Goodbye Euro, Welcome Back Drachma
Greek voters have rejected the German-imposed austerity, making a eurozone exit likely
May 16, 2012
The question many macro analysts are asking today is whether Greece will leave the euro zone. As Greece's situation is untenable economically and politically, a Greek exit from the euro zone is likely. A brief review of the situation demonstrates why.
With a quarter of the population unemployed and fully half of Greece's youth without work, Greece is clearly in an economic depression that can only worsen as government budget and wage cuts suck money out of the Greek economy. The depression has radicalized the voting population, pushing the Greek people to their breaking point; many voters have defected from the two mainstream Greek parties which they hold responsible for the depression and have flocked to more extreme fringe parties. These parties have rejected the crushing austerity programs carried out by Greece's two mainstream parties.
Meanwhile, in Germany, voters are concerned about rewarding Greece's so-called fiscal profligacy with German taxpayer money. Germany, with a government debt burden now in excess of 80 percent of gross domestic product, has long been in violation of the European government debt hurdle of 60 percent debt to gross domestic product itself. German voters are fearful that despite the wage sacrifices of the last decade, they could end up paying to reduce their own government debt burden and the Greek government burden at the same time. Because the perception in Germany is that Greece's problem is of its own making, German voters will not reward domestic political parties that advocate aiding Greece without very onerous bailout conditions attached.
But since the Greek economy is on the verge of collapse, German voters demanding more pain means there is little hope in the economic and political situation in Europe for Greece continuing in the euro zone. The political situation in Greece mandates noncompliance with the existing austerity regimen, which will result in European Union and International Monetary Fund assistance being withheld. Greece will have no choice but to default and exit the euro zone. However, once Greece reverts to the drachma, after the extreme economic chaos that results, Greece will benefit from a substantially weaker currency that is the missing link in allowing the country to pull out of its debt deflationary spiral. Will Greece exit the euro zone? The answer is resoundingly yes.