Will Greece Be Allowed to Remain in the Eurozone?

There is an ongoing debate over Greece’s new reform program, which threatens the already sensitive Eurozone system. The new Prime Minister of Greece, Alexis Tsipras, has proposed a set of reforms to Greeks debt situation that are similar to the London Debt Agreement of 1953. Essentially, Greece is refusing to implement the austerity measures and Greeks official lenders, such as Germany, are agianst any reform. Prime Minister Tsipras is attempting to isolate Berlin through a unified political assault of like-minded leftist governments within the EU. Should Tsipras succeed, leftist political parties stand to gain more influence in their host country’s government and would likely push for more socialist policies and the rejection of austerity implementation. This is especially problematic for countries like Spain, which has adopted the austerity measures and has begun to see benefits from those measures.

Recently, Spain has experienced a turnaround in its economy. With Spain’s real Gross Domestic Product (GDP) expected to grow by 3 percent next year and unemployment having fallen by 400,000 since 2014, there is proof that the pro market reform policies are actually working. The Spanish government believes that if Greece is allowed to reform its debt return policy, Spain’s leftist political party, Podemos, will take control of the government. If Podemos is able to take control of Spain’s government, the party will likely reverse the austerity measures put in place, just as Greece is trying to do now. While Prime Minister Tsipras has gained support in both France and Italy, conservative European politicians believe that this “support” will not actually aid Tsipras. Many Europeans feel that Greece, which already has the longest debt maturities and the lowest interests costs in proportion to the GDP of any Eurozone country, should not be allowed to reform their debt policy. Government’s are not willing to act generously towards Greek taxpayers, as their tax payers would bare the cost if they have not already.

With the risk of Spain and other indebted Eurozone countries calling for a reverse in austerity implementation, the chance that Greece will be able to reforme their debt policy is unlikely. The Eurozone would suffer as a whole if countries threaten not to pay back their loans and Greece would certainly suffer if the country were to exit the Eurozone. Greece, with its already slowed economy, would lose out on the advantages the country currently receives in the EU and would need to look to other lenders to borrow the money the country will likely need in the future.

 

Article: The Wall Street Journal. Why the Eurozone May Need to Sacrifice Greece to Save Spain, Author: Simon Nixon.

 

Scott McPeek