The term Grexit is a combination of Greece or greek with the word exit which means an exit of Greece from the eurozone or European union. The Grexit was cropped up due to Greece’s possible withdrawn from the eurozone. The term introduced by two famous economists of Citigroup Ebrahim Rahbari and Willem H. Buiter on February 6th, 2012 and which subsequently made headlines in media and major newspapers.
The Grexit is very critical for investors and others including economists who tried to study the impact of the financial crisis on the greek itself and the world economy. The term Grexit become popular as greek citizens proposed to leave the European Union and introduce local currency drachma as the official currency of Greece to ward off the country’s debt crisis.
Greece joined the eurozone in the year 2001 but the 2009 financial crisis left Greece as the epicenter of Europe’s debt problems. Greece started facing bankruptcy from 2010 which spread the fear of the second financial crisisFinancial CrisisThe term "financial crisis" refers to a situation in which the market's key financial assets experience a sharp decline in market value over a relatively short period of time, or when leading businesses are unable to pay their enormous debt, or when financing institutions face a liquidity crunch and are unable to return money to depositors, all of which cause panic in the capital markets and among investors. one after the other among the peer members. By then many members had already assumed exit of Greece from the eurozone and the term Grexit cropped up.
The aftermath of the 2009 financial crisis makes clear the extent to which Greece was exposed to financial terrible ordeal it was going through. In 2010 when Greece was heading towards bankruptcy Greece’s debt to GDP ratioDebt To GDP RatioThe debt to GDP ratio is a metric to compare a country's debt to its GDP and measures its capability to repay its debt. A country with a high ratio would not have difficulty repaying its debt but will not seek debt due to higher chances of defaulting. was exorbitantly high 146%. There were many factors that were the apple of discord for the Greece debt crisis.
Factors Behind the Grexit
Following are the main factors which lead to the Greece debt crisis:
- Corruption and tax evasionTax EvasionTax Evasion is an illegal act in which the taxpayers deliberately misreport their financial affairs to reduce or evade the actual tax liability. This includes using multiple financial ledgers, hiding or representing lesser income, gains, or profits than actually earned, overstating deductions, & failing to file returns. which left Greece in debt problems had been consistent for many decades and being misreported to be in line with guidelines of the eurozone.
- The trade deficitTrade DeficitWhen the total sum of goods or services that a country imports from other countries is higher than the total sum of goods or services that a country exports to other countries, this is referred to as a trade deficit, which is the opposite of the balance of trade theory. also contributed to the Greece crisis significantly because when Greece become a member of the eurozone cost of wages went up very high leading to unmatched positions with available resources.
- Major industries of Greece like shipping and tourism were going through a terrible ordeal which subsequently fueled the Greece crisis.
Consequences of Grexit
The following are consequences of Grexit.
- Once it is confirmed that Greece’s economy is falling investors were asking for the higher interest rate on the loans being given to Greece to boost an economy which failed to create positive results instead it made Greece deficit more worse. To ward off the Grexit, in 2010 when it was evident that Greece was about to exit Eurozone European Union, IMF (International Monetary Fund)IMF (International Monetary Fund)The full form of IMF is International Monetary Fund. It is an organization of international recognition based in Washington DC comprising of 189 countries working towards international monetary cooperation with an objective of establishing economic stability across the globe. and European Central Bank came forward to bail out Greece’s economy with €110 Billion euro loan with conditional austerity measures including structural reforms and privatizationPrivatizationPrivatization is a measure that transfers ownership and management of public sector industries (those under the control of the government) to the private sector. This can be accomplished through the outright sale of such enterprise's assets or by allowing private individuals to participate in such industry or enterprise by removing restrictions..
- The Greece economy failed to crop up further due to the increasing rate of unemployment and poor economic performance across various industries major being shipping and tourism to name. The aftermath of recession due to which Greece’s economy become worse second bailout package was offered for around €130 billion euros. it was then in the year 2014 when the recession hit again Greece.
