It is no wonder that Nobel prize winners such as Krugman and Stiglitz have repeatedly warned that the measures imposed by the European Central Bank, the European Commission and the International Monetary Fund have been leading to a failure, as the numbers around Greece’s economic growth and repayment of its debt are unrealistic, therefore the model applied is simply wrong and will, with mathematical accuracy, drive Greece to disaster.
Furthermore, in the previous article of June 16, under the title “Final Countdown for Greece and the Implications on Europe’s Reputation”, the risks of a Greek accident unfolding in the short-term and the potential hazards involved were outlined in detail.
The Greek prime minister was essentially cornered into a lose-lose situation last Friday by the country’s creditors, and he was eventually forced to turn to the Greek people into making a final decision around their fate by voting during a referendum to be held this Sunday. It will, however, be extremely difficult and dangerous to navigate the country during this eight day period between the announcement of the referendum and the 5th of July when it takes place.
Planning to Fail
It turns out that there is no Plan B, as the country has been forced to a sudden stop with various parts of the Greek economy coming to a halt. The payment system is frozen with the banks being shut down and a 60 euro daily limit of withdrawing cash from ATMs being imposed. Therefore transactions are becoming extremely difficult, people are running out of cash, international trade is being impeded as suppliers are no longer able to get their goods delivered and circulated in the local market. Such an emergency situation occurred during the Asian as well as the Russian crisis, however, it is a new and uncharted territory for a European country, which will potentially lead to a massive economic crunch and social unrest.
In order to temporarily cope with the tragic implications of the disruption in the payment system, the Greek government will likely resort to an alternative solution for meeting its payments (such as pensions, salaries and other obligations) through IOUs, which may be redeemable for products or services and would effectively become a form of parallel currency in the short-term.
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Under the threat, imposing additional burdens to the already deprived and suffering Greek people that will simply make their lives unbearable, the possibility they will vote towards exiting the Eurozone stands quite high. The bailout and draconian austerity programs implemented in 2010 and 2012, as well as subsequent “adjustments”, only had short-lived results and eventually failed, as they only achieved to strangle the country’s economic growth.
Both sides may be at fault in the way the situation has escalated to where we are today, and an endless blame game will take place over the next few months. The creditors will go to great lengths to convince the citizens of other EU countries that they will now have to pay for what their Greek neighbors carelessly wasted away, and that it is not in any other EU country’s favor to follow Greece’s example. But the truth is that all of the promises made back in the 1990s about a wealthy and affluent Europe sharing a single currency, have only realised in certain corners of Europe, while for the countries of the South they are just fading memories against a painful present reality.
More Pain Coming
Bottom line is that the Greek citizens are the ones who have been suffering for the past five years, seeing their standard of living being crushed, unemployment skyrocketing to 26% and youth unemployment to over 50%, now facing an ever greater depression and soaring levels of poverty. The probability of Greece remaining in the Euro or even remaining in the EU, after Sunday’s referendum, seems to be low at the moment. Leaving the EU and the Euro may be harsh for the Greek people in the short term, but at least it would give the country a chance to implement a series of reforms that would put an end to the current social erosion, eventually leading to economic growth.
Although the economic impact of a Grexit may not be severe in absolute numbers, the reputational risk for Europe is far greater. Not only has Greece been destroyed in the process, but the credibility and trust in the system and Europe’s mere foundations as a political and economic entity will be tarnished, and this damage could be irreversible.
Furthermore, although markets around the world started the day with a big sell-off this morning, the gap has gradually narrowed, suggesting relative calm among investors, however, it is too soon to predict the full ramifications of the crisis, as uncertainty is expected to remain throughout the summer.