The victory of Syriza, the Greek party of radical left, in the recent national elections, is a message sent loud and clear to the European authorities: you cannot solve an economic crisis as big as the present one through austerity measures and also expect popular support.

Grexit or non-Grexit?

In six years, the Greek GDP decreased of one quarter of its value, unemployment got close to 30% and the average family salary fell of about 20%. Therefore, we can understand where the will to end these austerity measures is coming from and the reforms proposed by Tsipras go exactly in this direction.

Nevertheless, it is necessary to clarify several matters that will play a crucial role in determining the course of future events, such as the negotiations between the government and the Troika and to possibility of the exit of Greece from the Eurozone.

If the Greek government will try to negotiate the cancellation of its debt, or at least a big part of it, this might lead, ultimately, to its exit from the Euro “club”. This would be an irresponsible political decision, not only from the point of view of the disastrous economic consequences this would cause, but also considering the relative bargaining powers of Greece compared to the other EU countries. If Greece decided not to repay its debts, it would lose the right to receive help from the ECB, which until now has supported the Greek banks by injecting 100 billion euros. This would cause a fall, if not a complete failure, of the banking system with all its related consequences. Furthermore, differently from what is commonly believed, Greece cannot rely on the “threat effect”. The Grexit option would not cause the collapse of the whole Eurozone: the ECB and the EU have worked hard in the past few years to minimize the consequences of an event like this.

The Grexit option can occur as a consequence of failed negotiations with the Troika, but it can also result from the strict adoption of all the measures proposed by Syriza during their electoral campaign. In order to sustain tax cuts and increase in expenditures as the ones advocated by Tsipras in his program, there are not many possibilities: these require resources that can be guaranteed only by international credit institutions or forceful withdrawals. In the event that creditors were reluctant to lend more money (and the recent fluctuations of the Athens’ stock market seem to reinforce this trend), and that the government were skeptical about forceful withdrawals (equivalent to a political suicide), the only way to sustain greater expenditures would be to leave the Euro and print new currency (presumably the Drachma), which would be extremely depreciated against the Euro and also against its value pre-Euro. This scenario seems to suggest that the promises made by Syriza during the electoral campaign, are incompatible with staying in the Euro, unless Greece manages to obtain exceptionally favorable concessions during the negotiations.

Nevertheless, if exceptional conditions were guaranteed to Greece, every country in the EU (including Italy) would have all the reasons to ask for the same concessions and we would obtain a monetary union in which debtors, and not creditors, are in a position of strength. This is an unsustainable scenario unless we slowly introduce a system of debt-sharing among all the countries in the Eurozone. A single currency with separate debts is probably ineffective in the long-run, but at the same time it is also unsustainable to have a common debt without a centralized fiscal policy (in Bruxelles). Also in this case then, it is unlikely that Tsipras’ program can be adopted, without leaving the Euro.

Grexit: A Possible Solution

Realistically, no country ever repays entirely the debt it has contracted through time: what they normally repay are the interests on such debts. Greece currently benefits from very favorable interest rates (1,82%) on the debts incurred with other EU member states and if its economy kept on growing at the same pace as in 2014, in the future it could sustain its debt without abandoning the Euro. To maintain constant growth, Greece needs to complete a process of deep political reformation and continue the battle with the other Leftist European parties for greater fiscal flexibility, a part from benefiting of the effects of the Quantitative Easing, strongly supported by Mario Draghi. Concerning the Greek debt, the government could ask for a further extension of the payments deadline in order to give some extra oxygen to the fiscal policies in the short term.

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