things like pensions and healthcare,) the Greek government asked the Greek people to vote on whether or not to accept the creditors’ austerity terms.
The Greek people voted “oxi” (no in Greek) to the austerity measures.
Greece’s Prime Minister Alexis Tsipras himself campaigned for the “oxi” vote, thinking it would give him more leverage in negotiations with Greece’s creditors. He was hoping that, if the people of Greece were unwilling to bend to the ECB’s demands, the EU would do anything to keep Greece in the euro zone (including maybe forgiving some of Greece’s loans or giving Greece the bailout money without demanding austerity).
Did the vote actually give Tsipras leverage?
Looking For a Bailout
Tsipras is currently trying desperately to form a bailout deal with the ECB to allow Greece to receive funds and stay in the EU. The conditions of that deal could end up looking just as austere as the measures the Greek people voted against. In fact, some are saying the new terms might actually be worse.
So why is Greece considering an austerity-esque deal after voting against austerity? Because if Greece exits the euro zone (a “Grexit,” as many call it) things start to look pretty bleak. Greece’s banks will collapse, and Greeks won’t have any money until Greece prints new versions of its old currency, the drachma.
The Return of the Drachma?
Even when Greece gets back on the drachma, the drachma will be worth about 40 percent less than the euro, and Greece will suffer from some pretty severe inflation. That means that all imports, such as oil, will become ridiculously expensive, and any companies that borrowed loans from euro-based banks outside of Greece could go bankrupt. In other words, economic chaos will reign.
On the Bright Side
There could, of course, be a bright side to the Grexit: the country’s new super-cheap status could boost tourism and therefore boost its economy. But really, there’s no guarantee that the Greek economy will bounce back again. Greece is in for financial trouble no matter what, but at least the creditor-pleasing austerity-related trouble is predictable and offers Greece the support of the EU.
So what is Europe going to do? France is all about compromising with Greece to keep the EU together, but countries like Germany and Finland insist that Greece needs to cut back its spending — cut it way, way back — if it wants to stay in the EU. And Germany has some major clout; it’s a powerful EU country and the home of the ECB.
So what are the potential scenarios?
If Greece cuts back on spending, essentially enacting austerity despite the people’s vote against it, Germany and Finland will probably open up discussions for another bailout for Greece. If this happens, Greece will most likely remain in the euro zone, but civil unrest and intense protests against the cutbacks might come to a dangerous head.
If Greece leaves the euro zone, not only will Greece fall into economic chaos, but also the EU will essentially prove itself impermanent. If Greece eventually recovers, other debt-riddled countries (cough cough Spain and Italy cough cough) might be tempted to leave as well. The uncertainty could also cause the value of the euro to fall in international markets.
But all in all, a Grexit would probably hurt Greece more than it would hurt the EU. And a Grexit could definitely occur if Greece won’t accept the EU’s terms, or if the bailout talks don’t actually result in a bailout.
Greece’s creditors are putting the pressure on for a deal, so by the time you read this, the whole Grexit situation might have changed dramatically. Tsipras returned home on Monday with a new deal he struck with EU leaders and has till Wednesday to sell the deal to lawmakers and the people of Greece.
In other words… watch this space.
Featured Image Credit: Photo by KiloMeater via Flickr
Image Credit: Photo by Tilemahos Efthimiadis via Flickr