This House believes that Greece should default on its debt and return to the Drachma.

Greece’s economic woes have been at the forefront of the Eurozone debt crisis over the last few years. It has received bailout packages in the form of emergency low interest rate loans in excess of €200 billion and has written off a portion of the existing public debt. Greece’s public debt rose to dangerous highs of 165% of its GDP in 2010 and its Budget Deficit reached a record high of 16% in 2009. Putting these figures into context, the membership criteria for the Eurozone under the Maastricht Treaty dictates that governments must maintain a budget deficit below 3% and total debt must not exceed 60% of GDP. Although it is true that most other European nations do not conform to these criteria, Greece tops the charts comfortably in terms of debt % GDP and only Ireland has a larger budget deficit.

‘Today’s crisis in Greece is mainly the result of short-sighted policies from the part of 1980s PASOK [main leftist party] governments, in two important respects: (a) PASOK’s economic policies created  a deadly mix of a bloated and inefficient welfare state with stifling intervention and overregulation of the private sector. (b) The political legacy of PASOK was even more devastating in the long-term, since its political success transformed Greece’s conservative party (“New Democracy”) into a poor photocopy of PASOK. From 1981 to 2009 both parties mainly of offered welfare populism, cronyism, statism, nepotism, protectionism, and paternalism.’[1] Subsequently, the nation’s public sector grew and now employs one fifth of the total Greek workforce. Crucially, however, PASOK’s legacy was to create a welfare state riddled with inefficiencies and corruption causing it to leak from all directions. Tax evasion has been a huge problem in the country and is estimated to cost the Greek Government €20-30 billion (i.e. two thirds of the budget deficit) every year. [2] Indeed, the unreported (untaxed) proportion of the Greek economy is thought to amount 25% GDP [3]. What’s more, the gravity and unsustainability of Greece’s debt only became apparent in 2008-9 because the Greek Government employed Wall Street firms including Goldman Sachs to help them fudge the numbers and deceive lenders. [4]

Two bailout packages later, and the Greek economy shows limited signs of recovery. The severe austerity measures enforced on the Greek Government by the “troika” constituting the International Monetary Fund (IMF), the European Central Bank (ECB) and the European Commission, have done little more than keep the country afloat and prevent it from defaulting (although the budget deficit has dropped to below 10%)[5]. The austerity measures have largely have largely taken the form of drastic increases in income tax, corporate tax and VAT and reduction of the minimum wage (in an attempt to make the private sector more competitive). Thus far, the results have been hard felt: Greece is in its fourth consecutive year of recession and the economy is shrinking at an unparalleled rate (7% so far in 2012). Unemployment in Greece is second highest in Europe (after Spain), at over 20%, while youth unemployment is at 36%. [6] The theory behind harsh austerity measures is that short term pain will eventually lead to a more efficient and competitive economy and, hopefully, a budget surplus that would start eroding at the total debt. Such targets certainly seem unattainable for Greece in the near future.

The Greek coalition Government headed by Antonis Samaras unilaterally seeks to remain in the Eurozone, but has been trying to persuade the ECB, IMF and European Commission to reduce the severity of the austerity measures, primarily by demanding more time with which to implement the measures. Such demands have so far been outright rejected. An alternative to austerity measures that many call for, could be for Greece to undergo an orderly default and leave the Eurozone. Such a scheme would most likely be undertaken overnight so as to lessen the impact of speculation about a possible default.  Although it is true that a Greek Government default does not necessarily lead to them exiting the Eurozone, most believe it would follow, and for the purposes of this debate it will be assumed that that would be the case. Exiting the Eurozone would mean Greece would have to adopt a national currency – in most likelihood their pre-Euro Drachma. ‘Briefly put: the return to the drachma should be sudden, accompanied by a short bank holiday and immediate imposition of capital controls’ [7] to prevent mass outflow of capital from the country. It would also most likely be accompanied by an ECB and European Commission backed bailout package to support the Greek banking system. [8]

[1]  Hatzis, Aristides: “Greece as a Precautionary Tale of the Welfare State” in After the Welfare State

edited by Tom G. Palmer, Atlas Economic Research Foundation, Washington, DC, 2012 http://users.uoa.gr/~ahatzis/Hatzis_2012_09.pdf

[2] ibid

[3] ibid

[4] ibid

[5] BBC Eurozone Crisis Statistics (5/9/2012) http://www.bbc.co.uk/news/business-13366011

[6] ibid

[7] Lapavitsas, Costas: “Eurozone crisis: what if … Greece leaves the single currency” 14 May 2012, The Guardian, http://www.guardian.co.uk/world/2012/may/14/greece-euro-single-currency-expert-view.

