For you. World globe An icon of the world globe, indicating different international options. Get the Insider App. Click here to learn more. A leading-edge research firm focused on digital transformation. Good Subscriber Account active since Shortcuts. Account icon An icon in the shape of a person's head and shoulders. It often indicates a user profile. Berenberg's analysts go further: "Even if the financial system is managed as well as possible under the circumstances, we expect the cash drought and capital controls to set off a sharp recession in Greece.
Unemployment would rise from its already eye-watering levels, and such an event would leave the country's economy about two thirds of the size it was before the financial crisis. There would be other strange events in the lives of ordinary Greeks. For example, IOUs might begin to surface in place of currency. The government can't pay its creditors in a parallel currency, but it could pay pensioners, contractors and public servants. The cash alternative would hold value in the same way that any other modern money holds value — because it's backed by the government.
Although in this case, while euros are backed by a European institution the ECB , the IOUs would be backed by the Greek government alone, and would likely be worth very little outside of the country. Here's how Capital Economics think that would play out:. Shopkeepers and other economic agents would find themselves obliged to accept these IOUs as payment whether or not they were declared as legal tender. But they would not be obliged to accept them on equal terms with euros proper, and they surely would not want to.
A dual pricing system would develop; a good or service would cost euros but, say, IOUs. Greece joined the Eurozone in , and some consider that the Eurozone partly to blame for Greece's downfall. However, the Greek economy was suffering structural problems prior to adopting the single currency, and the economy was left to collapse—although not without its reasons. During the s, the Greek government had pursued expansionary fiscal and monetary policies. However, rather than strengthening the economy, the country suffered soaring inflation rates, high fiscal and trade deficits , low growth rates , and exchange rate crises.
The belief was that the monetary union backed by the European Central Bank ECB would dampen inflation, help to lower nominal interest rates , encourage private investment, and spur economic growth.
Further, the single currency would eliminate many transaction costs , leaving more money for the deficit and debt reduction. However, acceptance into the Eurozone was conditional. Of all the European Union EU member countries, Greece needed the most structural adjustment to comply with the Maastricht Treaty guidelines.
For the remainder of the s, Greece attempted to get its fiscal house in order to meet these criteria. While Greece was accepted to the EMU in , it did so under false pretenses, as its deficit and debt were nowhere near within the Maastricht limits. Greece was hoping that despite its premature entrance, membership to the EMU would boost the economy, allowing the country to deal with its fiscal problems.
In , the Greek government openly admitted that its budget figures had been doctored to meet the entry requirements for the Eurozone's single currency. Suddenly, Greece was perceived as a safe place to invest, which significantly lowered the interest rates the Greek government was required to pay. For most of the s, the interest rates that Greece faced were similar to those faced by Germany.
These lower interest rates allowed Greece to borrow at a much cheaper rate than before , fueling an increase in spending. While indeed spurring economic growth for a number of years, the country still had not dealt with its deep-seated fiscal problems which, contrary to what some might think, were not primarily the result of excessive spending. In , Greece was below the EU average of Much of this lack of revenue was the result of systematic tax evasion. Many expect Greek banks to implement capital controls to prevent a mass exodus of funds.
Deposits have already slumped around 20 percent since the start of the year, and the banking system would probably collapse without further assistance of the ECB. Indeed, economists at TD Securities argued that even if a bailout extension is agreed to this weekend, it's doubtful that it would last because Greece, unlike other European countries facing economic challenges, has been more willing to risk sending its economy into a fiscal abyss.
Jonathan Berr is an award-winning journalist and podcaster based in New Jersey whose main focus is on business and economic issues. Jonathan Berr Jonathan Berr is an award-winning journalist and podcaster based in New Jersey whose main focus is on business and economic issues.
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