Why Greece will leave the euro

As Greece's political and economic conditions worsen, the conventional wisdom about Greece never abandoning the euro will be sorely tested.

According to an old Wall Street adage, when the winds are strong even turkeys fly. If ever there was a case to which this adage would apply, it would be that of the market’s present favor for Greek government bonds. Over the past year, as the market has stretched for yield in a low interest rate global environment, the Greek government’s long-term borrowing cost has declined from over 18 percent to its present level of 8.5 percent. And it has done so despite increased signs that Greece lacks the political willingness to resolve the many deep-seated problems that still characterize the Greek economy.

Anesthetized by ample global liquidity, markets are simply choosing to ignore many warning signals emanating out of Greece about that country’s political and economic future. They certainly seem to be turning a blind eye to the Greek government’s insistence that Greece has reached the social and political limits as to how much more budget austerity and painful structural economic reform the country can tolerate. They also seem to be disregarding Greece’s stalled IMF-EU negotiations and increased signs that its foot-dragging on real economic reform is causing Berlin’s patience to run out.

A troubling indication that Greece may now be on a collision course with its official creditors was the Greek government’s recent presentation of its 2014 budget without the blessing of either Brussels or the International Monetary Fund. According to the IMF, Greece’s 2014 budget has an unfinanced gap of around €1.5 billion. The IMF also notes that Greece’s efforts at structural economic reform have fallen far short of the country’s commitments under its IMF-EU program, especially in the areas of public sector layoffs and privatization policy. This lack of progress would seem to make it highly improbable that Greece’s official creditors would agree to yet more bailout funds.

The full text of this article is available on The American's website.

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About the Author

 

Desmond
Lachman
  • Desmond Lachman joined AEI after serving as a managing director and chief emerging market economic strategist at Salomon Smith Barney. He previously served as deputy director in the International Monetary Fund's (IMF) Policy Development and Review Department and was active in staff formulation of IMF policies. Mr. Lachman has written extensively on the global economic crisis, the U.S. housing market bust, the U.S. dollar, and the strains in the euro area. At AEI, Mr. Lachman is focused on the global macroeconomy, global currency issues, and the multilateral lending agencies.
  • Phone: 202-862-5844
    Email: dlachman@aei.org
  • Assistant Info

    Name: Emma Bennett
    Phone: 202.862.5862
    Email: emma.bennett@aei.org

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