- In 2015 when the new government steps in with Syriza being elected by the Greek people whose main mandate was to terminate the austerity measures which they assume was bone of contention for failing economy so they restraints the loan repayments to the lenders. Greek people voted to reject the bailout terms and conditions to be followed which results in decreasing trends in stock markets as the perceived chances of greek to recover wiped out. European Central BankEuropean Central BankThe European Central Bank is the apex bank of the member European countries, monitoring the banking and financial functions of all member countries in order to maintain the price stability of the European currency, the Euro. kept on providing emergency liquidity services and help to ward off the liquidity crisis. If Greece runs out of the required money the only option remains with Greece is to print an alternative currency which could be the Grexit from the European Union.
- Eurozone or the European Union has the number of benefits for its respective member countries in terms of trade and other but at the same time, there are demerits as the 19 member countries share the same currency. Greece’s monetary policyMonetary PolicyMonetary policy refers to the steps taken by a country’s central bank to control the money supply for economic stability. For example, policymakers manipulate money circulation for increasing employment, GDP, price stability by using tools such as interest rates, reserves, bonds, etc. including the extent of currency which Greece can print is controlled by the European Union. Members of the eurozone were afraid of the fact that increasing the number of euros in circulation will result in inflation. The exit of Greece from the eurozone will make Greece have its own monetary and fiscal policiesFiscal PoliciesFiscal policy refers to government measures utilizing tax revenue and expenditure as a tool to attain economic objectives. and could reintroduce the drachma as their official currency.
- Reintroduction of drachma as the official currency of Greece has its own limitations as the drachma was expected to devalue against the euro which will increase the government debt ratio because the loan was provided in euro. Devaluation of drachma also resulted in the people withdrawing more euro from the bank causing the bank on run. Devaluation of the drachma and official exit of Greece from the eurozone had made the people withdraw more euros due to which deposits in Greece reduced by circa 13% in March 2012.
Impact of Grexit
- The official exit of Greece from the eurozone had negative consequences. it was expected that the initial impact of Grexit would be confined to the extent of minor economic trouble but in the long term, many economists knew it would be a disaster that could easily impact other European member states at the same time and subsequently effecting the entire eurozone. Grexit impacted investors’ confidence very badly which could be felt in other eurozone particularly Spanish, Italian and Portuguese markets.
- It also increases the chances of sovereign defaults and created the worldwide recession causing a decline in the GDP of major economies by circa 17.4 trillion euros. Grexit had far-reaching consequences and had affected major economies like the US, China, and Germany which subsequently increases unemployment across the various sectors.
- Grexit also impacted the economic policies of the other eurozone members which had economic and political relations with Greece. Due to Grexit, other members had to write downWrite DownWhen the carrying value (purchase price – accumulated depreciation) of an asset exceeds its fair value, it is referred to as a write down. their respective budgets considerably. The budget deficitsBudget DeficitsBudget Deficit is the shortage of revenue against the expenses. The budgetary deficit could be the sum of deficit from revenue and capital account. of government to which Greece owes money increases further resulting in sovereign defaults. To recover these losses the government had to raise taxes and a further reduction in expenditures desired. All these factors reduced the demand for goods and services which subsequently impact the economy as a whole and quality of living of people.
In conclusion, we could say that Grexit had been envisaged as bad for Greece in the short as well as in the long run.
- Lack of competitiveness of the Greece economy resulting in the devaluation of drachma as compared to the euro.
- The real income of people, employees including pensioners contracts considerably.
- Sovereign debtsSovereign DebtsSovereign debt is the money borrowed by a country’s central government, primarily achieved by selling government bonds and securities. Treasury notes, bonds, and bills are some examples of sovereign debt issued by the United States. and private debts increase as the euro appreciates against drachma and Greece could not service the debt obligations.
- Deposits in the bank had been converted into drachma which decreases the actual deposits being kept in the initial euro.
- No credit had been available for new business as the lenders to Greece were not willing to lend the same which reduced the supply of basic necessities like foods, medicine, and fuel, etc.
- The government failed to balance revenue and expenditure. If the government print more local currency it will create inflationary conditions which in turn will wipe out the improvements being made by drachma.
- Domestic political parties could not provide a positive economicPositive EconomicPositive Economics is a branch of modern economics that describes, explains, & clarifies several current economic facts with an objective approach. It prohibits value judgement & only revolves around the “what is” scenario. environment that is required to sustain in the long run for the growth and prosperity of Greece.
This has been a guide to what is Grexit and its meaning. Here we discuss the impact and factors behind the Grexit along with consequences and Greece’s timeline. You can learn more from the following articles on Economics –