GREXIT, what could happen if Greece leaves the Euro #Greece #Grexit #UE ?

 

grexit

Nowadays, Greece is suffering a similiar situation as Argentina did in the year 2002. But, if Greece leaves the euro, will it experience the same recovery as the South American country did when it abandoned a currency peg to the US dollar?

It is obvious that in the short term, if Greece abandonates the euro it will be a tragedy for its economy and at the same time it will produce a higher volatility in the financial markets.

Therefore, if the Grexit exists,  Greece will operate again with the dracma suffering a higher depreciation which will cause then a higher inflation. So if all these things happen, the country could be on a very difficult situation as it won’t receive funding from the European Union.

If we observe the Argentine case in 2002, Greece’s GDP would fall deeply, but it wouldn’t have to be for a long time as for example Argentina achieved in a short period its pre-crisis level, (its economy grew an 8% one year after). However, it doesn’t have to be the same for this European country because Argentina had a moderate external deficit, so the Greek recovery would be slower. Moreover, we have to take into account that the rapidly recovery of Argentina ocurred in a clearly expansive international context which is very different from today.

Apart from that, many analysts think that the fact of leaving the euro could be benefitial for them in the long term as the government can modify economic policies to deal with the crisis. Also, the recovery would be slower than in the case of Argentina but it could be faster than staying with the European Union currency as they wouldn’t depend on it.

Furthermore, as the dracma would suffer a notious depreciation, some people think that the country would become more competitive so they can increase their exports and attract more tourism. But, it only could be benefitial in the short term because after that, they would lose competitiveness due to its higher external deficit and the higher costs of imports.

The devaluation wouldn’t encourage the economy to gain efficiency and produce higher quality products.

 

Patricia Fernández Ruiz.

 

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