[8] Ruparel, Raoul and Persson, Mats: “Better off Out? The short-term options for Greece inside and outside of the euro”, June 2012, Open Europe, 2012 http://www.openeurope.org.uk/Content/Documents/Pdfs/Greece_better_off_out.pdf

Title 
The current austerity measures are not working
Point 

The Austerity measures put in place by the ECB, IMF and European Commission have led to nothing but misery for the Greek people. They have failed to cut down the total debt % GDP ratio and have also failed to increase the competitiveness of the Greek economy. This is because raising taxes and slashing the minimum wage has sent the economy deeper and deeper into recession. Unemployment is at a record high of 21% and there is a severe shortage of credit leading to severe difficulties in companies financing their day to day projects. What’s more, the country itself is plunged into depression. Escalated (inevitably) by the local and international media, the climate is one of despair and investment is at the bottom of anyone’s priorities. This further perpetuates the cycles of recession and prevents any of the austerity measures having their desired effect. Additionally, the drastic fall in GDP every quarter means that cuts in government spending are also not having their desired effect on reducing the budget deficit % GDP ratio. Worst of all, the economic hardships have drawn many people to despair and the suicide rates in Greece have dramatically risen over the last year and access to healthcare has drastically declined. [1] In this manner, the government is failing in fulfilling its most basic duties of safeguarding the lives and wellbeing of its citizens. If the current measures are not working then a new approach is needed. A default would alleviate much of the suffering caused by austerity.

[1]  Armitsead, Louise: “Why Greece should default and exit the euro” 23 February 2012, The Telegraph, http://www.telegraph.co.uk/finance/financialcrisis/9101397/Why-Greece-should-default-and-exit-the-euro.html

Counterpoint 

The proposition’s claims that the austerity measures have totally failed are unfounded. Although it is true that the total debt % GDP ratio has not gone down, this is not as serious as the prop make out. The budget deficit is the main problem that needs to come down because a consistently high budget deficit is what will make the situation spiral out of control and make Greece default on its debts. There is nothing per se problematic with having a large total debt (look at the USA’s total debt of $10 trillion, or Japan’s much higher debt to GDP ratio of 230% which unlike in Greece has not resulted in high interest rates,[1] for example). The fact that Greece’s budget deficit has gone down from 16% to 9% is an encouraging sign of improvement.

In addition, the proposition are not contentious in their claims about the negative effects of austerity. What they have failed to demonstrate, however, is why defaulting is the only solution to the suffering Greek people and the inability of the austerity measures to have their desired effect. The austerity measures have failed thus far because they have been targeted at the wrong areas of the economy and because the Greek Government has not been implementing them properly. Hitting the private sector with high taxation has done nothing to fix the faulty public sector which is the real cause of the debt crisis. The Greek Government remains hugely reluctant to carry out redundancies and wage cuts within the public sectors, as well as privitisations. [2] Greece, therefore, must be made to see that they must fulfill their promises and actually tackle the public sector, while alleviating taxation from the private sector.

[1] Free Exchange, ‘Defying gravity’, 14 August 2012, The Economist, http://www.economist.com/blogs/freeexchange/2012/08/fiscal-sustainability

[2] Babbington, Deepa: “Greek PM sings in tune, now must hit the hard notes”, Septembe 5 2012, e-kathimerini, http://www.ekathimerini.com/4dcgi/_w_articles_wsite1_1_04/09/2012_459620

Title 
Defaulting would be the quickest route to economic recovery
Point 

Under the status quo, the Greek economy is only headed in one direction: deeper recession. There are no signs of the situation changing any time soon. Were the Greek Government to default on its debts, after a period of recession, conditions would quickly be favourable for economic growth once more. This is what was observed when Argentina and other nations [1] recently defaulted and can be explained by many factors. Firstly, defaulting and exiting the Eurozone would allow Greece to conduct monetary policy more freely: they would be able to quickly devalue their currency in order to make Greek goods and services more competitive on the international market. This would increase exports and attract investment, as well as tourists looking for cheaper holidays – all of which would contribute towards the rebuilding of the Greek economy. [2] Moreover, were Greece to default, it would put an end to the huge degree of unpredictability and uncertainty about the Greek economy. At the moment, nobody knows if the banks are safe, if the government will default etc. The constant chopping and changing of current austerity measures such as increases in varieties of corporate tax and changes in regulations also contribute to the huge degree of uncertainty in the Greek economy. Uncertainty breeds risk and risk breeds fear: a recipe that drives away foreign investors and makes it difficult for local businesses to start up. Were Greece to default, however, such elements of uncertainty would be seriously diminished, and conditions would be ripe for investment from abroad and locally. Greek would be able to start afresh.

