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Greece: The Austere Effects Of Parting

| 5/31/2012 9:00 PM Thursday

Despite a 240 billion euro bailout package, Greece seems to be tottering on the verge of an economic collapse and a possible exit from the Euro zone. The fallout of such a situation for the Euro zone as well as for the global economy may throw the global economy into a tailspin, says Shashikant.

The impossible is looking highly inevitable as time passes by. Interestingly, a growing number of people are changing sides in favour of this conclusion. Yes, we are referring to the exit of Greece from the Euro zone. Even two years after the crisis first erupted and after doling out 240 billion euros in a bailout package, all efforts by the member countries of the Euro zone to keep Greece afloat are faltering.

What Happens When Greece Defaults

Recently, the Eurogroup Working Group (EWG), a body of experts who work for the bloc’s finance ministers, said that the Euro zone countries should prepare a contingency plan individually for the potential consequences of a Greek exit from the Euro. This is further reflected in a research report by Citi, in which the estimate of the likelihood of Greece dropping out of the Euro zone has been raised from 25-30 per cent in the month of February to 50-75 per cent in the month of May.

It is not just bad economics that is hurting in this case, but the politics is not helping either. There is a political vacuum in Greece - the last elections remained inconclusive and the citizens of Greece gave a fractured mandate, with no single party being able to form a government. Moreover, a majority of votes went to the party that is against austerity measures, which is considered to be anti-growth. The next round of elections is scheduled to be held on June 17, 2012. We believe that depending upon the outcome of the next election we could see Greece exiting from the Euro zone, which many observers are terming as the ‘Grexit’.

Many analysts are comparing this situation with the collapse of the Lehman Brothers. Is the ‘Grexit’ such a big crisis that it will again push the shaky recovery of the global economy into the next round of recession? Here is what we believe the Greek exit from the Euro zone could possibly mean going forward.

From the latest opinion poll held in Greece, it is evident that the Syriza party, which is opposed to implementing the international financial rescue package, is building on its lead in voter support ahead of the elections to be held June 17. The building up of such support is not unfounded, as the country’s standard of living has fallen by 20 per cent from 2009 and the overall unemployment has reached nearly 22 per cent. Among the country’s youth, unemployment is at an alarming high of 51 per cent, and remains the highest in Europe.

 

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