INTERNATIONAL BUSINESS AND TRADE

Mini-Case Synopsis and Questions

In 2008 and 2009, international financial markets suffered large declines in stock,
bond, and real estate prices. Due to excessive government spending and related
borrowing, Greece experienced a debt crisis that worsened after the introduction
of the euro. To head off default, the Troika provided Greece a bailout in 2012.
Some experts believe Greece should exit the euro entirely, but others argue that
if other countries follow Greece, the euro and the EU itself could be seriously
damaged.

Questions:

1. Should Greece exit the euro? How would it benefit? What could go wrong?
Explain your answers.

- Greece has two options: default and remain in the eurozone, or leave. In order to stay
solvent, Greece would have to stay in the eurozone for a long time. Furthermore,
defaulting would put them at a disadvantage, making it difficult for the government to
conduct business because its currency would be regarded expensive. Leaving the Euro,
which is seen as the better alternative among the awful options they have to begin with,
would result in the collapse of its financial system and, in the long run, destroy its
economy. If Greece remained in the Eurozone, debt relief would be impossible.
Creditors would very probably default as a result of the exit. As a result, Greece's
sovereign debt load would be reduced. On leaving, negotiated debt restructuring will be
available.

The bailout of Greece suffers from a lack of political cohesiveness. The European Union's
leaders are not with austerity measures, but with full commitment to shouldering
Greece's losses. Greece will reclaim its sovereignty if it leaves the EU. Instead of
following deflationary measures, Greece will be able to make its own monetary policy
decisions. The Greek economy is being crushed by Europe's tight-fisted central banking
mindset in policymaking. Keeping the euro will just add to the agony. If Greece exits, the
government will be able to amend the budget to account for inflation and
unemployment. This means printing massive amounts of new currency to pay off its
debts, inevitably leading to hyperinflation.