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What Happens if Greece Leaves the EU?

We take a look at what could happen if Greece left the European Union

17Feb

Since the 2008 financial crisis, Greece's economy has declined by 25%, meaning that even if it grew by 2% every year, it would take 13 years to get it back to its pre-recession level. In 2014, Greece's debt as a proportion of its GDP rose to 174.9%, second only to Japan, whilst its unemployment rate sits at around 25%. In short, Greece's economy is in crisis mode and a serious worry for the rest of the countries in the European Union.

Angela Merkel, Germany's Chancellor, has reiterated her view that Greece's exit from the European Union wouldn't be catastrophic. According to several leading German politicians, the Euro wouldn't be adversely affected and the ECB would be able to handle the likely spike in interest rates in countries such as Portugal and Ireland.

Not a view held by everybody however, some commentators have even alluded to the fact that if Greece successfully reinvents its economy outside the European Union, there's a chance that other nations will leave and follow the Greeks' example.

If Greece were to leave the European Union it would mean writing off an enormous amount of debt, which at the very least would put them in a difficult situation when it comes to international capital markets. After leaving the Euro, Greece would be forced to reintroduce its old currency, the drachma, which would allow it to centrally control its economy, but mean that they would have to go through the arduous process that comes with switching currencies.

In reaction to Greece's financial problems, many of its citizens have withdrawn money from their banks, meaning that there's an increased need for loans from the ECB. Without a bailout programme, the ECB could stopping supplying Greece, a situation which would almost certainly put them in financial crisis, and as mentioned before, would mean that they have to revert back to the drachma.

For the European Union, it would be naïve to suggest that Greece's fallout would have no consequence. A Greek default would cost billions of Euros and would greatly affect financial markets worldwide. Barry Eichengreen, professor of Economics at the University of California, stated that Greece's exit would dwarf the impact that the bankruptcy of Lehman Brothers had on the economy in 2008.

Other nations whose economies are far from healthy could also follow Greece's suit if the amount of debt produced from these nations become untenable. This is unlikely, but is always a possibility and will loom heavy over countries such as Portugal, Ireland and Italy.

In light of recent events, where Greece's Finance Minister, Yanis Varoufakis, rejected an offer from the EU which planned to extend its current £178 bn bailout, calling it 'unacceptable' and lacking in detail, the pressure around Greece's situation is close to its boiling point. With only days left to reach an agreement, it's clear that the finance ministers in Greece and the European Union do not see eye to eye on this matter.

Although Greece's fallout would mean that we'd all be able to go holiday there for a cut price, the ramifications for the world-economy could be drastic. With time running out all the time, there will have to be considerable progress over the next days, or we could be standing on the cusp of an economic meltdown both within Greece and the European Union as a whole.

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