European Dilemma The Fight is not over

Mariel Tavera Aramis paredes

Escuela de la Producción y la Competitividad

The European DilemmaThe Fight is not Over

Mariel TaveraAramis Paredes

Financial Engineering DepartmentInternational Business Department

ePC Business SchoolUniversidad Católica Boliviana

February 11, 2015

THE EUROPEAN DILEMMA

Already seven years had passed since the beginning of the global crisis in 2008 and Greece - among other european countries - is still fighting the long uphill austerity battle apparently heading to nowhere. Now, the country’s newly elected prime minister, Alexis Tsipras, is determined to take things through an entire different path, asking Eurozone creditors to relieve its monumental debt burden, as well as relaxing the imposed austerity measures. Accepting or declining this proposal will have a serious impact on the entire international monetary system.

Accepting Greece’s plan for reactivating its long dead economy would mean accepting a “monetization or mutualization” of Greece’s debt burden and inviting other countries in similar situation (e.g. Spain) to ask for the same deal. The pressure can then lead to a series of new external debt payment arrangements that ultimately slow down the entire already highly interconnected european financial system. Although it can provide some well deserved rest to the internal economies in such countries, the risk of letting them get out of their responsibilities on their terms could bring more bad than good to other more stable european countries, which also depend on their abilities to collect what they lend in order to keep their internal economies moving.This can also mean that, in the long run, as Tsipras proposes, Greece and other parts of the region can get back on their feet and start proactively contributing to the european economy again, but it can have some major cost already in the beginning and even more serious cost if not handled properly. Now Greece needs an easier monetary policy to generate inflation. If the bailout option fails, the greek economy will have no other option more than leaving the eurozone. This idea wasn’t the best option the greek economy had, but it may be their last hope. Leaving a lot of repercussions.The first thing that could happen with a Greece leaving the eurozone would be the European Central Bank holding a billions of dollars of Greek debt. This may cause the Euro to devaluate putting in risk other countries, a lot of investor would retreat their investments abruptly.If Greece exits the eurozone, investors would start viewing the weaker economies of Europe as risks. this will cause investors to liquidate their assets in masses slowing

down Europe’s economy. This might have a great impact in the economy but the most dangerous thing would be contagion. Once Greece leaves the euro a lot of countries would start thinking on leaving the euro generating instability. The Grexit may become a self-fulfilling prophecy. If people think it will happen, they will rush to withdraw their money from the banks so it will happen. Leaving countries like Portugal, Spain and Italy vulnerable.

The future is uncertain, whether Greece succeed or not is going to have a lot of repercussions, The proposal has been made and the time is running out. Whatever the outcome might be, the Greek fight is not over and won’t be over in a near future. Leaving us with a lot of questions and few answers.

Bibliography

Reguly, E. (2015, February 9), Greece – and Spain – Put Merkel in a No-Win Situation, The Globe And Mail, Retrieved February 11,2015. http://www.theglobeandmail.com/report-on-business/international-business/european-business/greece-and-spain-put-merkel-in-a-no-win-situation/article22873818/?

Ferro, S. (2015, January 31), Here’s a 3-Way Roadmap For The Situation In Greece, Business Insider, Retrieved February 11, 2015http://www.businessinsider.com/greek-situation-where-next-2015-1

Kennedy, D. (2015, February 9). What happens if Greece exits the eurozone? Three big questions explained. Retrieved February 12, 2015, from http://business.financialpost.com/2015/02/09/what-happens-if-greece-exits-the-eurozone-three-big-questions-explained/#__federated=1