Greece has been in the throes of economic crisis for years. Turmoil first erupted after Greece’s economy was badly bruised by the global impacts of the Great Recession, and the Greek people have been suffering ever since. In 2009, a poor economic climate combined with a debt level of over 119 percent of GDP caused Greece’s credit rating to fall below an “A” grade for the first time in a decade. Now, almost six years later, investor confidence is still plummeting as Greece’s credit rating is at an all-time low of “CCC minus” and its debt level stands at an overwhelming 177 percent of GDP.
So, what is the best thing to do when your country is in a downward tailspin headed toward complete economic collapse? Grab your money and run. Reuters recently reported that an estimated 600 million euros were withdrawn from Greek banks last Saturday alone, clearing out more than one-third of the country’s ATMs. In order to prevent a 1920’s era bank run reminiscent of the Great Depression, and a consequent collapse of the Greek banking system, officials announced a shutdown last Monday that closed all Greek banks as well as the Athens Stock Exchange. These capital controls have not only left Greek citizens without access to their own money, but also set off a dangerous domino effect: global stock markets sank soon after the shutdown, reflecting investors’ growing doubts about Greece’s ability to pay back its debt.
Well, investors were right. Last Tuesday’s 1.5 billion euro deadline came and went, and Greece is now effectively in default. Furthermore, Prime Minister Tsipras’s cries for a two-year extension went unanswered by the International Monetary Fund. Now all eyes are on Greece as the world awaits Sunday’s referendum vote to see if the Greek people are willing to accept the austerity measures that will be imposed on them as a condition of Greece’s new bailout. But recent years of financial hardship may make austerity a tough sell: public opinion polls taken this week found that 54 percent of Greeks are planning to oppose measures to reign in government spending while only 33 percent are in favor of the austerity that would accompany another bailout. If this poll is indeed indicative of what is to come on Sunday, and the Greek people vote “no” on austerity, it may yield more than a failed deal between Greece and its creditors; Greece may be forced to abandon the Euro altogether.
The European Union’s establishment dates back to the creation of European Economic Community after the end of World War II. The EEC was formed to foster peace and cooperation between nations that had all but destroyed each other just over ten years earlier. The goal was simple: create a single market across all of Europe in which countries are bonded together by fewer trade barriers and the unrestricted movement of people, goods, services, and capital. And as this community grew with more nations joining its roster, the European Union was born. Unfortunately, the engineers of the EU failed to weigh the economic consequences of such a union as heavily as their political aspirations to unite the diverse European continent.
There are 19 countries in Europe that are included in the Eurozone. They all share the same currency, the euro, and together make up what is known as a monetary union. This means that monetary policies for all 19 countries are dictated by one dominant force: the European Central Bank. By adopting the euro and entering into this union, countries such as Greece, Germany, and France effectively gave up control of their own money supplies in exchange for the convenience of a common currency and single exchange rate. This is a great option for some regions; The United States is the epitome of an optimal currency area because American citizens share common a language, culture, and the ability to freely relocate around the country. The Eurozone, however, may not follow suit: the euro nations are incredibly diverse and often experience vastly different economic shocks requiring unique monetary policy solutions. Furthermore, European nations lack the labor mobility of the United States. It is much more difficult to respond to poor economic conditions by moving to a different European nation than it is to relocate to a different American state. Ultimately, Greece’s participation in a “one size fits all” monetary strategy controlled by the ECB has left itself unable to employ monetary policy as a defense against the current debt crisis.
Plenty of analysts are busy spreading fear about the dangers of Greece’s potential exit from the European Union. If a deal cannot be reached with Greece’s creditors and the country is forced to leave the Eurozone, the Greek people will have to sacrifice the convenience and prestige that comes with the euro. However, they will also be empowered with the ability to devalue their currency, increase exports, and start on a path toward economic recovery. There is no question that the Greek government needs to make responsible economic decisions moving forward; the country is in dire need of structural reform to address the commonplace corruption and rampant unemployment around the country. Monetary policy is simply another tool that should be made available to Prime Minister Tsipras and the well-deserving people of Greece.