A lot of our Business Studies students have been asking us to explain the Greek Referendum and its implications on the European Union countries and India. So here is a quick explanation of what the Referendum was all about and how it could impact other nations.
What the Vote was all about
The people of Greece voted on whether to accept a Bailout package form Troika (European Union, European Central Bank, International Monetary fund). The Bailout package demanded a lot of Tax increases, Spending cuts and economic references. But officially this voting was also widely seen as a referendum on whether Greece should continue being part of Eurozone or exit it.
The final result of the referendum was that 61% of the people voted ‘No’ while the others voted ‘yes’.
What led to the referendum?
In any country, the government borrows money from the people in the form of taxes. It uses this money to build roads, develop infrastructure and power projects, improve healthcare and to run its industries. So what happens when the money collected from the people isn’t sufficient? It starts borrowing money from the governments of other nations. Greece was exactly in the same situation and it borrowed money from other countries. However, it was unable to pay back the loans it borrowed. The other economies of the European Union said that further bailout packages wouldn’t be possible if it doesn’t implement the necessary checks and balances (austerity). The Greek government felt that the other nations are putting a lot of pressure/conditions on them and hence it would be better if they could move out of the Eurozone and re-establish its old currency ‘Drachma.’
The Implications of voting ‘No’
25% of the people in Greece are currently unemployed. If, Greece simply doesn’t want to follow the austerity measures and decides go back on its own, it will have to start printing more currency notes. This would mean, more money circulation in to the market. As we all know more money in circulation would increase the price at which people buy products and hence lead to a situation of hyperinflation. Even if the government doesn’t take this extreme measure, it would probably take tens of years for the industries to revive and for the economy to improve. Recovery would probably start with tourism in Greece as travel to Greece would become cheaper. The main point to note would be that Greece would have to pay off all the current outstanding loans to the IMF before it can borrow further to develop its economy.
What does it mean to other Eurozone Countries?
The European central bank could have easily paid out the loan taken by Greece to the IMF. However, if the same situation follows in Spain, Portugal, Italy and Ireland, it might have a hard time.
How are Germany and France reacting?
The German Chancellor Angela Merkel and the French President Francois Hollande are desperate to keep Greece in the Eurozone. Germany has benefited the most from being in the Eurozone. As it had a strong currency, Germany’s exports weren’t that competitive. By adding weaker countries to the Eurozone, it has been able to increase its exports and reduce unemployment. Germany’s trade balance has gone from a net deficit to a surplus. The competitiveness measure is based on currency movements and changes in unit labour costs in major industrialized countries. With the exception of Germany, each of the countries shown has lost competitiveness because unit labour costs have risen more rapidly in those countries.
What does the Greek crisis mean for India?
India is the European Union’s largest trading partner, exports to the EU account for about 2.4 lakh crores every year. Investors in US and elsewhere would pull money out of India and other "foreign" stocks for the losses in Greece [basic human psychology is that if we get into trouble with one person, we avoid everyone similar to them]. When investors pull money away, the Indian stock markets will take a hit. This will in turn affect Indian companies. When the world bond markets get into a problem, the Indian government would find it tougher to borrow money and that would affect domestic investments & growth.
So what happen now?
Greece is in talks with the European Union to work out a solution that would be mutually favourable to both all parties.
2 weeks later and after 17 hours of negotiation
After 17 hours of talks Greece accepted a third bailout package with numerous conditions imposed on them. Greece very much wanted and needed a bailout but not in terms of IMF & ECB because a majority of the money would change hands among the creditors, with no money flowing through to the Greeks in other words the bailout money will be used to pay back the old loans and not for the country’s development. Greek default is catastrophic for German, French and Spanish banks so in all probability technical default was avoided due to the acceptance of the bailout.