I’m talking about Greece’s new bailout deal, agreed to on Monday. The agreement, proposed by representatives of the European Commission (Eurogroup), the European Central Bank (ECB) and the International Monetary Fund (IMF), offers much needed capital injections into the stalling Greek economy to help pay off Greece’s €320 billion debt and keep the country afloat. Greece stays in the Eurozone, and creditors like the IMF and Eurogroup members get paid back.
Everyone wins, right?
Well, not exactly. Much like a medical helicopter or a long ambulance ride, the price of this rescue is steep, with crippling austerity, the abandonment of many government assets and an aggressive timeline that strips Greece’s growth potential. As creditors around the globe breathed a sigh of relief, Greek citizens, the very people the bailout ostensibly saves, breathed a sigh of despair.
Greece has faced financial problems before. When it joined the Euro in 2001, low interest rates on Euro loans fueled rising incomes and lavish government entitlement programs. Greek workers work more hours than any other Europeans, but produce less and retire earlier, drawing on expensive pensions. As a general trend, the Greek government collects few of the taxes it imposes. Greece’s previous debt crises have been bailed out under terms of strict austerity. In short, Greece consistently borrows more than it can afford.
That’s not to say that Greece is entirely to blame. I’d argue in many ways that Greece is actually a victim. Wherever there is over-borrowing, there is over-lending. And the Eurozone allows financially weak nations, like Greece, to borrow at rates like financially strong nations, such as Germany.
Greeks overwhelmingly rejected further austerity measures during the July 5 referendum but desperately wanted to remain within the Euro as to facilitate the same kind of financial liquidity they enjoyed during the early 2000s.
Which brings us to Europe’s current ultimatum: submit to new reforms or leave the union. The current proposal will stifle Greece’s growth and force it to sell off many assets (islands, companies, infrastructure) that could help it recover. The incredibly short timeline to enact structural and political reforms will leave Tsipras’s government weak and divided.
Should the proposal pass, Greece will kick its debt burden down the road, only to face it again later as a weaker nation.
The alternative, of course, remains Greece leaving the Eurozone, or the “Grexit.” The Grexit would cause years of financial hardship, hardline reforms, and would be a political setback for the Eurozone.
And I think it’s Greece’s best option.
Should Greece leave the Eurozone, it will revert back to the drachma, its own currency. This makes business more costly in the short term, but it also gives control of the monetary policy back to the Greek government.
As Greece prints more money, the drachma becomes less valuable. If drachmas become less expensive relative to the U.S. Dollar or the euro, Greek exports like olive oil and feta cheese become more internationally competitive.
Initially, the lack of liquidity in the marketplace will make Greece grow very slowly and make it more difficult to service its debt. This will catalyze Greek businesses and government sectors into competitiveness in a way that remaining in the Euro won’t.
In the short run, leaving the Eurozone would be incredibly difficult. But in the long run, Greece would regain financial sovereignty without forfeiting their assets and political control.
Furthermore, a successful Grexit would signal the importance of localized monetary policy, and could help pave the way for structural reforms that benefit not only Greece, but the ECB as well.
Greece probably won’t choose leave the Euro—it’s too hard of a decision. Instead, they’ll likely succumb to the proposal before them, taking on a burden too heavy to carry. Only then, after the expensive price of the Euro becomes too great to bear, will that first cradle of democracy enjoy again the taste of freedom.
Ben Jackson is a sophomore majoring in accounting and finance.
