The Third Bailout

Story by Rachel Abastillas | abastillas.r@husky.neu.edu

White sand beaches and clear blue waters are a couple of the reasons why Greece is one of the most popular Mediterranean destinations. In early 2014, as approximately 20 million tourists vacationed in Greece, it almost went unnoticed that the country was suffering a major economic crisis. With tourism accounting for roughly 20 percent of Greece’s gross domestic product (GDP), the country would take a dark turn if the time came where tourist rates fell.

It is vital to first address how Greece’s economy began sinking into bailout territory. Greece is a state that is part of the Eurozone, a binding system that includes 19 other European states that all use the euro as their currency. The European Central Bank is the organization that regulates the currency, while budgets and taxes differ depending on a country’s interests.

At first, one would assume that the Eurozone is a great idea because movement within the borders of these countries is easier, given that the currency is the same. Unfortunately, because Greece is tied to the other countries within the Eurozone,  Greece is not just tarnishing its own economy, but also the economies of all 19 states.

When Greece’s debt crisis began in 2010, it was losing money, bringing the value of the euro down. Germany, a state in the Eurozone, felt obligated to lend Greece money during the past two bailouts to prevent the crash of its own economy. In recent years, Germany’s economy has had excellent standing, which led to the assumption that it was in a much better position to absorb losses than the rest of its neighbors.

After the first two bailouts, Germany lent roughly 57.23 billion euros to Greece. Other European countries in addition to Germany also loaned money to show their support for their European Union counterpart. Loaning such large amounts of money, however, has serious consequences because this wealth has to come from somewhere, and that place ended up being international banks. Therefore, by investing north of a billion dollars on saving a country, other members of the European Union are risking their own economy given that they will now have to repay the international banks involved with the Eurozone.

One might assume that it would be easier to just leave the euro altogether, and generate a new currency. The implied benefit of switching over to a new currency would be that Greece could lower the value of its currency, making products such as groceries and other general expenses cheaper. However, there are more downsides to changing over a currency than to keeping the same one. First of all, it is difficult to leave the euro because then other countries would consider doing the same. This would become a major issue because printing new currencies and distributing them to banks and ATMs is an arduous process that could take months to redistribute. Secondly, it is extremely difficult to switch to another currency when inflation is growing uncontrollably within a country. This concept of “de-dollarizing” is dangerous territory because it is deemed to fail rather than succeed, and in an economic crisis like this, Greece cannot stand for another failure within their market.

Today, Greece is facing its third bailout. Greece is in an extremely vulnerable state, and must find a way to reallocate its funds so that it can stabilize its finances in order to prevent a crisis like this in the future. It’s tough to determine whether the tourism industry will suffer or flourish. However, one thing is for sure: if the tourism industry in Greece also collapses, Greece is going to face losing money in the industry they are most reliant on, thus causing an even greater economic disaster.