[1] Pettifor, Ann: “Greece: The upside of default”, 23 May 2012, BBC News, http://www.bbc.co.uk/news/business-18143078

[2] Lapavitsas, Costas: “Eurozone crisis: what if… Greece leaves the single currency”, 14 May 2012, The Guardian, http://www.guardian.co.uk/world/2012/may/14/greece-euro-single-currency-expert-view

Counterpoint 

The proposition vastly understates the negative impact a default has on the local economy. It is unrealistic to compare Greece with Argentina. As a member of the Eurozone, the developments within the Greek debt crisis have a huge impact on nations suffering from similar problems, as well as the Eurozone as a whole. Moreover, devaluing the Drachma would be nowhere near as beneficial as the proposition suggests. Greece is not rich in natural resources or industry and so boosting exports will not make a huge difference.

Yes, a default would resolve the uncertainty about whether Greece will default and exit the Euro. However this new predictability would not be good; it would simply show investors that they cannot invest in Greece because they will lose their money. Ratings agencies are unlikely to consider Greece a safe investment for a long time so there will not be international investment.[1]

[1] Pappa, Eppi: “Q&A: What happens if Greece leaves the euro?”, 14 May 2012, Al Jazeera, http://www.aljazeera.com/indepth/opinion/2012/05/2012510154748106118.html

Title 
A Greek default would increase stability for the rest of the Eurozone
Point 

A Greek exit from the ‘Eurozone does not mean the end of the euro. It will, instead, mark a new beginning. Germany has a long and proud tradition of currency strength, but it could not cope with going back to the deutschmark because it would rocket in value and destroy the country's competitiveness. Some 97% of the Eurozone's population will continue to use the single currency and their leaders will circle the policy wagons to protect what is left.’ [`] A Greek default and departure from the Eurozone would decrease uncertainty and fear within the rest of the Eurozone. This, in turn is likely to attract higher levels of investment and transactions across Eurozone members.

[1] Parsons, Nick: “Eurozone crisis: what if… Greece leaves the single currency”, 14 May 2012, The Guardian, http://www.guardian.co.uk/world/2012/may/14/greece-euro-single-currency-expert-view   

Counterpoint 

Greece’s default will not decrease uncertainty. If anything, the perceived risk of investing in other Eurozone members suffering from their own debt problems like Italy, Spain, Portugal and Ireland would rocket sky-high. The Eurozone project as a whole may struggle on with Germany trying to keep it together, but claiming that a Greek exit from the Eurozone would restore stability is short-sighted.  Many of Greece’s creditors are European banks and financial organisations. Greece’s default would, therefore, be a heavy blow for many of their creditor companies who would be unlikely to be willing to invest in other nations suffering similar problems to Greece.  

Title 
Defaulting would cause chaos in Greece
Point 

There is no good solution for the crisis Greece finds itself in, only less bad ones. Austerity measures imposed on Greece may currently be causing suffering, but austerity is the least bad option available for the Greek people: default would be considerably worse. Here is what would most likely happen:

  1. The Greek banking sector would collapse [1]. A large portion of the Greek debt is owed to Greek banks and companies, many of which would quickly go bankrupt when the Government defaults. This is also because Greek banks are almost totally reliant on the ECB for liquidity. [2] People would consequently lose their savings, and credit would be close to impossible to find.
  2. The Government would quickly devalue the Drachma by at least 50%. This will lead to imported goods being more expensive and consequently to a huge rise in inflation with the living costs increasing tremendously.[3]

These two events would lead to a severe shortage of credit, making it almost impossible for struggling companies to survive. Unemployment would soar as a result. It will become increasingly difficult to secure supplies of oil, medicine, foodstuffs and other goods. Naturally, those hit worst would be the poor. The Government, in this respect, would be failing on an enormous scale in providing many citizens with the basic needs. [4]

[1] Brzeski, Carsten: “Viewpoints: What if Greece exits euro?”, BBC News, 13 July 2012, http://www.bbc.co.uk/news/business-18057232

