Homer’s Odyssey features two monsters of the sea named Charybdis and Scylla. They occupy the narrow strait of Messina, which separates the island of Sicily from mainland Italy. Scylla, a six-headed monster with shark-like teeth living near the Italian mainland, would devour anyone who came near her. Any ship that came close would have to sacrifice six crew members, one to each head, to gain safe passage. Charybdis was a whirlpool monster on the Sicilian side of the strait, who would capsize any ship that came too close. Given the geographical constraints, all ships fell victim to either one monster.
Present day Greece faces a challenge between its own Charybdis and Scylla – to exit or not to exit the Eurozone?
Why it all began
The euro convergence criteria, also known as the Maastricht convergence criteria, are five economic criteria that must be met if a country wants to become a part of the eurozone.1 Greece met the five criteria and became a member of the eurozone in 2001.
The monetary union, along with its promises of prosperity and convenience, brings with it the danger of inflexibility and the lack of autonomous monetary policies to suit specific local needs. Not all economies are the same. Combining a multitude of economies into a single monetary zone requires a united political will to weather financial storms, and the eurozone has lacked such a will, especially of late.
Export-oriented economies tend to leave behind economies like Greece in terms of competitiveness. In such a scenario, a country’s central bank would normally devaluate its currency, thus making its exports cheaper and so more lucrative in the global market, all of which would contribute to bridging any fiscal deficit. In Greece’s case, since the drachma was replaced with the euro, only the European Central Bank (ECB) has the authority to devaluate the euro.
So, Greece was left with only one option – to borrow money. The healthier economies in the eurozone happily obliged Greece without taking into account the systemic risks of the Greek economy. The debt kept mounting.
The prudent thing for Greece to do would have been to invest the borrowed money in capital expenditure, which would have resulted in the creation of assets. Instead, it used the borrowed money to cover revenue expenditures, such as salaries, pensions, and social benefits.2 The net effect of this move was that Greek economic competitiveness was at a near standstill while Greek debt kept mounting, clearly unsustainable. This problematic situation was further aggravated by the 2008 economic crisis. When Greece could no longer pay back its outstanding debts and keep its economy afloat, it requested a bailout. Approved by the ‘troika’,3 Greece received a one hundred and ten billion euro bailout package.4
The austerity measures that came as a part of the 2010 bailout package weren’t enough to keep the Greek economy afloat, and by 2014 Greece’s debt was 176% of its GDP.5
Sadly, Greece’s woes didn’t stop there. The Guardian reports that the Greek unemployment rate has been as high as 26%, youth unemployment rate was more than 50%, a quarter of the the national income has been wiped out, and an estimated 8500 small and medium businesses have shut down since the start of this year.6
The Inescapable Dilemma
Greece either has to accept the austerity measures suggested by the IMF and the ECB, or it can exit the eurozone and return to the drachma.
If Greece satisfies its creditors with its austerity measures, it will have to reduce its interventions in the public sector, cut down on social security, and so on. This will be
painful, but it will remain in the eurozone and can find cheaper credit to bring the economy back on track.
If Greece actually exits from the eurozone (now a seemingly unlikely scenario), it will likely default on its debt, leading to the collapse of its banking system, and will have to return to the drachma. Since confidence in Greece’s economy is abysmal, the value of the drachma will immediately reach its nadir, making imports expensive. Greece may thus not be in a position to meet its import bills. The hard-earned savings of people would be eroded too.
For financing the widening fiscal deficit, Greece would have to borrow from international markets, but since investor confidence is low, any money Greece manages to raise will be at extremely high rates, which would further compound the problem. Printing more drachmas would be no solution because that would fuel inflation and may lead to hyperinflation, which would lead to the collapse of the currency.
Alexis Tsipras could use some lessons from Odysseus and his time-tested wisdom!
Krishna is a post graduate from IMT-Ghaziabad with a keen interest in economics. He is an entrepreneur who runs two start-ups and an international platform on corporate social responsibility and sustainability. He has more than three years of experience in finance, IT and management. He worked with companies like Deloitte, Infosys, and RINL, and has assisted CxO level executives in financial valuations.