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March 30, 2010

Will Greece Leave the Eurozone?

Catherine New
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Greece is likely to leave the Eurozone in the next few years unless it can achieve major fiscal reform, Professor Charles Calomiris says. In his article “The Painful Arithmetic of Greek Debt Default” (March 18, 2010) from e21, an online economics journal, Calomiris maps out the difficult road ahead for the country’s economy.

At the heart of Greece’s fiscal problems is a toxic combination of outstanding sovereign debt (which exceeds 123 percent of the GDP), poor confidence in the legal and political systems, institutionalized corruption and huge amounts of social-welfare spending. Calomiris says that spending cuts are likely to be the most successful tool the government can use, however, without reform that addresses the country’s chronic corruption, the prognosis for sustainable recovery remains dim. Calomiris writes:

The top priority for Greece right now is to make the immediate and massive cuts in public expenditure that are necessary to restore fiscal balance. Cutting expenditures by a total of, say, 14 percent and promising tax and corruption reforms that would increase taxes by 14 percent would buy Greece time to make the deep reforms necessary to restore its tax base. Failing those tax reforms, additional expenditure cuts would be needed quickly. Following that path not only would resolve the Greek debt problem, it would help restore Greece’s productive competitiveness, increase labor participation and increase savings, all of which would boost growth and reduce the Greek current account deficit. … In the medium term, even if Greece restores fiscal sustainability through expenditure cuts alone, it must address the deeper problems that plague its economy, its taxation system and its society more broadly, all of which revolve around the problem of endemic corruption.

Photo credit: Flickr/lpinseel

Comments

by Georgios Dimopoulos | March 30, 2010 at 10:39 PM

Greece is high unlikely to leave the Euro zone. This will mean practically an economic and political disaster for the country. It will lose all the benefits of being a country member of E.U. (political and economic). It's currency will be easy target and very vulnerable to speculators and the everyday life in Greece will change for the worse. Politicians know that and no sane Greek politician will take the decision to take the country out of E.U. . Such a decision will cost him and his party their political future. The only way Greece to leave the E.U. is if only other countries decide to kick Greece out. Personally I think this is also high unlikely since this will mean that countries with similar problems will be kicked out of the E.U. in the future (Spain, Italy, Portugal etc.) and E.U. will lose the character of a Federation whose main goal is to compete directly U.S.A. Is like U.S.A. kicking out California because of it's fiscal problems. I think that Greece will do whatever it takes to meet all the budgetary targets on time. It's population has realized that this is a serious situation and people are ready to make big sacrifices. Leaving E.U. it is simply not an option for Greece and the Greeks know that for sure.

by rick sav | March 31, 2010 at 6:08 AM

Hi Georgios, We used to do business with Greece back in'93 exporting oranges to other EU countries and found that corruption was there and fully established even then. You had to pay every custom employee to get the product out of the country so corruption is so inbred in Greek mentality that only a very radical solution like outsourcing some governmental services (tax collection) to an honest independent outsider would solve the problem. And seeing the protests of communists and unionists in the streets I dont believe the PM has the guts and the people are really ready for this radical change. They would rather try to get as much credit as possible until the very last moment before the collapse and avoid this problem. But either way Greeks should prepare for a radical change, change from having a huge amount of government employees pushing papers to having very low salaries permanent unemployment unless Greeks can actually show something that they can do. Because last time I checked Greece does NOT produce anything and there is nothing that they can export (ok, food products, but even that kind of manual labor is done mostly by illegal albanians since Greeks are to "proud/lazy" to work for the same fee. But soon as it all crashed, they will be kicked out and will have no other choice but to work for even less than albanians unless they want to depend on UN food distribution system.

by Nameless | April 05, 2010 at 10:38 AM

I agree with Rick Sav 100%, being easy going (or lazy) and feeling superior is a Greek tradition. So Georgios, when Greece runs out of money to pay it's employees what will happen? It's 2011 and no one wants to lend you a penny. Wages are due and the treasury is EMPTY. You are the PM, what to do? P.S: Greece has zero friends in the EU /Balkans, they are antagonistic to everyone (FYROM, Turkey, Bulgaria, Albania) and they have effectively stopped any EU/NATO cooperation due to their Turkish dispute (Turkey is in NATO but not EU; Cyprus is in EU but not NATO) . Now they are going out of their way to shame Germany into bailing the Greeks out. It will only make the Germans angrier.

