Greece: An Exit Strategy for a Failing Economy

Topics: Inflation, Macroeconomics, Unemployment Pages: 41 (12779 words) Published: May 6, 2014

Greece: An Exit Strategy for a Failing Economy

Group 30:
Viktoria Pilinko
Toms Andersons
Jekabs Jurdzs
Kipras Kazlauskas
Edgaras Marcinkus

Macroeconomics
The Stockholm School of Economics in Riga
April 19, 2012
1. Abstract
In this report the authors look at the current macroeconomic situation of Greece. The report provides an insight on the combined effects of the global financial crisis and the European sovereign debt crisis on the Greek economy. A selection of statistical data on the main macroeconomic variables has been included to facilitate understanding of the overall health of the economy. The report reflects how the inherent problems present in the economy have escalated since the adoption of the Euro, causing unsustainable levels of government debt. The authors of the report stress how the impairment on Greece to automatically adjust its competitiveness through changes in the exchange rate throughout the recession has ultimately resulted in the need for international aid. The report goes on to show how the austerity measures undertaken by the government to be eligible for receiving assistance from the European Central Bank (ECB) and the International Monetary Fund (IMF) have played a role in deepening the economy’s recession, and highlights how destructive would a continuation of the existing trends be for the economy. In the final part of the report the authors provide their view on a possible exit strategy for Greece that takes into account the previously described situation together with the potential dangers associated with this plan. The authors also provide with examples of similar cases previously and argue for why the suggested strategy of leaving the European Monetary Union (EMU) is necessary and the optimal way for Greece.

Table of Contents

2. Introduction
It is the opinion of the authors that the effect of the current economic policy undertaken by the government is only deteriorating the state of the Greek economy in the form of even less GDP growth, more unemployment and a larger government debt not only in the short run, but also in the long run. Measures implemented so far have proven to be fruitless, only to lead Greece to a state of a Selective Default credit rating by Standard and Poor’s, which very much represents reality with the second haircut on privately owned Greek debt agreed on in March 2012. (Standard & Poor's, 2012) The interest rate is has rocketed to nearly 30% and the only way to borrow more, which is inevitable, is through the ECB, IMF and the European Commission (EC) (together commonly referred to as the Troika), which would require intensifying austerity measures and thus sending Greece in an even deeper recession. Although one might argue that leaving the EMU is as much of a political decision as joining it, the economic reasoning behind the proposition of the authors is straight-forward and based on conclusions drawn from extensive analyses, conducted by both the authors and various statisticians in reports and articles, which are used as reading material and sources of reference throughout the paper. No disregard for the striking lack of competitiveness, urgent need for structural reforms in both the welfare system and the labour market is made; rather, it is suggested that given the current situation of Greece, the only reasonable and rational course of further action is for Greece to cut its losses and actually default and leave the EMU. Leaving the EMU would legally also imply leaving the European Union (EU); however, it would not be the first case of a taboo broken within the EU.(The Economist, 2012) A default in combination with regaining monetary policy instruments would provide with a ground zero for very much needed adjustments and space for action that is not self-destructive and presents an opportunity to save the Greek economy. The authors will analyse the beneficial effect of this regained “space” in the final part of the report. Within...

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