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The Current State of the Greek Economy and of the Eurozone

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For the past couple of months, Greece has had to deal with austerity measures imposed on it by its creditors. Following the momentous decision by the Greek people to elect the leftward-leaning SYRIZA party which favoured a confrontational stance on the bailout conditions, uncertainty over the future of the country plagued stakeholders on a global level.

 

Government asks Greek people whether they want to stick with bailout terms

 

In a startling move, Greek leaders passed on the decision to follow through with the bailout conditions to the people and called an extraordinary referendum on the issue. The hope was to receive the approval from the people.

 

Greeks vote a “resounding” No

 

With 39% for and 61% against, austerity measures were flatly rejected by an overwhelming majority of Greeks, whose wholly faith now rests in the national government’s ability to negotiate for better terms that involve less demanding fiscal measures and additional debt relief.

 

Following the results

 

In consequence to the decision, Greek Prime Minister Alexis Tsipras took some decisive actions as Greece’s irreverent Finance Minister Yanis Varoufakis stepped down from office. Tsipras immediately sought out a deal and believes a compromise can be reached in merely 48 hours after the referendum results. This contradicted creditors’ message that additional bailout aid will come with a plethora of new conditions. European lenders have, to a large degree, out rightly declined to discuss any debt relief as that would result in significant losses on the part of their own taxpayers. In the coming month, Greece is ordained to pay-back a £2.49 billion bond issued by the European Central Bank. If no agreement is reached, the country risks defaulting on those bonds, and even worst, risks losing any liquidity support from the ECB. This would put pressure on Greece’s banks and could cause their failure, therefore bringing the country closer to the brink of a Grexit and force the country to begin using its own currency.

 

What’s next

 

Following the decision to decline the bailout conditions by the Greek people, the country itself continues to move in treading waters. Analysts continue to warn of a potential Grexit from the Euro which would be calamitous for Greece as well as the global financial system. At the same time, leading up to the referendum, Greek officials claimed that a deal was on the table and the government was prepared to approve it. It remains to be seen whether this was a scheme designed to induce Greek voters or whether this was true.

 

Surely, this optimism isn’t met by some of the Eurozone’s key policy-makers including German Finance Minister Wolfgang Schauble, who strongly advocates for a Greek exit from the euro as he deems such a move as potentially strengthening the aggregate European economy. On the other hand, Germany’s Chancellor, Angela Merkel, has continued to encourage Greece to remain in the Eurozone as she worries a Grexit could severely destabilize the currency union and create a dangerous precedent for other economies including Spain, Italy and possibly France. In the end, all will come down to the Greek government’s willingness to cooperate with international creditors.