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Why a Greek Default Is Disastrous for Greece and the European Union

by Kathleen Taylor

On June 30, Greece defaulted on its €1.55 billion payment, becoming the first developed country to default to the International Monetary Fund (IMF). This default will have damaging consequences for Greece and the European Union (EU).

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(Flickr)

On June 30, Greece defaulted on its €1.55 billion payment, becoming the first developed country to default to the International Monetary Fund (IMF).  The financially challenged country also missed the deadline to repay its European lenders loan payments totaling €245 billion. Greece and its international creditors have been unable to forge any agreements or settle any differences on the reforms Greece was to implement in exchange for the loans. The two sides are now at an impasse on how severe the austerity measures Greece must undertake in exchange for aid. The IMF and Europe want Greece to raise taxes and make spending cuts worth €2 billion while Greece considers such measures to be unfair, fearing its economy will fall into further recession. Greece’s prime minister, Alexis Tsipras, has unwisely called for a referendum to allow Greek citizens to vote if Greece should undergo more austerity measures. The Greek government ran out of both time and money, and has, as a result, defaulted on its loans. This default will have damaging consequences for Greece and the European Union (EU).

Economically, this default could prove catastrophic. Greece’s central bank recently warned that failing to reach a deal with its international creditors would cause an “uncontrollable crisis,” as losing access to international credit markets would create such austerity as to injure the economy further. Jobs will be harder to find and Greeks will have trouble withdrawing money from its banks. Living standards would decrease. Overall, an already poorly performing economy will suffer and it is the poorest Greek citizens who will suffer the most.

On the EU level, Greece’s European creditors have largely had a unified reaction to the country’s reluctance and inability to pay back its loans. Germany, the central player pushing for austerity measure implementation and the biggest eurozone donor, has maintained its hardline rhetoric. German Vice-Chancellor Sigmar Gabriel wrote recently: “Everywhere in Europe, the sentiment is growing that enough is enough.” As a result, Germany and several other European creditor countries, such as France and Spain, refuse to provide debt forgiveness and believe that Athens is dragging its feet on hard but necessary economic reforms. This regional frustration could force Greece to leave the eurozone, which in turn could prove devastating for the faltering economy. Even though Greece makes up only a small percentage of the eurozone’s total economy, it would still have significant implications: it would be the first time a member country exited the eurozone, suddenly making an exit a viable option rather than a toothless threat. The risk of financial contagion could also be great, possibly increasing borrowing costs for other economically troubled eurozone countries (Italy, Spain and Portugal) and further damaging the value of the euro.

A Greek default would also have significant political ramifications. On the state level, if Greece exited it is possible that further social and political turmoil could ensue. Greece’s government and social makeup have proven to be less stable than desired. In January 2015, Syriza, a left-wing party, was elected to renegotiate Greece’s debt; its overall purpose was to secure a better deal than the austerity measures its international creditors desired. As a populist party, Syriza’s political legitimacy would falter if it were seen to acquiesce to its international creditors by raising taxes and cutting public spending. Following an exit, the Greek government would also struggle to provide basic services to its citizens, potentially provoking more discontent and unrest. Since Athens was unable to avoid a default, social unrest and political disorder are already probable and an exit from the eurozone could further disrupt the fragile political situation in Greece.

Regionally, the economic disagreement between Greece and the other money-lending eurozone countries has also become a political battle, because Greece’s future with the European Union is under question. Greece’s failure to implement the necessary concessions to secure continued lending has hurt its reputation throughout the eurozone and has, perhaps irrevocably, damaged relations with its EU partners. There is no precedent for forcing a country to leave and a Greek exit could begin a domino effect of other eurozone countries with struggling economies, like Spain and Portugal, also defaulting on their debts and threatening to leave the eurozone. If Greece is forced to make such an exit, it is uncertain how the European Union would handle such complications and impossible to predict how far-reaching the consequences could be for Greece and EU.

The Greek default to the IMF and European lenders will have severe consequences for Greece and the European Union. Going forward, it is imperative that the Greek government make concessions on implementing required austerity measures and that Greece’s lenders provide the necessary bailouts. This default is not going to secure Mr. Tsipras or his Syriza party more favorable terms on the loans, instead, it has damaged the credibility of the Tsipras government and Greece itself. Mr. Tsipras made a grave mistake that will have dire consequences for his own country, citizens, and the wider European Union. Now, it is up to both sides to work together in earnest to prevent Greece from exiting both the eurozone and the EU. 

 


Kathleen Taylor is a contributing editor for Charged Affairs with Young Professionals in Foreign Policy. She is based in the Washington, D.C. Metro Area.

The opinions expressed in this article are the author's own and do not reflect the views of their employer or Young Professionals in Foreign Policy.


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