The Greek Dilemma

After a lengthy negotiation period, it appears that Greece and its creditors may be close to reaching a deal on extending economic relief in the form of more short-term bailout packages to the struggling country. In the next two weeks alone, Greece owes billions of dollars to the IMF and other creditors--an amount it is nowhere near capable of paying on its own. The risk of a potential default is very serious, and creditors know that. All that is left now is for the terms of new bailout money to be finalized, and taken to the Greek government for a vote.

Greek Prime Minister Tsipras has lobbied hard for fairer terms in an effort to make good on the anti-austerity promises that swept him into office months ago, yet his success has been mixed as he confronts a reality in which Greece's unstable level of debt leaves it holding very few cards at the negotiating table. Any new deal will include cuts to Greek pensions, reforms to labor laws, and possibly reforms to Greece's tax system, notorious for its ineffectiveness at collecting taxes. However, PM Tsipras' left-wing Syriza party must accept these compromises with the understanding that such a deal may be the only thing preventing Greece from running out of money entirely.

PM Tsipras. Courtesy of Financial Times

The problem is that this is only a short-term solution to a much larger issue--and that it may not be the right solution at all. It has become generally accepted that austerity is not the right way to help a struggling economy. Drastically cutting government spending during a period of high unemployment is only going to perpetuate unemployment, not help consumers get back on their feet and spend more. And with Greece's unemployment rate hovering around 25 percent - and much higher for youth - more austerity measures are going to hit the public hard.

Further, this isn't to say that there won't be a Greek exit from the Eurozone farther down the road. Greece's debt-to-GDP remains around 175 percent (compared to Germany's, which is less than 80 percent). Between paying back its creditors and paying bills at home, Greece is just barely staying afloat. Short-term loans will help stabilize the Greek economy temporarily, but what's to say that Greece needs another bailout months later?

A Greek exit would be catastrophic not just for Greece, which would have to revert to its (now extremely devalued) drachma currency, but would pose an existential threat to the Eurozone itself. If Greece exits, Italy may see an opening and exit as well. Spain is struggling nearly as badly as Greece and Italy, and would perhaps consider the same decision. Ultimately, Greece could set the stage for an exodus of damaged economies and a potential collapse of the euro as the currency for the EU.

Courtesy of WSJ

This crisis has been years in the making. The thought that countries with as much diversity in culture and financial stability as those that make up the EU could come together and operate under one set of financial guidelines is absurd. Sure, the U.S. dollar works well for all 50 states in America, but that is because they report to one federal government--not more than a dozen, as is the case in the EU. What a country like Germany and a country like Greece need in terms of economic policy are far too varied--yet they lack the flexibility to adopt policies that will benefit them. It is hard to see how the Eurozone can rebound when this is the case.

Yet at the end of the day, what is Greece to do? Unfortunately, there are simply no other options left than to take the money it is offered and pay what it owes. Whether it is the solution Greece needs is not the point--it is the solution Greece has, and the solution it must use. However, as loans are repaid, towns and cities all over Greece will likely look the same: scores of working-age citizens sitting in cafes without work, shuttered storefronts, and an ever-increasing disillusionment with the economic union and currency Greece adopted more than a decade ago.