The unmaking of the Eurozone: Greece Story – Part III By Dr. Bobby Srinivasan and Dr. Sudhakar Balachandran

April 7, 2015 | Posted by bobbysrinivasan << back to blog

As expected, Greece, because of its poor fiscal policy of giving goodies to its citizens with borrowed money, is facing an insurmountable problem of having to reduce the budget deficit and budget debt which is near 200 percent of GDP. In the short-term it is neither feasible or nor practical to achieve.

Greece needs Euro 1.7 billion to pay the salaries and pensions of its citizens for April 2015 along with Euro 450 million payment to the IMF due on April 9, 2015. This need will of course be met by the ECB. But this practice cannot sustain as both time and patience is running out. The Greece Prime Minister has categorically expressed that his country cannot meet all the debt payments and wants atleast part of it to be written off. This of course will not be acceptable to the other Eurozone countries. If Greece is permitted then what about other debt ridden countries like the Portugal and Spain.

In the meanwhile the liquidity crisis had become rampant in the Eurozone countries. Mario Draghi ECB President lowered the euro interest rates from 0.15 to 0.05 percent. This was not enough. So he introduced an open ended program to purchase govt. assets worth 60 billion euro per month for the next 18 months. This will of course provide ample liquidity to the Eurozone markets. This will also bring down the govt. borrowing costs to record lows. It has facilitated the value of euro to sink lower to 1.08 level to the dollar a level not seen in the last decade. This some economist believe will mask the pain of a potential Greek exit from the euro, a prospect that once terrified financial markets and the country’s Eurozone partners. Just how consequential a Greek exit is the most important question for the 19 member block.

Some projections are already made. If Greece exits, the financial world will witness the following,

Greece GDP growth will fall anywhere between 20 to 40 percent.
This might prompt overseas investors to look less kindly on Italy, Spain, Portugal and other countries which carry large amounts of debt burden in their books.

As far as the Eurozone is concerned the Greece’s output as a percentage of Eurozone GDP is less than 2 percent. So their withdrawal may mean nothing to the continuance of euro. Further the European bank exposure to Greece has dropped from euro 175 billion to about Euro 42 billion. Thus banks have accepted the inevitability and reduced their risk.

From all points of view, it seems clear that the exit of Greece from the Eurozone will not have major economic impact on the overall performance of the Eurozone.

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