by Georgios Dimopoulos | April 06, 2010 at 1:23 AM

Hi rick and nameless, Rick sav makes some good points. Regarding Nameless I would like to avoid addressing the issues mentioned, because it has to do with foreign policy also and by the way he/she puts them he/she seems if not biased at least clueless about the situation in Balkans and the historical facts. The fact that Turkey is not in E.U. it is not Greece's fault. There are articles on-line explaining why Germany or Belgium-France don't see favorably the entrance of Turkey to E.U. Trust me, the Greeks are the ones who want most Turkey to enter E.U. so that we will stop spending a huge percent of our GDP to military equipment and fuels for F-16 dog-fighting over the Aegean Sea. Also accusations of a whole country being lazy or feeling superior I don't think are appropriate and in line with the spirit of the article or the general site of CBS and the CBS community. I never said that there is no corruption in Greece. Actually this is one of the main problems in Greece. Obviously rick sav knows the Greek reality really good and has experienced it firsthand. However I would not agree that Greece produces nothing. Greece has a very strong presence in the Shipping industry. It is consistently ranked in the top 3-5 countries globally. Additionally Greece has a rather healthy tourism industry which has a big contribution to the country's GDP. Moreover it has a strong Banking sector with all the major Banks having a strong presence in Balkans. Constructions firms have undertaken projects in Middle East and so on. Also I never said that no changes are needed. Radical changes are needed and will be made. Already the government voted for a package of measures and more are to come in the future. Greece problem right now is not that we are not having any money or the markets are unwilling to lend us. We have been able to gather offers to cover every bond issuance up until now with the exception of a 20-year bond issuance which was half covered because the price was way too low (pricing of a 5-year bond), but still even in this case we managed to raise 500m from that issuance. So up until now the markets are open for Greece and there are out there people who actually want to lend us more than a penny. The problem is the pricing we are getting from the market and that is what the fuzz is all about! By studying the agreement that E.U. reached last week someone understands that even if the rest of the European countries help us, they will lose no money at all. The goal is just to guarantee our debt so the markets will have no reason anymore to request such high interest for our debt. Overall, even though I am not proud about the current situation, I am rather optimistic about the way things will play out. Following the whole situation very close, I can tell that people in Greece have realized the severity of the situation and are ready for some serious reforms (decrease of the size of public sector, decrease in salaries, increase in taxes, cut in public spending etc.) In conclusion, I think it is a mistake to consider this only as a Greek crisis; It is more of a test about the E.U. as an institution. From a political point of view, it is a great opportunity to demonstrate it's commitment to become strong political and economic union which will be able to compete in the global markets with U.S. and China.

by Nick Christakis | April 10, 2010 at 3:12 PM

I belive greece will leave the EU, as well as the other countries, regardless of what I have read above. I am from the United States, I am an importer exporter of many goods and services, as well as crdue oil. I see the pains the greeks are going through, regardless of corruption. By the way all of EU are corrupt, maybe not germany, but Italy, please they are blowing up bridges against anti mafia wars. So its really germay who are weired, they need to change not the Eu, we should kick Germany out and let the eu run itself the greek Italian way, I assure you it would work. Greece will survive regardles of the EU, it is a strong country with strong roots.

by Don Antonius | April 25, 2010 at 5:36 PM

My 2 cents on the topic: The sollution would be to drop the Euro all together, return all the separate euro-zone currencies. This isn't going to work out for the Euro-Zone. In my opinion they made a huge mistake when choosing for one currency. You can not have one currency, If all countries in the Euro_Zone keep there own governments. Now every government/country has to be successfull to push the Euro up. Which is impossible, so the weaker countries will always pull the strong countries down. If you have 1 currency you need ONE central government and one monetary pollicy. You would have to have a set up like the USA. 1 president leading all the separate states. For Europe and the EUro the only way is down. THe issue that countries can not print more of their currency to solve or help with their deficit problem is showing to be a economical fatality. Will Greece leave the Euro-zone? No I do not thinks so. Will Greece turn to the Drachmen, its trusty old currency. Well I think that would be a Great sollution.

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