All eyes are on Greece as the overwhelming majority has rejected EU's proposed austerity measures and people are scrambling to figure out what happens next.
In essence, it seems that Greece wants the best of both worlds. They don't want the austerity measure but they still want to be part of the euro project and they want the EU to provide them with a line of credit.
Understandably, certain parties are saying that Athens has ruined any chance of compromise with its EU partners.
Personally, I'm confused by the actions of Greece prime minister Alexis Tsipras. On one hand, he's been advocating for additional assistance and on the other, he masterminded the rejection of the austerity measures. It seems like Alexis Tsipras is gambling that the EU will not force Greece out of the 19-nation currency area.
It's a very risky bet and so we probably should consider what happens if Greece does default on its debt.
If Greece doesn't pay the debt to the IMF and ECB this month, then the country will be defaulting on its loans. This is significant for a variety of reasons:
- Greece will be the 1st advanced economy to default in the history of the IMF.
- Greece will have the largest single overdue payment in the history of the IMF.
- Greece will be joining the list of IMF debtors that defaulted, debtors like the Taliban and Robert Mugabe, people you generally don't want to associate yourself with.
- If Greece is unable to pay back its debt after 2 years (which seems very likely if they leave the EU), then Greece will most likely lose its IMF membership.
- Greece might be force to exit the eurozone.
IMF rules does not permit any grace period for Greece so IMF will probably try to figure out a way for Greece to pay them back asap (not sure how though). Both IMF and Greece actions are limited so not sure what options are available for either party.
How will Greece exit (Grexit) the eurozone? Interestingly, no one knows because the euro project wasn't designed with an exit strategy. The Maastricht Treaty doesn't mention a way for a country to exit the eurozone because exiting was never considered. Perhaps this is what Greece prime minister Alexis Tsipras is gambling on.
If Grexit is successful, then the eurozone can technically be unbundled so that whenever a country suffers too much financially, the EU partners just might kick them out. Naturally, this isn't good for EU solidarity and so that's probably the reason why the EU has been trying to stop the Greek headache.
So, if Grexit doesn't happen or happens very slowly, then the country might go into Grimbo (Greece + limbo), where the country is in a state of political and economic limbo since no one knows what to do with them.
Right now, it already feels like Greece is in Grimbo and if Greece Prime Minister Alexis Tsipras doesn't figure out something soon, the country will probably face all three: Grexit, Grimbo, and Gone. I say gone because it would take decades for Greece to recover and Greece looks like it is on its way to becoming a gigantic ghost town. The chart on the right shows that capital and people are leaving the country in massive numbers.
Just consider these heartbreaking statistics: Greece economy shrunk 25% since 2008, a Grexit is predicted to cause a further 25% contraction of the economy, 25% of the population is unemployed, and for people under the age of twenty-five, the unemployment rate is at an unsustainable 52%.
French economist Thomas Piketty, author of the influential Capital in the Twenty-First Century, recently said that “Europe was founded on debt forgiveness and investment in the future. Not on the idea of endless penance. We need to remember this.”
The interview seems to suggest that Mr. Piketty wants the EU to consider debt forgiveness. Furthermore, Mr. Piketty stated that, "Germany is the country that has never repaid its debts. It has no standing to lecture other nations." (The whole interview is available here)