The headlines again tell us about Greek debt and the possibility that Greece will default on its loans. We have been hearing about Greece’s problems for over three years and the potential disaster that they may cause the western world. Perhaps it is because we are so used to the idea that we don’t even get upset about it.
Economists at the Carnegie Endowment, Bennett Stancil and Uri Dadush, have outlined 2 economic strategies that Greece could use to tackle its economic woes. Each strategy will have dramatic consequences, both for Greece and for the rest of the world. One strategy is to follow Latvia’s example of dealing with its economic woes by accepting a new economic recovery plan from the EU and continuing to work within the European economic system. This seems to be working for Latvia but it is an incredibly slow and painful process. It will also involves years of very slow economic improvements and many debt repayments to the IMF and the EU.
Argentina was also tied to a foreign currency, the American dollar, when it economy collapsed. However, Argentina separated itself from the dollar, devalued its currency and defaulted on its loans. The countries competitiveness returned quickly and its exports grew significantly. According to Stancil and Dadush’s analysis, Greece’s best option is to leave the Euro and go it alone. This however, will have devastating consequences on the European and international economic system. Europe should try to help Greece to improve within the system.
If Greece leaves and defaults on its debt, the European banking system will have to pick up the tab in loan defaults. This will strain the European banking and economic system. If Greece leaves, Italy, Portugal and Spain may follow suit and bankrupt the Europe. That will have at least 2 effects on America. First, exports to Europe will decrease dramatically leading to lower profits (or losses) for American companies, layoffs, unemployment, less tax revenue, etc. The second effect will be that financial investments in Europe will be lost, weakening America’s financial power.
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