Wednesday, July 01, 2015


A Greek debt default and its exit from the Eurozone is probably inevitable now.  Indeed it was probably inevitable when the economic crisis first hit.

When it happens there will be alot of blame being thrown around by the various parties but really the lion's share can be place squarely on the EU, the IMF and Greece's creditors. They are the ones with the greatest room to maneuver in this crisis but due to their stubbornness they are refusing to use it.

By no means is Greece innocent in all of this.  They spent beyond their means expecting the EU to bail them out when the proverbial other shoe dropped but on the other hand Greece's creditors kept lending them money because they expected the same thing.  

The current crisis could have been avoided if the EU and the IMF would have taken a different approach to Greece's debt situation than their default position of demanding austerity before providing for bail-outs.  In order for Greece to get out from under its debts it needs to positive economic growth.  Austerity creates the exact opposite.  In fact since the crisis first materialized the Greek economy contracted 25%.

So the Greeks run into debt trouble.  They seek help and their helpers demand they take steps which reduces economic activity within Greece, which, of course, prevents the Greeks from being able to meet their new debt obligations, which leads to more demands for austerity from the EU and the IMF, which reduced economic activity some more and so on in a nice little vicious circle.

It is an untenable situation and something drastic will have to change in order to break the circle.

There are probably two choices, neither one of which is a good one.

The first choice is the EU and the IMF forgive some of Greece's debt and reschedule the rest of it, without imposing any more tough austerity measures on Greece, in order to allow that country to begin realizing positive economic growth again and give it the ability to repay its debts without having to take out new loans to pay off old loans.  This choice will not fly of course.  Internal EU politics will prevent that since other EU countries besides Greece have spent beyond their means and have been suffering the same austerity being imposed on them in order to receive EU bailouts.  If Greece gets a different deal they will demand the same and that will not just do for the movers and shakers in the EU.

So that leaves us with a Greek default and exit from the Eurozone.  Certainly it would have an economic impact in the broader EU but that would pale in comparison to what would happen in Greece itself.  The Greeks would suffer that is for certain and the EU and IMF would point to that suffering to keep the other countries going through EU/IMF imposed austerity in line.  

However, the Greeks are already suffering and this choice would eventually allow them to get off the treadmill they currently find themselves on.  

The current situation has pretty much run its course.  Neither side wants to continue down the current path.  Their reasons for not wanting to are markedly different but the final conclusion is identical. Since the chances of the EU and the IMF relenting on their austerity demands are nil it will be up to the Greeks to bite the bullet and do what is necessary to break the current vicious circle they find themselves in.


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