Over the past few months, members of the European Union have been debating how to deal with the sovereign debt crisis. When Greece joined the euro zone, investors assumed that its debt was as valuable as that of larger European countries, such as Germany, and allowed Greece to borrow heavily to finance its public sector. Today, Greece is unable to repay its debts and stands on the brink of default. There are several possible solutions to the Greek problem. Currently, legislators in the EU are working on approving an expansion to the EU’s bailout fund, which is funded by each of the euro zone nations. As long as Greece can show that it is making financial reforms, it will receive bailout loans and avoid a default. Some people, however, believe that Greece should default and leave the euro zone, claiming that allowing Greece to continue borrowing exacerbates its borrowing problems. If Greece dropped the Euro and returned to the drachma, some argue, it would be able to restore competitiveness and growth more rapidly than if it continues to borrow from the rest of the EU. What do you think? Should Greece default on its debts and leave the euro zone? Or should the EU fund a bailout and allow Greece to continue borrowing?
I believe the best solution is for Greece to leave the Euro Zone and return to the drachma. On the one hand, if Greece leaves the Euro Zone it could cause a crisis in confidence. On the other hand, Greece is an uncompetitive country, meaning that being a member of an expensive currency makes their exports less desirable. If Greece is allowed leave the Euro Zone, it can be freed of being part of an overvalued currency.
As for Greece defaulting, it seems as if that is inevitable anyways. Greece’s two year bonds have yields of over 65% percent. They cannot pay that back considering that their economy is quickly shrinking. At some point, the bailouts to Greece will have stop. The key issue going forward is ensuring that the banks which hold Greek bonds do not fail causing a second banking crisis similar to 2008. A miniature bank run is already in the works, European banks don’t want to lend one another. Hopefully, it all works out.
The solution for a heroine addict is not more heroine. Greece’s current crisis is due to the fact that they were high on credit. It is inherently illogical that the solution to a problem is more of the same. The best option for Greece and, even for the international community, may in fact be bankruptcy. Any adverse affect felt by Greece and the international market will be felt two, three or ten-fold down the road when Greece inevitably defaults on an even bigger bill.
Greece is a warning that must be heeded by the United States (if it’s not already too late). If the U.S. doesn’t get its financial house in order, primarily by learning to live within its means through massive cuts in government spending, it may find itself in the same position as Greece.
I do not believe Greece should get off the Euro, and I do not believe Greece should be allowed to default. It is not in the best interest of Eurozone nations to allow for a Greek default as the ramifications are difficult to predict and could severely harm the weak economies of the Eurozone in addition to the global economy in general. Despite the relatively low levels of direct contagion relating to a Greek default (Greek’s debt is estimated to be roughly 170% of its GDP in 2011, or about $527 billion, where the GDP of the European Union was $14.82 trillion in 2010), a default would compromise the fragile balance sheets of other nations like Portugal and Italy, among others, and those of global financial institutions, possibly leading to a financial crisis like that of 2008. To instill confidence in the global economy, all nations and institutions must do what they can to avoid a chaotic Greek default.