Just three months in, Greece’s newly elected government is standing firm on the anti-austerity platform that brought it to power in the first place. Its creditors are not wanting to give in to the persistent Greek demands and offer another new bailout deal. If progress is not made soon, Greece will have to make a decision on whether or not they will stay or leave the European Union. Let’s take a look at both scenarios.
What it would mean if Greece leaves the European Union
If Greece were to abandon the EU, the new government would have to immediately circulate a new currency. This new currency would quickly depreciate against the Euro, put Greek banks in danger of closing and cause interest rates to shoot up. Some are saying that a Grexit may be best for both Greece and Europe in the long term. Greece would have the opportunity to allocate more funds to areas that they feel are important for progress. Jobs could be created to address the 20% unemployment rate in the country, and banks would be better able to loan money to consumers. If Greece hopes to once again be a contributing and thriving economy, the best course of action might well be to leave the EU –but it won’t come quickly, and it won’t be painless.
So, how will this affect the markets? In the short-term, we could see an increase in volatility, but European banks have been reducing exposure to Greece, and investor confidence in the Eurozone is much higher than it has been in recent years. Long-term, structural risk could be a concern due to the potential precedent such a move would set for other European countries like Spain, Portugal and Italy – all of which are carrying large amounts of debt. The fallout of an exit remains largely unknown, though as no country has ever left the EU.
What it would take to keep Greece in the European Union
Greece and its creditors will have to find a common ground if they hope to stay in the EU. Since the beginning, the two sides have taken a tough stance in negotiations but recent progress has led to optimism (albeit cautious) that a deal will get done. To access rescue funds, Greece will need to win over its counterparts of the Brussels Group which consists of the International Monetary Fund, the European Commission and the European Central Bank. If Prime Minister Alexis Tsipras is able to strike a deal with the creditors’ group, it will pave the way for euro-area finance ministers to consider making a payment.
With the European Central Bank recently approving a €1.2 billion increase in emergency funds to Greek lenders, negotiators seem to be making a little bit of progress. Hopefully this is the case, as Greece has said that it fails to secure more funding from its creditors it may be forced to seek funding from other countries. Tsipras, recently met with Vladimir Putin to discuss a possible exchange of cash for Greek assets. With the EU and Russia already at odds over Ukraine, many see the meeting as no more than politicking. But if a Greek/Russian partnership were to happen, it would be interesting to see how the Russians leverage the agreement, as Russia is in a recession of its own.
Unlike 2010, the EU is in a much stronger position now to handle a Greek departure. German Chancellor Angela Merkel remains optimistic that an agreement will be reached and that a Grexit will be avoided.