[2] Ruparel, Raoul and Persson, Mats: “Better off Out? The short-term options for Greece inside and outside of the euro”, June 2012, Open Europe, 2012 http://www.openeurope.org.uk/Content/Documents/Pdfs/Greece_better_off_out.pdf  

[3] ibid

[4] Arghyrou, Michael:  “Viewpoints: What if Greece exits euro?”, BBC News, 13 July 2012, http://www.bbc.co.uk/news/business-18057232

Counterpoint 

It is not necessarily true that the whole banking sector in Greece would collapse. Given that the default would be orderly and take place within the context of the European Union, the ECB and European Commission would still provide substantial liquidity aid for Greek banks. Moreover it is not true that a devaluation of domestic currency necessarily leads to high inflation – this was not the case, for example, when Britain exited the European Exchange-rate Mechanism in 1992 and pursued a devaluation policy of the British Pound. [1] Lastly, evidence of recent governments that have defaulted suggests that even though some of the harms the opposition refer to may actualise, recovery generally follows fairly quickly, as was the case with Argentina, South Korea and Indonesia. [2]

[1] Ruparel, Raoul and Persson, Mats: “Better off Out? The short-term options for Greece inside and outside of the euro”, June 2012, Open Europe, 2012 http://www.openeurope.org.uk/Content/Documents/Pdfs/Greece_better_off_out.pdf

[2]  Becker, Garry:  “Should Greece Exit the Euro Zone?”, The Becker-Posner Blog, 20.5.2012, http://www.becker-posner-blog.com/2012/05/should-greece-exit-the-euro-zone-becker.html

Title 
Defaulting would not solve Greece’s problems
Point 

The proposition argue that the hardship endured by the default would only be temporary, but an analysis at the particular situation facing Greece indicates the opposite. Greece’s problems arose from a horrifically inefficient public sector embedded within a mentality of corruption and tax evasion. Even if we assume that defaulting would eventually boost Greek exports and help the economy recover, this would not solve the underlying problems that caused the crisis in the first place. By leaving the Eurozone and defaulting, Greece would lose easy access to borrowing, meaning that taxpayers would soon have to face the reality that they would have to pay for the inefficiencies within the public sector and support all the other structures that need reform. [1] Greece must, therefore, address these underlying issues or face the exact same problems in the future. Given that solving these problems necessarily involve austerity measures and job cuts, it makes most sense for Greece to undergo these changes now (as it is with the current austerity measures), under the framework of IMF, ECB and European Commission funding and supervision.

[1] Barrell, Ray: “Eurozone crisis: what if… Greece leaves the single currency”, 14 May 2012, The Guardian, http://www.guardian.co.uk/world/2012/may/14/greece-euro-single-currency-expert-view

Counterpoint 

In receiving financial support from the ECB and European Commission to prevent the escalation of a major banking collapse in Greece, the Greek Government would be expected to continue with reforms of the public sector. What’s more, defaulting would grant the Greek Government more time to implement such reforms, making them more likely to succeed and less painful on the Greek populous.  The oppositions fears are, therefore, unfounded. 

Title 
A Greek default would have a negative domino-effect on other Eurozone countries.
Point 

A Greek default will leave tremendous shockwaves across the Eurozone. Investors will instantly become wary of default in Portugal, Spain, Italy or Ireland, particularly given the sudden nature of the Greek default. Consequently, huge volumes of capital will flow out of these countries and into other more secure ones like Germany and the Netherlands. [1] This will, in turn, heighten speculation about the danger of default of other Eurozone nations. Speculation of default is particularly dangerous because it drives demand for government bonds down. This leads to the interest payments on government bonds rising which in turn raises the interest rates governments need to pay on their outstanding debt. The new, higher payments governments must make on their debt increases their budget deficit % GDP ratio, thus making it more likely that the country will actually default. We thus see how increased fears about the future of Italy, Portugal, Spain and Ireland that will arise from a Greek default, will cause big problems and will put even more strain on the ECB and primarily Germany in providing financial support.                                  

