Grexit

The term Grexit is a combination of Greece or greek with the word exit, which means an exit of Greece from the eurozone or European union. The Grexit was cropped up due to Greece's possible withdrawal from the eurozone. The term was introduced by two famous economists of Citigroup, Ebrahim Rahbari and Willem H. Buiter, on February 6, 2012, which subsequently made headlines in media and major newspapers.

The Grexit is critical for investors and others, including economists who tried to study the impact of the financial crisis on Greece itself and the world economy. The term Grexit became popular as Greek citizens proposed to leave the European Union and introduce local currency drachma as the official currency of Greece to ward off the country’s debt crisis.

• Grexit, a term combining "Greece" and "exit," refers to the possibility of Greece leaving the eurozone or the European Union. 
• Coined by economists Willem H. Buiter and Ebrahim Rahbari in 2012, it gained media attention as Greece faced a financial crisis. The suggestion of adopting the drachma as the official currency to resolve the crisis popularized the term "Grexit."
• The Greek debt crisis was influenced by various factors, with Greece's vulnerability to economic challenges becoming evident during the 2009 global financial crisis. The nation's debt-to-GDP ratio reached a staggering 146% in 2010, highlighting the severity of its economic situation. 

Greece joined the eurozone in the year 2001, but the 2009 financial crisis left Greece as the epicenter of Europe's debt problems. Greece started facing bankruptcy in 2010, which spread the fear of the second financial crisis one after the other among the peer members. By then, many members had already assumed the exit of Greece from the eurozone, and the term Brexit cropped up.

Many factors were the apple of discord for the Greece debt crisis. The aftermath of the 2009 financial crisis clarifies the extent to which Greece was exposed to the terrible financial ordeal it was going through. In 2010 when Greece was heading towards bankruptcy Greece’s debt to GDP ratio was exorbitantly high, 146%.

Following are the main factors that lead to the Greece debt crisis:

• Corruption and tax evasion which left Greece in debt problems, had been consistent for many decades and were misreported to be in line with guidelines of the eurozone.
• The trade deficit also significantly contributed to the Greece crisis because when Greece became a member of the eurozone, the cost of wages went up very high, leading to unmatched positions with available resources.
• Major industries of Greece like shipping and tourism were going through a terrible ordeal which subsequently fueled the Greece crisis.

The following are the consequences of Grexit.

• To ward off the Grexit, in 2010, when it was evident that Greece was about to exit the Eurozone European Union IMF (International Monetary Fund) and European Central Bank came forward to bail out Greece's economy with €110 Billion loans with conditional austerity measures including structural reforms and privatization.However, once it was confirmed that Greece's economy was falling, investors were asking for a higher interest rate on the loans being given to Greece to boost an economy which failed to create positive results. Instead, it made Greece's deficit worse.
• The Greece economy failed to crop up further due to the increasing unemployment rate and poor economic performance across various industries, e.g., shipping and tourism. In the aftermath of the recession, Greece's economy became worse. As a result, a second bailout package was offered for around 130 billion euros. It was then in the year 2014 when the recession hit Greece again.
•  In 2015, when the new government stepped in with Syriza being elected by the Greek people whose main mandate was to terminate the austerity measures, which they assumed was bone of contention for the failing economy, they restrained the loan repayments to the lenders. Greek people voted to reject the bailout terms and conditions to be followed, which resulted in decreasing trends in stock markets as the perceived chances of Greek recovery were wiped out. The European Central Bank provided emergency liquidity services and helped ward off the liquidity crisis. If Greece runs out of the required money, the only option with Greece is to print an alternative currency which could be the Grexit from the European Union.
• The Eurozone or the European Union has several benefits for its respective member countries in terms of trade and others. Still, at the same time, there are demerits as the 19 member countries share the same currency. Greece’s monetary policy including the extent of currency which Greece can print, is controlled by the European Union. Members of the eurozone were afraid that increasing the number of euros in circulation would result in inflation. The exit of Greece from the eurozone will make Greece have its own monetary and fiscal policies and could reintroduce the drachma as their official currency.
• The reintroduction of the drachma as the official currency of Greece has its limitations as the drachma was expected to devalue against the euro, which will increase the government debt ratio because it provided the loan in the euro. Devaluation of the drachma and official exit of Greece from the eurozone had made the people withdraw more euros, due to which deposits in Greece reduced by circa 13% in March 2012. Devaluation of drachma also resulted in the people withdrawing more euro from the bank, causing the bank to run.

• The official exit of Greece from the eurozone had negative consequences. Expected that the initial impact of Grexit would be confined to the extent of minor economic trouble, but in the long term, many economists knew it would be a disaster that could easily impact other European member states at the same time and subsequently affect the entire eurozone. Grexit impacted investors’ confidence very badly, which could be felt in other eurozone, particularly Spanish, Italian, and Portuguese markets.
•    It also increased the chances of sovereign defaults and created a worldwide recession, causing a decline in major economies' GDP by circa 17.4 trillion euros. Grexit had far-reaching consequences and had affected major economies like the US, China, and Germany, which subsequently increased unemployment across the various sectors.
• Grexit also impacted the economic policies of the other eurozone members, which had economic and political relations with Greece. Due to Grexit, other members had to write down their respective budgets considerably. The budget deficits to which Greece owes money increase further, resulting in sovereign defaults. To recover these losses, the government had to raise taxes and further reduce the expenditures desired. All these factors reduced the demand for goods and services, which subsequently impacted the economy and people's quality of living.

In conclusion, we could say that Grexit had been envisaged as bad for Greece in the short and long run.

• The lack of competitiveness of the Greece economy results in the devaluation of drachma compared to the euro.
• The real income of people, employees including pensioners contracts considerably.
• Sovereign debts and private debts increased as the euro appreciated against drachma, and Greece could not service the debt obligations.
• Deposits in the bank were converted into drachma, which decreases the actual deposits kept in the initial euro.
• No credit had been available for new business as the lenders to Greece were unwilling to lend the same, which reduced the supply of necessities like foods, medicine, fuel, etc.
• The government failed to balance revenue and expenditure. If the government prints more local currency, it will create inflationary conditions, which will wipe out the improvements being made by drachma.
• Domestic political parties could not provide a positive economic environment required to sustain Greece's growth and prosperity in the long run.

This has been a guide to what Grexit is and its meaning. Here we discuss the impact and factors behind the Grexit along with consequences and Greece’s timeline. You can learn more from the following articles on Economics –

• Crack Spread
• What is Brexit?
• Currency Depreciation
• Economic Indicators