The Reason Why Europe is Afraid of a Greek Exit

Photo of author

By Jacob Maslow

Greece and BrusselsIt’s a foregone conclusion that Greece is going to exit the European Union. It’s not a question of if but when. Greece has so many debts and has a lack of political will to do what it takes to fix those debts.

Normally, countries in such a bad financial shape would simply devalue their currency. This is the traditional solution. It’s not the preferred solution and in many cases, it’s the most shameful solution, but it’s a practical solution. Unfortunately, Greece is a member of the European Monetary Union. It’s part of the Eurozone. It uses the euro. It cannot devaluate the euro, although its bad financial shape and the drama surrounding it is working to do just that.

Considering the rise of the Syriza party and its anti-austerity stands, it appears that we are at a deadlock. Greece is not going to budge regarding austerity, but it wants a bailout. You can’t have your cake and eat it too. The only option really short of a military coup in Greece is for European Union to leave the Eurozone. I strongly believe that most other members of the nineteen-nation European Union know this. In fact, the Greek exit might actually be priced into the value of the euro.

So why are people making such a big deal about Greece leaving? Why are people pulling their hair and going through all sorts of dramatic convulsions trying to save Greece’s membership in the monetary union? The problem is not Greece leaving. The problem is the message it sends to other members of the European Union. Greece’s exit might set a bad precedent. The precedent is simple: A country screws itself up fiscally, can’t bail itself out, tries to mooch off its more stable neighbors, fails, and leaves the Union.

If you think that Greece is one-off situation, think again. Spain, Italy, and some eastern European countries have the same fiscal issues. It’s not dramatic as the Greek situation, but it’s quite bad. Interest rates follow fiscal management and unfortunately, a lot of these economies, especially around the Mediterranean have bad financial management. Many of these countries are suffering from an entitlement mentality. They want a first-world standard of living, and they’re willing to rack up their debt to afford that standard of living, but their underlying economy is not strong enough.

It’s only going to be a matter of time until the whole idea of a European Monetary Union is utterly rejected. It’s a bad idea in the first place. It’s only a matter of time until the whole system falls flat on its face.

Images Courtesy of DepositPhotos

Comments are closed.