[1] Kapoor, Sony, “Viewpoints: What if Greece exits euro?”, BBC News, 13 July 2012, http://www.bbc.co.uk/news/business-18057232

Counterpoint 

The situation in Ireland, Italy, Spain and Portugal is not as extreme as that faced by Greece. It is therefore highly unlikely that a Greek default would have as severe a domino effect as the opposition suggests. Greece is the main source of political and economic uncertainty in the Eurozone, and their departure would ease the situation, facilitate investors and allow for the Eurozone to rally strongly. [1]

[1] Ruparel, Raoul and Persson, Mats: “Better off Out? The short-term options for Greece inside and outside of the euro”, June 2012, Open Europe, 2012 http://www.openeurope.org.uk/Content/Documents/Pdfs/Greece_better_off_out.pdf  

Title 
Leaving the Eurozone would be detrimental for Greece in the long-run.
Point 

Even if the proposition are correct in claiming defaulting and leaving the Eurozone would stimulate growth in the Greek economy, such benefits are transitory whereas the benefits of remaining in the Eurozone are permanent. [1] Having the Euro provides stability for the Greek economy – investors know that the currency will not collapse, making their invested capital worthless. The gravity of the outcomes of a Greek default cannot be known for sure, however some economists have even suggested that hyperinflation could occur – leading to disastrous consequences for Greece. [2] Moreover, in the long term, a single currency makes investment and transactions with other Eurozone members much more efficient and profitable. This is particularly important given that the vast majority of Greek trade is carried out with other European members. In light of these benefits, a short term cost that comes with the austerity measures enforced under the status quo, would be worthwhile in the long term.

[1] Barrell, Ray: “Eurozone crisis: what if… Greece leaves the single currency”, 14 May 2012, The Guardian, http://www.guardian.co.uk/world/2012/may/14/greece-euro-single-currency-expert-view

[2] Ruparel, Raoul and Persson, Mats: “Better off Out? The short-term options for Greece inside and outside of the euro”, June 2012, Open Europe, 2012 http://www.openeurope.org.uk/Content/Documents/Pdfs/Greece_better_off_out.pdf   

Counterpoint 

Even in the long-term, continued Eurozone membership for Greece is not sustainable. The size of their total debt % GDP ratio is such that even if Greece were to recover (eventually) with the current austerity measures, Greece would always be susceptible to yet another debt crisis in the event of a future global or European recession. Eurozone membership denies Greece fiscal and monetary policy freedom required to face economic shocks to prevent this from happening. We thus see that in the long-term growth is more sustainable for Greece without the Euro. 

Bibliography 

Arghyrou, Michael:  “Viewpoints: What if Greece exits euro?”, BBC News, 13 July 2012, http://www.bbc.co.uk/news/business-18057232

Armitsead, Louise: “Why Greece should default and exit the euro” 23 February 2012, The Telegraph, http://www.telegraph.co.uk/finance/financialcrisis/9101397/Why-Greece-should-default-and-exit-the-euro.html

Babbington, Deepa: “Greek PM sings in tune, now must hit the hard notes”, Septembe 5 2012, e-kathimerini, http://www.ekathimerini.com/4dcgi/_w_articles_wsite1_1_04/09/2012_459620

Barrell, Ray: “Eurozone crisis: what if… Greece leaves the single currency”, 14 May 2012, The Guardian, http://www.guardian.co.uk/world/2012/may/14/greece-euro-single-currency-expert-view

Becker, Garry:  “Should Greece Exit the Euro Zone?”, The Becker-Posner Blog, 20.5.2012, http://www.becker-posner-blog.com/2012/05/should-greece-exit-the-euro-zone-becker.html

Brzeski, Carsten: “Viewpoints: What if Greece exits euro?”, BBC News, 13 July 2012, http://www.bbc.co.uk/news/business-18057232

Hatzis, Aristides: “Greece as a Precautionary Tale of the Welfare State” in After the Welfare State edited by Tom G. Palmer, Atlas Economic Research Foundation, Washington, DC, 2012 http://users.uoa.gr/~ahatzis/Hatzis_2012_09.pdf

Kapoor, Sony, “Viewpoints: What if Greece exits euro?”, BBC News, 13 July 2012, http://www.bbc.co.uk/news/business-18057232

Lapavitsas, Costas: “Eurozone crisis: what if… Greece leaves the single currency”, 14 May 2012, The Guardian, http://www.guardian.co.uk/world/2012/may/14/greece-euro-single-currency-expert-view

Parsons, Nick: “Eurozone crisis: what if… Greece leaves the single currency”, 14 May 2012, The Guardian, http://www.guardian.co.uk/world/2012/may/14/greece-euro-single-currency-expert-view

Pettifor, Ann: “Greece: The upside of default”, 23 May 2012, BBC News, http://www.bbc.co.uk/news/business-18143078

Ruparel, Raoul and Persson, Mats: “Better off Out? The short-term options for Greece inside and outside of the euro”, June 2012, Open Europe, 2012 http://www.openeurope.org.uk/Content/Documents/Pdfs/Greece_better_off_out.pdf

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