Eurozone crisis: Why the Greek case is now different

As the leftwing Syriza party swept to power in Greece early this year, the question of whether Greece will be able to stay in the Eurozone came to forefront once again. Since the financial crisis in 2008, Greece is grappling with its ever rising debt burden. To ride out the crisis, they needed help from the European Commission, European Central Bank and the International Monetary Fund, but at the same time had to comply with strict austerity measures suggested by them. People of Greece were clearly fed up with the consequences of this austerity programme, leading to a victory of the Syrzia party which promised to ease the budget belt-tightening and reorganise the 240 billion euro bailout debt. This means there is a potential of conflict between Greece and its European counterparts on the current bailout programme, which many fear might lead to a Greek exit from Eurozone.
Greece is trying to negotiate by arguing that if it leaves the Eurozone, it might have a strong contagion effect and countries like Portugal, Spain and Italy might follow suit. But in reality, that might not be the case. When the risk of a Greek default peaked in 2010, there were worries across Europe. Investors usually consider debt issued by governments safe, as governments can always print money to pay off its debt. It was not possible in Eurozone as only the European Central Bank (ECB) had control over money. This risk of contagion of potential Greek default sent borrowing cost skyrocketing for other peripheral countries like Portugal, Spain and Italy. Later, tension eased off slowly as the ECB promised to deliver 'whatever it takes' to save the Eurozone.
Things are different this time around as the probability of Greek exit is again in the news.  Markets are relatively calm and the yields on government bonds are at much lower level (less than 2 per cent) for peripheral countries like Italy and Spain, while for Greece it is 11 per cent. This calmness indicates that the peripheral countries are now in a much stable situation than they were 5 years ago.  ECB continuously lowered the interest rate to reach zero lower bound. As the growth rate became positive again, interest rate below growth rate helped these troubled countries to stablise their debt to GDP ratio. The ECB's decision to start quantitative easing - the outright purchase of government bonds with newly created money - has brought yields throughout the region down even further, helping to improve the region's debt dynamics significantly.  
All these mean chances of other countries following Greek exit are much lower now compared to few years ago. This, in turn, means Greece needs to come up with stronger argument that will justify its importance in the Eurozone. At the moment, if both parties are not ready to compromise, a Greek exit is the likely scenario. However, many believe this might be good for both Greece and the Eurozone. For Greece, though there will be chaos in the beginning, things might eventually improve. With a floating exchange rate and control over money supply, adjustments might be less painful. Greek currency will be much lower in value compared to Euro which will boost export and tourism. It will be a cheaper place to do business and employment would eventually pick up.
A Greek exit would mean lesser problems for Eurozone to deal with. However, that will not mark the end of the crisis. Though the debt to GDP ratio has become stable for some countries, it will take a lot of time to reduce it. For Eurozone, the stability depends crucially on the prospects of growth, which is very hard to predict at the moment. If growth stays sluggish for a long time, any external shock might exacerbate the situation and the breaking up of Eurozone will again be a serious possibility. For now, it seems Europe will continue to grow slowly without any risk of breaking up of common currency in the very near future.
The writer is a PhD student at the Institute of International Economics
University of Muenster, Germany. nazmus_eco70@yahoo.com