Breaking Up is Hard to Do: A Bleak Portrait of Greek Eurozone Withdrawal

Open Access
Author:
Ponnett, John Andrew
Area of Honors:
Finance
Degree:
Bachelor of Science
Document Type:
Thesis
Thesis Supervisors:
  • David Lawrence Buehler, Thesis Supervisor
  • Brian Spangler Davis, Honors Advisor
Keywords:
  • Greece
  • European Union
  • Eurozone
  • Sovereign Debt Crisis
  • Currency Unions
  • Euroscepticism
  • Populism
Abstract:
Since the European Union’s earliest incarnations were formed, there has been recurrent skepticism about the idea of a supranational organization to which the countries of Europe have surrendered sovereignty. In the wake of a crippling sovereign debt crisis and the United Kingdom’s 2016 vote to exit the bloc, the futures of the EU and its Eurozone currency union have increasingly been called into question. The rise of populist politicians skeptical of the EU’s ever-growing influence have been especially critical of its handling of its structurally weakest members, particularly Greece, during the sovereign debt crisis. Some politicians have gone so far as to argue that by exiting the Eurozone and re-adopting its national currency, Greece would have better prospects for economic recovery and long-term stability. According to economic theory, the new currency could be devalued against the euro, thus improving the trade balance between Greece and its EU partners. Leaving the Eurozone would also allow Greece to implement its own monetary policy, one more in line with the needs of Greece than the Eurozone as a whole. A Greek Eurozone exit would save the European Union hundreds of billions of euros in future stabilization funding, while in theory still allowing Greece the ability to stabilize and recover in a future crisis. This thesis finds that, based on observations of Greece’s historical economic data, devaluation of a new Greek drachma would fail to sufficiently achieve the intended economic recovery, likely leaving Greece worse off than if it had remained in the Eurozone. While stability and growth could potentially be achieved in the long-run, the short-term consequences would be harsh. Long-run success is also contingent on greater Greek fiscal discipline, which Greece has proven incapable of in the past. Without the governing mechanisms put in place by the EU, Greece would have even less incentive to adhere to debt control and monitoring.