Crisis in Europe is like
Duracell, it goes on and on. In Greece, the government keeps agreeing to increasingly
harsher austerity demands of European creditors, apparently with no clear plans
of how to implement them.
Implementation – is going to be
very difficult. People will not go through the resulting pain quietly. Firstly,
nobody likes austerity if it affects them. And secondly, if they still have to
bear it, three conditions should be met. - a) People should feel it is
justified (decision makers should be credible), b) it is temporary (lasts for a
short time), c) and it will end in a beneficial situation for them. In the
present case, austerity measures are obviously being driven by foreigners. Greece
has already gone through 4 years of recession, has 50% youth unemployment, and
no improvement in economy to show for it. Greek citizens will therefore, find
it difficult to accept current austerity measures. Therefore, Greece will continue
to witness strong social unrest (Athens is already burning).
These conditions make it very
difficult for any democratic government to implement more austerity, especially
in crunched time. Ultimately, Greek government will fail to meet these targets
and default on its payments. This will likely be followed by Greece exiting
Eurozone – voluntarily or involuntarily.
Risks to Greece from a default
are already known. New Drachma will be a severely depreciated currency
resulting in high import inflation. Greece won’t have access to credit for some
period of time and the economy would still be in need of reforms. However, an
exit from Eurozone may also mark the bottom for its economy. The default will
remove uncertainties in the market about the event. Economic reforms from here
on will be internally driven and thus would have more credibility and less
domestic opposition. A depreciated currency may also help export growth. Thus, any
stabilization or improvement in economy should also increase value of New
Drachma rapidly, and with it, value of any investment made in this currency.
