Greece Elections: What Would Happen If Greece Left The Eurozone?

Q&A: What Would Happen If Greece Left The Eurozone?

This weekend's Greek election is being viewed as a make or break moment for the eurozone. The success of an anti-austerity party like Syriza could ultimately lead to Greece leaving the euro, while a win for a pro-bailout group will see years of harsh spending cuts imposed on its people.

The country was the first to receive a European bailout to help it survive the global downturn and it remains the biggest casualty in Europe.

Here we look at how Greece found itself in this position, what it has done so far and what might happen next.

:: What is wrong with the Greek economy?

Greece's debts total around 356 billion euros (£290 billion) - or around 165% of the country's gross domestic product, a broad measure for the total economy. Greece's high levels of debt mean investors are wary of lending it more money, and demand a higher premium for doing so. The yield on Greek 10-year government bonds - the cost of borrowing to Greece - is one of the highest in the world at 29%, compared to 1.7% in the UK and 1.6% in the US. Greece is struggling to repay its debts as it is in the throes of a deep recession.

The economy is expected to contract by around 6.4% this year, while unemployment is at record levels. To add to the economic turmoil, the Greek government is in tatters. Unable to form a coalition government due to fierce differences over how to lead the country out of the crisis, another general election was forced.

How did it end up in this mess?

Greece is in a large amount of debt following years of living beyond its means; public spending soared in the last decade and public sector wages doubled during the period. However, as the government upped its spending, tax income was hit because of widespread tax evasion. So when the global financial downturn hit, Greece was not equipped to cope.

What has been done to help Greece fix its problems?

The Greek government was granted a 110 billion euro bailout (£96 billion) in May 2010 from the International Monetary Fund, European Union and European Commission, collectively known as the troika. This was not enough for Greece to keep up with its debts and another 109 billion euro bailout was agreed in July last year.

Much of the bailout cash has gone on Greece's running costs, including wages for its massive public sector, which accounts for around 40% of the total economy. However, one billion euros of the most recent tranche of bailout cash was recently withheld as EU leaders were concerned by the failure to form a government. At the time of the last bailout, leaders pledged to slash Greece's budget deficit through a programme of spending cuts and tax reforms.

What is everyone waiting for?

The election on Sunday is not just crunch time for Greece, but a key turning point for the entire eurozone. The country is likely to renege on its bailout commitments if anti-austerity parties such as leftist Syriza hold sway and seek new terms. But this will be difficult as it will require the likes of German Chancellor Angela Merkel to back down. If the new government does not reach an agreement with its eurozone partners, it could be forced from the single currency.

However, if a pro-bailout party, such as New Democracy, gets into power it will still not be an easy ride. With four years of recession behind it, the country will continue to suffer under the stringent austerity measures required by the troika. Many analysts believe Greece will require a third bailout if it remains in the euro.

What if Greece exits the euro?

A Greek exit from the euro would have a mixed impact. The cost of imports - which in Greece includes a lot of its food and medicine - could soar as the new drachma currency plummets in value. The country will find it even harder to borrow money. It is possible fears over the impact on savings would see a run on Greek banks as people empty their bank accounts. Businesses would face extreme difficulties, as they dispute whether contracts should be converted into drachmas or remain under euro valuations. Markets could suffer further turmoil as investors become nervous about the potential "contagion" impact a Greek exit would have on the rest of the continent and world.

In the longer run, Greece's economy would hopefully benefit from having a much more competitive exchange rate, making its exports more appealing and boosting its already strong position as a tourist destination.

How does this all affect the UK?

Greece owes huge sums to European banks including more than 7.2 billion euros (£6.2 billion) to British banks. The financial sector is in such a fragile state that banks might collapse if Greece does not pay what it owes. The "contagion" effect could then see other countries' finances suffer, for example French banks are owed 42 billion euros (£33 billion).

This domino effect could lead to another credit crunch, as banks across the eurozone lose confidence in other banks and refuse to lend to each other. A worst-case scenario could see the financial system go into meltdown with banks across Europe, possibly the world, being bailed out by governments, with taxpayers footing the bill.

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