Financial markets around the world have been jittery this week, as fears rise of a possible Greek exit from the eurozone after Prime Minister Alexis Tsipras rejected an extension to the country’s $270 billion bailout program. Greece's meeting with eurozone finance ministers failed to yield a deal Wednesday, and talks have been pushed to Monday. But time is running out. Greece's current bailout program ends on Feb. 28.
During his inaugural speech in parliament Sunday, Tsipras said Greece would not extend the deadline for its bailout, putting the economy in danger of going bankrupt. The leftist premier also said he would reverse some of the measures imposed by Greece's creditors, risking the country's place in the eurozone.
Tsipras’ determination is leading many to ponder what might happen if Greece were to part ways with the rest of Europe.
There are some advantages for Greece if it did end up leaving the eurozone.
“Greece would trade short-term pain for longer-term gain,” Bill Adams, senior international economist for PNC Financial Services, says. If Greece leaves the eurozone, the country would be forced to impose capital controls and sharply devalue its currency, Adams says. Greece would then endure high inflation and financial stress for a couple of years but would likely see stronger growth.
An exit would allow Greece the freedom to devalue a new currency to make foreign trade more attractive, according to Douglas Elliott, a fellow in economic studies at the Brookings Institution.
The crisis comes at an interesting moment for Greece. Economists expect the country’s economy to expand at a 2.5 percent to 3 percent annual rate in 2015, stronger growth than most European economies are currently experiencing, according to the Conference Board.
“The question is whether Greece would want to go through another long period of severe crisis to achieve that when you’re already at a point of recovery at the moment,” Bert Colijn, senior economist at The Conference Board, says.
The dangers of a Greek exit from the eurozone far outweigh the positives -- especially in the first year. “Pulling out of the euro would almost certainly throw Greece at least temporarily back into a severe recession. The [currency] switchover itself would create huge uncertainty, because the euro was deliberately designed without a way of exiting,” says Elliott.
But if Greece were to exit the eurozone, there would also be negative psychological impacts. In the short term, euro member nations would be skeptical about the future value of euros, given the fact that one highly indebted country has withdrawn from that monetary union, which could lead to possible exits from Portugal, Spain and Italy.
“The value of the euro has been a disaster for a lot of southern European countries, notably Greece, but also Spain, Portugal and Italy,” Gary Burtless, senior fellow for the Brookings Institution, says. “If Greece leaves, then the eurozone will have to wonder what it must also offer Spain, Portugal and Italy to make them willing to stay in.”
The situation in Greece could be similar to Argentina in 2002, when it uncoupled from the U.S. dollar and adopted a new currency that was revalued. The immediate effect: Goods and services produced in Argentina became a lot cheaper for the rest of the world to buy. Argentina’s recovery was fairly rapid, and the country enjoyed a few years of exceptional economic growth, offsetting what had been some terrible years ahead of time.
The difference between Greece and Argentina, however, is that although Argentina was pegged to the U.S. dollar, it was not part of the U.S. economy.
“Greece is much further into the game of integration with the rest of the eurozone than Argentina was with the United States. The analogy holds for what to expect with Greece’s export sector and eventual return to growth, but the question of what Greece’s place in Europe would be after an exit is much more uncertain,” Adams says.
Although Greece is a very small share of eurozone gross domestic product and eurozone employment, the most important impact Greece has on the rest of Europe is presence. “The concern of how Greece’s problems set for how the eurozone sorts out governance issues is an extremely important one,” Adams says.
The new Greek government said last month it would not cooperate with the so-called troika (i.e., the European Commission, European Central Bank and International Monetary Fund), nor would it seek an extension to the bailout program that ends Feb. 28. Before winning national elections last month, the far-left Syriza Party, led by Tsipras, staged a revolt against the budget cuts and other austerity measures under the bailout arranged by the troika and accepted by Greece's previous conservative government.
Shortly after the Syriza electoral win, Tsipras agreed to form a coalition government with the small, right-wing Independent Greeks Party and said he would try to renegotiate Greece's debt agreements, the $270 billion bailout package that has allowed Greece to avoid bankruptcy.
Last Friday, Standard & Poor’s downgraded Greece’s credit rating with a negative outlook, reigniting concerns about the health of the global economy. Also last week, the European Central Bank announced it is blocking banks from using Greek debt as collateral, boosting fears about the global economy.
“Europeans conceive the eurozone as foremost a political project and secondarily an economic one,” Adams says. “If you look at what’s going on in Ukraine right now, the motivation for Europeans to stick together is pretty clear.”