The economy of the European sphere has been taken on an up-and-down ride over the last few months, with the Greek economy posing an additional challenge to an increasingly uncertain financial situation on the continent. Greece has been the victim of financial woes for more than a few years now and has been one of the flagship members of the so-called “P.I.G.S” of Europe (Portugal, Italy, Greece and Spain), nations whose weak economies are hindering the strength of the eurozone as a whole, according to many economists. But the crisis in Greece has come to a head, with the country’s top officials negotiating with other key euro users as to whether or not the current bailout program in place will be continued.
The bailout program in question is particularly problematic for the current government in Greece, due to these new officials having been elected on a strict anti-austerity platform. Austerity is the general name for policies governments adopt during tough financial times in order to reduce their deficits; usually, this involves either higher taxes, cuts in government spending or both. It’s a sticky situation for a country working through an economic depression. No other solutions seem to be lurking on the horizon, but the already-suffering Greek people aren’t in the position to be giving more than they already are. But if the newly elected Greek government sticks to its anti-austerity resolutions, then it runs a high risk of defaulting, losing funding from the European Central Bank and from individual countries across the continent as well as loans from the International Monetary Fund.
One potential solution to the Greek problem is for Greece to remove itself from the eurozone and cease all use of the euro as its national currency. The potential of a “Grexit,” as it is currently being termed, is garnering responses up and down the spectrum, from negative to positive. The Greeks believe that many of their financial troubles stem from being so interconnected with the European markets and using the euro. However, being part of the eurozone is the only thing that seems to be keeping the Greek economy afloat right now.
Thus far, the prospect has not made many dramatic waves in European and American markets. If Greece was to leave the euro and revert to having its own currency (the former currency was called the drachma), it would have to figure out how to quickly print new notes and how to ensure that there is no bank run that would drain any kind of remaining reserves. The new currency would be valued very low and would have to do some intense catching up before making it close to the value of the euro or other key world currencies.
A currency change would pose all of these problems in addition to likely high inflation, and Greece would not have the relatively easy access to funds from other European countries that it had in the past. Greece would most likely stabilize eventually, but it would be working with a long recovery.
However, the effect in European and American markets would likely not be painless but would be minimal and nothing to be too concerned about. Despite Greece coming to a deal Monday morning that ruled out a Grexit for at least the time being, it’s still not a wholly negative option for Greece to consider other currency options if this current deal fails.
Feb. 27, 2015