Brexit? How About Grexit?

The debate over whether the UK should/will leave the European Union continues. The same question should be asked about Greece leaving the Eurozone. Remember Greece? That was the country that encountered some economic turbulence right after the global depression resulting from the US bank collapse in late 2008. It the reason the Eurozone has not yet recovered (current overall unemployment rate of 10%) to this day.

The Eurozone was a bad idea. It forced countries with quite different cultures to play by the same economic rules. It meant that if Italy and Greece were not as productive as Germany, they would end up running large balance of payments deficits. Why? Because they could not compete on world markets at the same exchange rate as Germany. And if you do not think having the exchange rate as a competitive adjustment mechanism is not important, consider the US. The dollar weakened relative to the yen from ¥360/$ in 1971 to ¥120/$ in 2015. That meant a dollar would only buy only a third as much from Japan as it did in 1971. Conversely, yen holders could buy dollar products for only one third as much as they did in 1971. In short, this adjustment allowed the US to remain competitive with Japan.

The Greek Bailouts – What Has Happened To Date

The first bailout program for Greece was in 2010 for €110 billion. An IMF “Stand-By” provided €30 billion (27%) and Eurogroup countries contributed €80 billion (73%). In 2012, it was cancelled after €73.7 billion had been disbursed. It was replaced by a new IMF Extended Fund Facility (EFF) and additional Eurogroup support. The EFF was to provide quarterly payments of €6.2 billion into 2016 totaling €28 billion, provided Greece achieved numerous qualitative and quantitative performance targets. The Eurogroup promised €144 billion over the 2012 – 2014 period. And finally last summer, the Eurogroup agreed to a third bailout agreement in July worth up to €86 billion without IMF participation.

In addition, back in 2011, Greece and its creditors agreed to what was effectively a 75% debt reduction. Additional support for Greece has been provided by the European Central Bank (ECB). The Bank has been buying Greek debt to keep rates from skyrocketing. 

Policy Differences

Throughout all of this, the relationships between the key players – the Greek government, the Eurogroup, and the IMF – have been strained. Greece has not been willing to take the various policy steps the other two are demanding. The Eurogroup wants more austerity while the Fund says more austerity would be counter-productive. The Fund insists that Greece’s debt burden needs to be reduced. At this point, the real battle is between Germany and the IMF over these two issues.