Is It Time for Greece to Leave the Euro Zone?

by Matthew Rae

The euro has reached its lowest level in nine years when it closed at $1.05 against the U.S. dollar this month. This decrease was partially caused by the Greek crisis. At the same time, the majority of the political and economic crises plaguing Greece radiates from the currency zone itself, Andrew Moravcsik of the Foreign Affairs asserts. In order to deal with the crisis, Europe needs to re-examine its position in relation to Greece and the Greeks need to examine whether they should leave the common currency they have been a part of for 13 years.

The euro was introduced into the European common market through the Maastricht Treaty, and entered circulation in 1999. At the time, all the willing EU countries needed to meet a set of requirements, achieved only seven years after the original treaty was signed. Greece joined in 2002. According to Slovenia’s Central Bank economist, Juraj Zeman, the loss of an independent monetary policy due the adoption of the euro may lead to serious disadvantages. Thus, the EU Member States (MS) are deprived of certain tools to combat recessionary or inflationary periods when they join the currency union, such as interest rate adjustment mechanisms.

Martin Feldstein, an Economics Professor at Harvard University, argues in his Foreign Affairs article that “the European Commission (EC) casted [the euro] arrangement as a steppingstone toward greater political unity.” He continues by stating that the EC made “the specious argument that the free-trade area could succeed only if its member countries used a single currency.” Greater economic integration was not dependent on the introduction of a common currency. The political objects were apparent from the beginning.

The Maastricht Treaty explicitly says that the launch of the economic and monetary union (EMU) was “to continue the process of creating an ever closer union among the peoples of Europe.” The euro was used as a catalyst for a closer political union, but it now threatens to break the union apart.

The existence of a euro zone has exacerbated the 2008 recession, especially in Greece. In his New York Times article, Noble Laureate Paul Krugman, asserted that the Greek economy only just hit rock bottom in 2014 and has contracted by about 20 percent from its 2010 level. This has had implications for the traditional two-party system in Greece, and subsequently its political stability.

The economic crisis has led to a greater polarization of Greece’s political landscape with the emergence of far-right, Golden Dawn, and far-left Syriza political parties. These parties built upon the discontent amongst the Greek populace towards two traditional parities, New Democracy and Panhellenic Socialists.

The rise of Syriza demonstrates the displeasure of the Greek population with the economic policies of austerity coming from Frankfurt, the seat of ECB. The far-left party captured 149 of the 300 seats, only 3 seats short of an absolute majority in the recent national elections. Menelos Tzafalias, a journalist for Al Jazeera, explains this party’s ascent coincides with Greek popular discontent towards its leaders conceding control to European technocrats, who have determined domestic economic policy since 2011.

Alexis Tsipras, leader of Syriza, was elected on a populist mandate of anti-austerity. In his victory speech he said that, “Greece is leaving behind the destructive austerity, fear and authoritarianism. It is leaving behind five years of humiliation and pain.” The contraction of the Greek economy and the lack of empathy from Frankfurt have led to a rejection of current ECB policies by the public.

Matty Greece 1Membership within a common currency union is only beneficial if the benefits outweigh the costs. The political cost of the crisis is becoming apparent in public opinion. According to Eurobarometer, 61 percent of the Greek population believed that EU membership was a good idea in November 2009. In May 2014 this number had decreased to 43 percent. Membership within the political union, let alone the monetary union is becoming increasingly unpopular in Greece.

In his article, Martin Feldstein argues that if the Greek Central Bank was to reintroduce the drachma, it would immediately fall relative to euro, and lead to an automatic reduction in real wages. This reduction in wages would increase the country’s competitiveness, because labour would become cheaper within the country compared to the rest of the euro zone. A lower drachma would also reduce real personal incomes in Greece, leading to lower consumer spending and allowing more Greek goods and services to be exported to foreign buyers.

The ECB’s power over Greece rests within the Greek bank sector. Krugman, writing for the New York Times, highlights how “the power of creditors over Greece comes via the ability to crash the Greek banking system, which is heavily dependent on the ability to borrow at need from the ECB.” Matt O’Brien of the Washington Post discusses that there is only one way Greece could keep its people from losing their money. The solution would be to print more currecy if the ECB stopped emergency lending to Greek banks. If Mr. Tsipras chose to take his country out of the euro zone, it would give them more control over their banks.

If the Greek government is unable to reach a deal with the ECB and Brussels by the end of June 2015, when current bailout extension expires, there may be only one option remaining – they may be force to leave the euro zone. Aurel Schubert, Director General of Statistic Department of the ECB, says that Greece “will not be kicked out of the euro.” However, if the Greek banks no longer have access to ECB emergency funds they will have no choice but to leave the common currency.

Political tensions within the euro zone itself would also be alleviated if the Greeks chose to abandon the currency. Greece has received extremely favourable interest rates as part of the bailout package. Lorenzo Bini Smaghi, former ECB Governor, argues that Greece’s government debt already has an extremely low interest rate and the impact on the economy is much lower than in Portugal or Italy. If Greece was to receive more favourable interest rates, Portugal and Italy would begin to demand the same treatment. It would also be politically difficult to implement such changes. Ferdinando Giugliano, of the Financial Times, asserts that it will be hard for the Spanish Prime Minister to tell voters that Greece needs debt forgiveness when it has a lower interest burden. To argue for more favourable debt conditions for Greece would be political suicide.

The rise of Syriza is the latest example of the growing frustration many Southern Europeans have with ECB policies. As a result of austerity policies the Greek political system has been polarized. Its economy has also suffered greatly, and threatens to further worsen the euro exchange rate against the dollar. The EU and Greece need to re-examine the decision of 1992, and all options must be available, including a potential Grexit.

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