Grexit sounds like a threat from the realm of science fiction, but it is very real. It stands for Greece’s exit from the euro, a development that many think would lead to economic and social turmoil in the rest of Europe.
A snap general election on Jan. 25 may determine whether Greece stays in the euro currency system or defaults on its debt to taxpayers in other member nations of the European Monetary Union and gets kicked out. It would be better for Greece, the euro and European stability if it meets its obligations and stays in the union. But the party leading the polls wants more debt relief for Greece, and that is not a likely prospect.
The snap election is the result of the failure of the ruling coalition to persuade the Greek parliament to elect its candidate for the largely ceremonial president of the Greek republic in a Dec. 29 vote. That vote immediately raised questions about the stability of the 2012 deal that relieved Greece of some debts and gained it nearly $300 billion in loans from the International Monetary Fund and other European governments. Following the vote, the government’s cost of borrowing rose sharply on the bond market.
Though Greece is a small nation, its fiscal mess has had significant negative ripple effects throughout Europe — and beyond — over the last several years. Now more damage could be done by Greece’s ongoing financial meltdown, which offers a cautionary tale about what can happen to governments that spend far beyond their means.
In exchange for the 2012 bailout, Greece promised a program of government austerity. But that led to riots, a 26 percent contraction in a Greek GDP pumped up by reckless government borrowing and spending, and very high unemployment. The leftist political party Syriza that narrowly leads Greek polls (but with less than 30 percent approval) denounces the austerity program and wants 50 percent of Greece’s external debt erased. This, it promises, will restore Greek prosperity.
The German government has said, in effect, “nothing doing.” Senior German politicians have said they are prepared to kick Greece off of the euro if it defaults. “We are past the days when we still have to rescue Greece,” Michael Fuchs, the parliamentary leader of Chancellor Angela Merkel’s Christian Democrats, told The London Telegraph. “The situation has completely changed. It is entirely different from three years ago when we didn’t have the backstop defenses in place. Greece is no longer ‘systemically relevant’ for the euro.”
Other economists worry, however, that Grexit may become contagious by causing government borrowing costs to rise throughout Europe, weakening the economies of Spain, Portugal and Italy. Since Europe is a primary trading partner of the U.S., major disruptions could dampen this nation’s ongoing recovery.
Syriza has won support for its opposition to austerity. But last year saw the first positive growth in Greek GDP since 2007 and the forecast for the next two years predicts continued improvement. To back out of the euro now — or to be thrown out because of default — would risk high inflation and a return to the sort of uncontrolled growth of government spending that led to the crisis in the first place.
The ruling coalition in Greece for the last two years, led by Antonis Samarras, may once again be able to persuade Greek voters they have more to lose than to gain by leaving the euro, which remains popular in Greece. But the next week will see a high-stakes political struggle with consequences for all of Europe — and lessons for nations beyond the continent, including the U.S.