Greece is a hostage to the European Union. But Greece is not blameless in this. They were pulled into the formal EU environment through a drive by the EU to increase its member states, and were able (by hook and br crook) to show flexibility in regard to economic criteria for membership to achieve that objective. Having been admitted to the EU. They then had the full funding force of the EU to go on a massive spending and development spree. The attractiveness of Greece as a country in a key point of the Mediterranean, for shipping and tourism, led to a situation where major loans to Greece were made as part of an EU concept of growth. These were loans that were based on an EU dream of growth, not on an assessment of the ability of Greece to be able to repay.
The evolution has been that the Euro as a currency has fallen into difficulty. The Euro in northern Europe has become undervalued because of the industrial powerhouse of Germany. By contrast. The Euro in southern Europe is overvalued which has caused serious problems to unemployment and commerce.
The common currency is at the root of the problem for Greece and at the root of the increase in debts, which can never be repaid.
So what's next? They can either leave the Euro (and almost certainly the EU) restore the Drachma and default on its debts, or they can stay in the currency and try and ride it out and pray economic growth returns. Both options guarantee disaster.
The country owes at least €340 billion. Its debt is 175% of its entire economy. It is rescheduled to pay it off over 40 years. Its creditors include: The European Central Bank (€20 billion), Spain (€25 billion), The IMF (€32 billion), Italy (€37 billion), France (€42 billion), (Germany €56 billion), other Eurogroup countries (€34 billion), Greek banks (€25 billion), foreign banks (€2.5 billion) the bond markets (€49 billion), and around €10 billion in other assorted loans.
If Greece restores the Drachma these debts will still be denominated in Euros, and without the security of the single currency the Drachma will depreciate rapidly and make the debt burden even larger. If it simply refuses to pay the debts Greece will be plunged into chaos. No banks will lend to Greece or any of its companies. Capital will fly out of the country, and hyper-inflation will ensue followed by mass civil unrest. The creditors will then have to take massive losses onto their books causing the international bond market to collapse and the banking system will fold, making the 2008 crisis look like a walk in the park.
Greece as a key NATO member is vital to European security. What could happen if it could no longer pay its soldiers sends shivers down my spine. Recently Turkey has been causing mischief with infringements into Greek waters and airspace.
If Greece stays in the Euro and tries to pay its debts, scheduled to reach 275% of GDP according to the IMF, its economy will collapse. With unemployment at 24% (youth unemployment alone is at 45%) it is in the midst of a crisis. The economy has shrunk by 45% since 2008. No amount of asset stripping, benefit cuts, building programmes etc. will be able to make up that huge collapse. Policy initiatives, and reforms are only tinkering around the edges. To make cuts deep enough to even get close to Greece paying back its debts will result in a massive expansion of the brain drain it is already suffering, capital flight, and civil unrest.
The problem at the heart of this is the Euro and the EU. The reckless idea of the EU to encourage more and more new countries to join and then provide limitless credit has caused massive debts to be established in member states.
What is the solution? For me, I can only see one way out of this mess, and it is grossly unfair. Greece must have great tranches of its debts written off. This is unfair because it will be the taxpayers of the principal EU players of Germany, France, Italy, Spain and others who will have to pick up the tab for the folly of their Governments past and present. With debts cut by a sufficient amount, Greece should then incrementally exit the Euro at a stable rate, probably having a dual currency for a time. Markets do not like shock, and a progressive exit is, for me, the logical and reasonable solution. The alternatives are just too hideous to contemplate.