Greece and the euro: the essential guide

Bailout to breakup, Syriza to Grexit, all you need to know about the causes and consequences of Greece facing a euro exit
greece euro flag
Greece’s exit from the euro could have catastrophic consquences for the country and beyond. Photograph: Orestis Panagiotou/EPA
by Luke Harding originally published at the Guardian

1. The issue at a glance
2. Why is it being talked about now?
3. A brief history
4. What happens next?
5. The options – and key arguments
6. What does it mean for me?
7. Key players
8. Glossary
9. FAQ
10. Some key statistics
11. In greater depth
12. One sentence killer dinner party line on Greece’s exit from the eurozone
1. The issue at a glance
Successive Greek governments have failed to carry out badly needed reforms. The problem isn’t new: it goes back decades. As a result the Greek economy is in dire condition. The global financial crisis has exacerbated these problems. The steps needed to remedy the situation are politically difficult, as the recent Greek election result – or lack of one – shows. At the same time Athens is under immense pressure from its EU partners, especially Germany, to implement reforms. Greece’s fiscal tragedy is hurtling towards its denouement – the country’s bloody exit from the eurozone.
2. Why is it being talked about now?
On 6 May Greek voters rejected the two big parties that supported EU-imposed austerity measures. The centre-right New Democracy and centre-left Pasok parties had held power for four decades. Both were trounced, with voters instead flocking to radical anti-austerity parties on the left and right. Last Tuesday attempts by Greece’s president to cobble together a national unity government collapsed. Greece now faces a new election on 17 June. The likely winner is Syriza, a collection of leftists, who reject austerity. On Wednesday a caretaker prime minister, Panagiotis Pikramenos, took charge. If the Greeks catapult out of the eurozone, the contagion could spread to Spain and Italy. The entire European monetary project appears on the brink.
3. A brief history

Greece’s structural problems go back a long way. We are talking about chronic deficits, declining competitiveness and poor public sector performance. Foreign investment has been static for a decade. The tax code is opaque and regulations for business are notoriously complex. The country has been on the EU’s naughty step for a long time, certainly since 2004 when Athens sensationally announced its previous government “misreported” expenditures. It “discovered” Greece had exceeded the 3% deficit threshold for the eurozone.

The conservative government of Kostas Karamanlis – and its successor led by George Papandreou – took measures to restore economic credibility. They raised taxes to plug the massive deficit, reformed the tax system, and slashed expenditure. But Brussels and the markets have called for deeper and additional budget cuts. For ordinary Greeks life has got worse. Tens of thousands of companies have been forced to close; countless shops in downtown Athens have shut; once-crowded cafes and restaurants are half-empty. Greece’s famous nightlife now only exists at weekends. Banks have tightened lending. Greeks have scaled back on spending. Unemployment has gone up: it is at record levels with 21.7% out of work (of which over 50% are aged between 18 and 35). So has the retirement age, to 63 by 2015.

At the beginning of the crisis, most voters tolerated the government’s austerity programme. They did not back strikes by farmers and civil servants. Recently, however, it appears that most Greeks have grown fed up with the politics of austerity. Gloom and pessimism are now universal, according to surveys, with Greece officially Europe’s most displeased nation. The political beneficiaries have been the far left and right, with the country now practically ungovernable.
4. What happens next?
No one knows. But the most compelling scenario is that Syriza will emerge from next month’s elections on a platform to “tear up the barbaric accord”. Amid political chaos, and despite EU partners releasing a further €18bn (£14.4bn) cash injection, Greece will exit the eurozone. The IMF chief Christine Lagarde has talked of an “orderly exit” if Athens’s “budgetary commitments are not met”. But it may not happen like that. If Greece withdraws from the euro it will go back to the drachma. This will have catastrophic consequences: significant devaluation, the collapse of the banking system, a massive rise in unemployment above already high levels. And the collapse of the Greek economy. Greece would struggle to pay its civil servants or pensions and be unable even to run public transport. In other words, chaos.
5. The options – and key arguments
There are two options left for Greece: to fight to stay in the Euro or to accept the inevitable and plan for an orderly exit. Whatever government emerges next month will have to confront this crisis. Staying in would involve firefighting on three fronts: reviewing/renewing the budget to bring the deficit down; going to EU partners for political support; and talking down market concerns. As one adviser to Greece’s former prime minister put it: “We created this mess and we will solve it – in the Greek way.” The other option would be to prepare for meltdown that would accompany “Grexit”. A necessary first step would be to print some new banknotes. But the drachma would not solve any of Greece’s structural problems: the mismanagement of public finances, low competitiveness, tax evasion. And, the sceptics say, nobody would want to buy it. The country would be unable to import oil, gas, food and medicines, and chaos would ensue.
6. What does it mean for me?
Nothing good. A Greek exit would damage Europe’s faltering growth prospects. Not only would Athens leave the eurozone but it would also renege on its debt commitments. Banks that have lent money to Greece would suffer catastrophic losses with the risk of another credit crunch. The money markets, meanwhile, would turn their attention to the next country with major deficit problems, Portugal, making it prohibitively expensive for Lisbon to borrow. Already this is happening in Spain. This piles further pressure, according to City economist Vicky Pryce, on other euro states. The UK would obviously suffer too: the EU is its biggest export market.
7. Key players
Angela Merkel. With her uncompromising insistence that Athens pursue severe austerity measures, the German chancellor may inadvertently have contributed to Greece’s ultimate euro exit. She has recently moderated her hardline rhetoric on Greece but whatever happens next is likely to be seen by history as her responsibility.

