The Greek Bailout: Its Effect on the Eurozone

On February 19, the German government rejected Greece’s request for a 6 month extension to its Eurozone program. Germany had hoped that Greece would renew its existing deal that contains harsh austerity conditions, and a German Finance Ministry spokesman claimed that the proposed assistance package was “not a substantial proposal for a solution”. The Finance Minister himself, Wolfgang Schaeuble, stressed that no new payment of funds would be given to Greece until a new deal was made. Despite the Greek economy growing in all four quarters last year, it has been in recession for almost 6 years and must take measures to improve the condition of its economy.

The current Greek bailout is set to expire on February 28, so the country is currently in a time crunch to make a compromise with other countries in the European Union, to whom it owes about 60% of its 320 billion euro debt ($362 billion). This debt equates to about 175% of the nation’s GDP, and with about 2 billion euros of deposits flowing out of banks each week, according to JP Morgan,  the country is set to run out of cash to use as collateral against new loans within the next 14 weeks. Greece previously requested the 6 month assistance package to give Athens enough time to determine a new agreement with Europe throughout the coming 4 years, without the threat of blackmail or time deficits.

The new bailout program was proposed by Greece last Wednesday, and involved the implementation of a bridging loan to allow the country to continue normal functions for six months. This loan would also have helped in achieving the repayment of about 7 billion euros of maturing bonds. Another part of the plan was intended to help to refinance the country’s debt using “GDP bonds”, which are bonds that carry an interest rate directly determined by economic growth. Finally, Greece additionally hoped to approve a reduction in the primary surplus target, the surplus target that the government is required to generate, from 3% to 1.49% GDP.

According to Greek Finance Minister Yanis Varoufakis, Greece plans to continue deliberation with other EU officials to select a reconciliation that will achieve a favorable outcome for the average European, not just for the average Greek citizen. However, Greece and its people are extremely determined to remove the harsh spending cuts and increased taxes imposed by the current program. Just last month, Prime Minister Alexis Tspiras was elected to office on the campaign platform that the government would work to reverse the austerity measures imposed by the current bailout plan. Should an extension of the present loan take place, the new government leader could be accused of betraying its Greek voters. Within the next day or so, Greece is set to present a list of reforms to its lenders in order to help secure a bailout extension for four months.

Should Greece’s demands be met, some country leaders are concerned that Greece could potentially leave the currency union. Austrian Chancellor Werner Faymann believes that policymakers have underestimated the likelihood of a so-called “Grexit” and believes that this event could have “unforeseen consequences” for the entire Eurozone. If Greece were to exit the Eurozone, economists predict possible ramifications such as a rush of money out of the country, a long depression and severe inflation, and a decline in the price of Greek exports. The next few days of negotiation could be strenuous for European leaders, but they will be crucial in determining the economic future of Greece and the European Union.