I just returned from vacation in Malta, an island in the Mediterranean only 60 miles off the coast of Sicily. One of the topics of conversation there was whether their neighbor, Greece, could and would stay in the Eurozone, or would be forced to exit the union and return to using its own currency.
The Greek drachma has a long history. Its use in one form or another goes back to over 1100 BC, and the native Greek currency was only supplanted by the Euro in 2002. Still, a Greek exit from the common currency could have a devastating impact.
After several years of crisis, negotiations between Greece, the European Commission, and the International Monetary Fund (IMF) are still ongoing. Eurozone officials and the IMF want Greece to cut its spending and reduce outstanding debt, while the Greek government says it can’t easily do that and protect its citizens’ welfare.
According to economics professor Jeremy Bulow at Stanford University, since the crisis began, Greece has experienced a fall in income comparable to the Great Depression of the 1930s. Without dramatic reforms, it seems uncertain whether Greece can stay in the Eurozone, and the anxiety has already pushed yields on Greek 2-year debt to above 25%.
“The two sides are no closer to an agreement than when the Greek government took office almost three months ago,” says Simon Nixon, writing for the Wall Street Journal in Europe, with the negotiators arguing over Athens’s reform plans and ways to reduce government debt.
The bottom line, concludes Nixon, is that Athens won’t receive any bailout funds “unless it can reach a deal that satisfies the IMF that Greek debt is on a sustainable path.”
Meanwhile, European Central Bank President Mario Draghi claims Europe’s single currency is “irrevocable” and a way will be found to keep Greece in the monetary union.
Until there’s an agreement, the risk remains that Greece may default on its existing debt. That could cut Greece off from access to new IMF and Euro funds and foreign currency, which it desperately needs. It could also prompt a domestic bank crisis, as Greek citizens and businesses race to hoard or expatriate Euros before they’re frozen. Although Greece accounts for only a small portion of the Eurozone’s economic output (less than 2%), the fear remains that a Greece banking and financial crisis could be contagious and spread to the other more fragile members of the Eurozone.
The end game would be a Greek exit from the Eurozone, and a return to a domestic currency like the drachma. Financial analysts feel that the Eurozone, and the other European economies, are in far better shape now than they were when the European banking crisis first started. But there’s no doubt that if Greece is forced out of the Eurozone – the so-called “Grexit” – markets across the globe will feel the repercussions.