Greece, in Europe ?

Auriane Guiot, translated by Carolina Duarte de Jesus
24 Mai 2015

According to experts, the Greek debt has worsened enough to become a problem in Europe. With the arrival of the newly formed government lead by Alexis Tsipras, the matter of Greece leaving the eurozone is on the table again.

Source RR
Source RR
The eurozone is composed of 17 members, meaning that 17 states use a common currency. For a country to be accepted into this international ensemble, it must respect criterion of economic convergence specified by the European Union : criterions of Maastricht authorize a maximum of 3 % of an annual public deficit, and a public debt not exceeding 60 % of the GDP. It remains to be known if Greece respected these criterions when it entered the eurozone.

When the eurozone was created in 1999, Greece’s debt was of 105 %, greatly beyond the imposed 60%. Its deficit was of 1.8 %. The European Commission published a report announcing the convergence of the greek economy into the eurozone, which explains its entering in it. Nonetheless a few years later, the country is at the edge of default, that is to say, in the incapacity to refund the entirety or even a part of its debt.

The actual situation

The deal between the IMF and Greece ended last February. But with the arrival of Alexis Tsipras at the head of the Greek government, the IMF said they were ready to extend the deal. The new Prime Minister promised a peaceful negociation and assured that Greece was not in default and wouldn’t leave the eurozone.

On the 9 March, Yanis Varoufakis defied Europe in a Eurogroup meeting that was supposed to rule on the obtention of a grace period. The minister threatened to organize a referendum about Greece’s place in Europe the case of refusal of the proposed delays by Athens. As such, he suggested that the decision come to the Greek people as to whether their country stays in Europe.

What if Greece left the eurozone ?

If Greece leaves eurozone and reverts to its currency, the drachme, it would face a debt of 270 bilion euros, which represents 330 % of the GDP. This would induce the fall of international markets and the collapse of the European Union. If, contrarily, Europe were to grant preferential conditions to Greece, it would have to do the same for Spain or Italy, for example.

As a further handicap for Greece, its departure from the eurozone would induce an umconfortable situation with regards to its external commerce, since the country imports 75 % of its fuel. It would also lose the trust of other countries, whereas its notes have already been lowered by the main notation agencies.

Would Germany be the first victim of Greece's potencial departure?

According to Eric Dor de l’Iseg’s study, the Bundesbank, Germany’s Central Bank, would lose considerable amounts of money on its loans to the Eurosystem if the eurozone bursts. The German debt would be ailing because new currencies such as the drachme would lose their value compared to the euro. In this case, the Bundesbank would have to be recapitalized in Germany. Thus, this operation would be done at the expense of the German ratepayer and would highly raise German public debt.