Grexit: The What, The How and The Aftermath

GREXIT: The What, The How and The Aftermath

If you skim through the brown paper at least twice a week, chances are you have at least heard about the term Grexit. For those who haven’t heard, Grexit refers to the Exit of Greece from the European Union. Debates worldwide about the repercussions of Grexit have the economists in a fix. But why is there a possibility of Greece leaving the EU? Where did it all start? Let us answer some of these questions before exploring the effect of Grexit on various stakeholders.

European Union and Greece Debt Crisis

The European Union is a politico-economic union of 19 member states that have adopted the Euro as their legal tender. EU member states have free flow of capital, goods, people and services between them. To become a member, a country has to meet the Copenhagen criteria, defined at the 1993 meeting of the European Council in Copenhagen. These require a stable democracy that respects human rights and the rule of law; a functioning market economy; and the acceptance of the obligations of membership, including EU law. The main advantage of EU is that it greatly reduced the transaction costs for the rest of the world dealing European countries. It was better dealing with one currency than 19 different ones of different countries. Also, a noted condition was that a country’s fiscal deficit must be 3% of GDP-as a fiscal stability measure.

Greece joined the European Union in 1981, and adopted the euro in 2001. Starting from 2007, Greek’s economy was rattled and shattered by series of recessions, which consequently led to high structural deficits and debt-to-GDP levels. Greek tax revenues are consistently low, and as subsequent governments failed to reign in public spending, the debt pile simply kept increasing. Availability of cheap credit from the EU kept money flowing in the country, which led to increase in imports and cash outflow from the country. Greece’s government bonds were downgraded to junk bonds in 2010, which forced the Eurozone countries and International Monetary Fund to sanction a Euro 110 billion bailout package to the Greek government. The only condition was to implement austerity measures and some other measures to control the debt.

Extreme austerity measures meant a cut in public spending and affected the state welfare and pensions. There was a growing discontent among Greek people and many wanted the government to not to comply with what they believed to be financial arm twisting and unnecessary meddling in their affairs by other powerful countries, especially Germany.

In mid-May 2012, there grew a strong possibility of a new coalition Greek government, which led to strong speculation of Greece exiting the Eurozone, and for the first time the term Grexit was used. However, the new government continued with the austerity measures to keep their country afloat.

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