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Greece, the first European country to fall into debt trouble, is faced with a painful decision on whether to stay in the euro zone. At present, the country is suffering the heavy blow of a triple crisis—sovereign debt, social problems and political uncertainty.
There are no regulations on how a member country can leave the euro zone, and other member countries, are hardly able to expel Greece from the monetary union. But the possibility of Greece's exit has definitely increased compared with two years ago.
U.S.-based Citibank recently predicted that over the next year and a half the possibility of a Greek exit from the euro zone will be 75 percent. The Center for Economics and Business Research in the UK deems that at least one member state—most likely Greece—will quit the euro zone in 2012.
Doubtlessly, there will be serious negative effects if Greece exits the euro zone. Most importantly, the Greek economy will thoroughly collapse. Austerity policies implemented by the Greek Government have dampened the momentum of Greece's economic growth. The country cannot run without outside support. Greece will definitely lose foreign aid, and a large amount of capital will retreat from the country as soon as it exits the euro zone.
The collapse of the financial sector, the lifeline of the national economy, will lead to a more serious crisis for Greece. The Paris-based BNP Paribas Bank predicted that Greece's retreat from the euro zone would result in a loss of 20 percent of GDP, and drive inflation to more than 40 percent. The United Bank of Switzerland also forecast an average loss of 9,500-11,500 euros ($11,900-14,400) for each Greek.
Even reusing the past Greek currency is not a simple thing. The whole country will have to change price tags for all goods and it will cost a lot to print new money. In fact, retreating from the euro zone cannot rescue Greece from the deep pit of the debt crisis. Greece exports few kinds of goods and its goods are not competitive in the global market. Therefore, its exports won't grow much by using a devalued drachma.
Greece's creditors will bear great losses if it exits the euro zone. Although measures such as a massive debt write-down carried out by other European countries have alleviated the debt burden of Greece, European banks and other investors still have 55 billion euros ($69 billion) in Greek sovereign debt in their hands. A Greek exit would mean that the national debt might default. Other huge debt, including $69 billion in loans Greek enterprises and individuals borrowed from international banks and 100 billion euros ($125 billion) in loans the Greek central bank borrowed from other European central banks, may also default. It is also unknown whether the International Monetary Fund (IMF) will be able to get repaid for its 22-billion-euro ($28 billion) aid to Greece.
A Greek exit will also destroy the reputation of the euro. It will bring to light the deadly defects in the euro system. Its consequences are likely to spread to other troubled countries including Ireland, Portugal, Spain and Italy, producing a domino effect.
As a result, the progress of European integration will be interrupted. The euro is a necessary step of European integration. Many other European countries are expected to join the monetary union in the future. A Greek exit will be a major setback in the process.
There are several reasons why the European sovereign debt crisis remains unresolved three years after it broke out. Since it hit Greece, Ireland and Portugal, a chain reaction has dragged more European countries, including Spain and Italy, into the crisis. The EU failed to take rapid and efficient measures to curb the debt crisis following its outbreak. The IMF, the EU and the European Central Bank have paid too much attention to austerity as a counter-crisis strategy, restricting economic growth. International credit rating agencies have aggravated fears by downgrading the credit ratings of debt-ridden countries—moves that hindered the recovery of market confidence. Last but not least, the governments of the heavily indebted countries have been unable to win public support for their counter-crisis measures.