Introduction
Greece is the weakest member of the euro zone, and its economy is continuously contracting at a fast pace. Sarah Hewin, a London economist, proposed that the economy of Greece had been struggling even before 2008 when Lehman Brothers collapsed. The decline in the economy translated the economic depression in Greece (Jolly para. 1-4). This paper is aimed to evaluate the position of Greece in the euro zone, and it also focuses on the effects which Greece may suffer if it decides to leave the euro zone.
Problem in Greek economy
Greece’s expenditures were beyond its mean even before the change in its currency from drachma to Euro. After accepting euro as its currency, the public expenditure was significantly accelerated in Greece. The level of wages in the public sector greatly increased which was the highest rate in the euro zone.
The Athens Olympics in 2004 led the Greek government to exceed the limit of its debt. BBC reported that the national income of Greece declined significantly due to the tax evasion on a massive scale in the country. After overspending for years, the budget deficit of Greece went out of control, which resulted in the economic depression in Greece (Eurozone crisis explained para. 4-7).
Benefits of Euro zone
There are multiple benefits which Greece attains from being a part of the euro zone. In May 2010, Greece was provided bailout loans from IMF and the European Union in order to help the Greek government for paying its creditors. BBC reported that these loans had amounted in total to 110 billion Euros after that another bailout of 130 billion Euros was lent to Greece (Eurozone crisis explained para. 10-12).
The growth in the value of Euro in the past helped member states of the euro zone achieve significantly better economic and financial results (Barrell para. 3-7). Euro zone provides great support for countries like Greece, which face severe economic conditions. Being part of the euro zone has helped the Greek economy to survive, acquiring huge loans.
Affects of the exit from the Euro zone on monetary and fiscal policy
If Greece decides to exit the euro zone, it will impact member states of the euro zone and the European Union to a great extent. Its impact on the monetary policy of Greece will be severe. The money supply may reduce if the Greek state exits the euro zone. The unemployment rate will be rapidly increased, and at the same time the interest rate might also rise.
The fiscal policy, which deals with the expenditure and taxation, would also be affected by this exit. Taxes will be increased whether Greece leaves or stays in the euro zone, but the expenditure can get out of control if Greece exits the euro zone and introduces its own currency (Giles, Spiegel and Hope para. 3-9).
Impact of the exit on the options of financial debt
BBC reported that the exit of Greece from the euro zone would also affect the financing debt which the European Union and IMF would have to collect from Greece. The bailout loans which were provided to the country to clear its debt from other creditors have made Greece a major borrower. If Greece exits the euro zone, many possible outcomes are proposed which are, therefore, not in favor of Greece and its economic stability which would further entice bankruptcy and recessionary conditions in the country.
The availability of the options, by which the financing debt would have to be returned to IMF and European Union, would significantly be reduced with such a decision. The loans would be provided on a higher interest rate, which would worsen the economic status of Greece, and the crisis might have become more severe (What could happen next if Greece leaves the eurozone? para. 2).
Conclusion
Greece should stay in the euro zone because of the benefits which may be gained from a membership in the euro zone. There is a high chance of greater financial crisis in Greece if it decides to exit the euro zone and introduce a new currency, which will definitely be weaker than Euro is in the global economy.
Works Cited
Barrell, Ray. “Eurozone crisis: what if… Greece leaves the single currency.”The Guardian 14 May 2012. Web.
BBC. “Eurozone crisis explained.”BBC News Business. 27 Nov. 2012. Web.
—. “What could happen next if Greece leaves the eurozone?”BBC News Business. 18 June 2012. Web.
Giles, Chris, Peter Spiegel and Kerin Hope. Eurozone: If Greece goes… Financial Times. 13 May 2012. Web.
Jolly, David. “Greek Economy Shrank 6.2% in Second Quarter.”The New York Times 13 Aug. 2012: B2. Web.