Greek Financial Crisis By the Education & Research Core
There are many scenarios which Greece could face in order to solve their problem; however, out of all of them, two most plausible options could be seen.
First, Greece could accept the stricter austerity measures set by its creditors (the IMF, for example) in exchange for an 86 billion Euro bailout in order for it to repay its debt. Some of these stricter austerity measures include an increase in tax rates and a decrease in government spending such as a cut in pension and aim to make Greece a more fiscally responsible country. However, critics of these measures note that despite numerous austerity measures already in place due to previous bailouts, Greece still could not repay its debt (due to many things such as tax evasion and loss of jobs because of decreased government spending), thus, questioning the effectivity of these measures and the ability of Greece to repay its debt again in the future.
Second, Greece could default on its debt, leave the Eurozone and adopt its old currency, the Drachma. As mentioned before, it is important that a country has control of both its fiscal policy and monetary policy. Thus, by leaving the Eurozone and going back to the Drachma, Greece will have control of its own currency based on its fiscal policies. Once the switch has been made, the Drachma will be devalued and the advantage of this is that Greek exports will be much cheaper, as compared if they were priced in Euros, thus, being more attractive to foreigners. The downside of this switch is that Greece’s GDP will definitely contract for awhile, as it happened in Argentina when it switched from one currency to another, but, later on, the most plausible effect is a more stable output.
One thing is for sure, though, when it comes to the crises like these; the study of Economics can never be disregarded. It is important that policy makers must first look at the economic implications of their actions, before they go into the political ones or else they might be creating a crisis of their own.