Should Greece Leave the Eurozone?

Realistically speaking, it would be very hard for Greece to just get out of the Eurozone for that it has already sunk too deep in the debt trap. Greece has owed too much money from other EZ countries and private investors including interest. If it did not get bailout from financially more stable countries such as Germany, Greece could hardly imburse and default in its debt.

In order to prevent this to happen, Greece should consider leaving the EZ to establish its independent, flexible and more suitable monetary and fiscal policy. Like mentioned in question 3 about the disadvantages of a fixed exchange rate system, a freely floating exchange rate for Greece might help it out when balancing out the deficit and debt. It would be more aware of the money it borrowed and the amount to repay. One of the most important advantage of floating exchange rate is its ability to adjust automatically excess demand or supply of the domestic currency. This would automatically bring about a balance in the balance of payments. For Greece, its current account deficit would be eliminated through currency depreciation. The mechanism allows the economy to recognize and eliminate immediately any negative external effects.

Moreover, for Greece, it is too much isolated both geographically and culturally to other EZ countries. Greeks are known for enjoying life, which already created a huge burden on pension and government’s tax revenue. In comparison, Germen work hard and create less burden on their government. To start off, some GIPS have initially very different economic backgroudns due to cultural difference. In terms of this, they should not be unified into joining a fixed, inflexible monetary union. Leaving the union would allow Greece more space and time to deal with its own unemployment and economics downwards.

However, if Greece left, the main issue is social instability. A new currency would need to be restored, meaning new laws and contracts need to be written. It takes much time, effort and money from the government spending into designing new currency and banking system. This would also affect tax collection, which is already in difficulty. Less borrowing from abroad also means a huge cut in expansionary fiscal policy. Less jobs would be created, resulting in decreasing wage and higher unemployment. Consequently, affecting worse social, and health benefits. Economic decadence results in low social morale, and Greece residents are likely to flee to other countries. To avoid uncertainty is one of the reasons not to leave the EZ.

If Greece were able to default its debt, there is still immense benefit of joining the EZ. Theoretically, EZ still bestows a lower interest rate to borrow, attracting more foreign investors into Greece. Relating to what we studied about MNC and foreign market entries, there are a lot of opportunities for both Greece and foreign countries. As MNC brings in new investment and companies, more jobs are created, decreasing the unemployment rate and helping the economic growth. GDP is expected to increase. But at the same time, these depend on strict supervision on debit, debt numbers, and crisis management.