Alexis Tsipras. The radical left Greek leader has surged in the polls after defying Brussels and EU-imposed austerity. His rise could serve as a model for other populist anti-austerity European leaders, while his party Syriza is now poised according to opinion polls to win next month’s general election.

Nikolaos Michaloliakos. The leader of the far right, ultra-nationalist Golden Dawn party won 7% in the Greek elections and will soon be making its debut in parliament. His victory has made rights groups uneasy because of its overt racist stance and has raised questions about the durability of Greece’s democracy.

Panagiotis Pikramenos. The 66-year-old supreme court judge became caretaker prime minister on 16 May, replacing Lucas Papademos, the former central banker and head of Greece’s emergency left-right coalition. Pikramenos is heading Greece’s caretaker administration until the country’s next election on 17 June. His interim government will not have the power to make any new laws.

Jean-Claude Trichet. The former president of the European Central Bank. He is unhappy that the IMF has been involved with the Greek bailout. Trichet is also against offering cheap loans to Greece, arguing: “There shouldn’t be any subsidy element, no concessionary element.”

Evangelos Venizelos. The former finance minister and socialist leader took over Pasok, the party created by former prime minister George Papandreou’s father Andreas out of the 1970s anti-junta resistance movement. Venizelos has charged Brussels with coming up with new terms and conditions for a bailout because it wants to kick Greece out of the single currency.
8. Glossary
Austerity A Greek word that means severe. Also a policy to reduce the size of a government’s deficit. There are two ways of achieving this: by increasing government revenues through tax rises, and/or by cutting current and future government spending.

Bailout The rescue of a borrower unable to pay back debts. This can be done by lending the borrower money, guaranteeing their debts, or guaranteeing the value of their dubious assets.

Default When a borrower fails to repay a loan or debt on schedule, or when the borrower is unable to pay any of its debt obligations and is bankrupt.

Deficit The difference between how much a government borrows to fund spending, and its income from tax revenues, over the course of a year.

Grexit A new term coined to refer to the possibility of Greece leaving the eurozone. Citigroup’s Ebrahim Rahbari is credited with inventing the word, which is catching on fast.

Stability pact A set of rules devised by Germany in the 1990s when the euro was created. It states that governments inside the eurozone can only borrow up to 3% of their GDP, with fines for those who disobey. Greece fiddled its books to “stay” within the limits and has repeatedly breached the target.
9. FAQ
How much money does Greece owe?

Loads. In 2010 Greece’s national debt was around €300bn (£242bn), larger than the country’s entire economy.

How have Greece’s neighbours tried to help?

All 16 of Greece’s eurozone neighbours led by Germany have put together a rescue package. This includes bilateral loans from countries inside the common currency area as well as money and technical advice from the IMF. Germany has been the main contributor followed by France. In May 2010 the EU and IMF provided €110bn in bailout loans to help Greece pay its creditors. This wasn’t enough; a second €130bn bailout was agreed in early 2012.

How long has Greece been in recession?

Four years. Its economy shrank by a whopping 6.2% in the first three months of this year.

What has Greece done to get itself out of the mess?

Raised taxes on fuel, cigarettes and alcohol, hiked the retirement age by two years (to 63), imposed public sector pay cuts and brought in tough new anti-tax evasion laws.

Which other nations could be victims of a Greek-style meltdown?

Portugal. And the Republic of Ireland. Spain and Italy are also massively indebted and in poor economic shape.
10. Some key statistics
Unemployment 21.7%, of which over 50% are aged between 18 and 35

Debt to GDP ratio 160%

Debt Around €360bn
11. In greater depth
The euro union has long been falling apart

The only solution to the eurozone crisis

FT interview transcript: Jens Weidmann (Bundesbank president)

Death of a Fairy Tale

Whispers of return to drachma grow louder in Greek crisis

In Greece, the growing shadow of the dreaded drachma

It’s in Greece’s interest to reintroduce the drachma

The Greek election could be the start of a European spring

The Greek protests are not just about the economic crisis
12. The one sentence killer dinner party line on Greece’s exit from the eurozone:
“It’s no longer a matter of if, but when.”


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