The Greek elections may be over, but the uncertainty over the future course of the Greek economy — and the impact on Europe and the world at large — is still high. The narrow victory of the New Democracy party means that Greece will stick to harsh austerity measures in return for $300 billion in bailout money, but for a country in its fifth straight year of recession, the distance to a default and an exit from the European Monetary Union is a short one. Any breath of relief will be short-lived; with a debt to gross domestic product ratio of 163 per cent, when one in every five adults — and one out of every two young people — is unemployed, economic conditions will only get harsher. That also implies that political stability is very fragile; recall that this election is a do-over because the May 6 election did not result in the formation of a government. Most analysts and commentators have said that the election results have ensured that there will be no disorderly exit for Greece from the euro, but no one rules out a ‘Grexit’ from the currency eventually. What makes things even more difficult is that there is no process set out in the huge rule- book of the European Union for such an event.
Should Greece eventually exit from the euro, the effects on the rest of the countries in the EU could be close to disastrous. Before the elections, some analysts called it a referendum on the euro; though the results of the elections have been positive, it’s not clear that the referendum is. The impact of a Greek exit from the euro, whenever it happens, will be far and wide. Borrowing costs for ‘shaky’ economies like Spain, Portugal and even Italy could skyrocket, making them the next possible candidates for similar exits from the unified currency. Even in the event of a planned and orderly exit, things are not going to get easier for Greece. It will have to issue its own currency, the drachma, whose value relative to the euro would go down by half. Inflation will go up dramatically, and imports from other EU countries will get costlier. On the flip side, labour will be cheaper, and encourage other countries to build factories and businesses in Greece; exports from Greece would also benefit enormously. A Greek holiday would be several hundreds of dollars cheaper, so tourism could get a huge boost. But until the government that is formed demonstrates real commitment to addressing the country’s economic issues, a real Greek tragedy is still possible.