It’s the question on everyone’s lips: can Greece stay in the euro area?

Why it might go

Greece has requested “a substantial watering-down” of its bailout terms. This means that Greece has asked if the ECB can make life easier for the Greeks by easing up on Greece’s bailout repayments; the Greek public has simply had enough of austerity and it cannot take much more.

Let’s say that Greece falls short of the budget cuts and promises for reform it made in March. For Greece to request a second, €130 billion bailout from the IMF would only fuel the debate about cutting Greece loose from the eurozone.

If the central European authorities give Greece another chance, it would need a supplementary bailout almost to the tune of €20-50 billion. But there is little appetite to give Greece another handout.

It’s certainly true that Greece cannot push through more austerity; 20% of the Greek population is now reportedly living in poverty and dependent on “food handouts”. Further cuts to state salaries and pensions, and the sacking of another 40,000 public sector workers risks violent protests.

Why it might stay

Here’s the kicker: while Greece cannot endure much more austerity, the German public cannot endure many more bailouts. In all likelihood Germany will veto further aid to Greece unless it meets repayments. With that in mind; Greece appears to be on the brink of leaving the euro. At the very least, there’s growing evidence that Greece will default on its debts.

Former ECB policymaker Joerg Asmussen, previously Germany’s deputy finance minister, said that a Greek exit would be manageable. Asmussen supported the German Bundesbank’s view (the central bank of Germany) that it would rather see Greece leave the euro than agree to eurobonds.

Undeterred, Greek prime minister Antonis Samaras has insisted he has an austerity plan which will generate about €11.5 billion - a key condition for Greece to continue receiving bailout funds, to avoid default and to avoid a possible exit from the currency club. This austerity plan must be proved (i.e. it must be shown to be successful) before inspectors return in early September. Whatever the inspectors see, their report will decide whether to release the next loan tranche or to initiate the Grexit.

Samaris has said of the doubts: ‘The Germans will get their money back. I am guaranteeing that personally. We will fulfil our obligations fully.’ Speaking to the German tabloid Bild, Samaris asked for a bit of “air to breathe” to kick-start the Greek economy.

Meanwhile, Greece’s economy continues to collapse – it is calculated to shrink by 6.2% over 2012 – leading to a worsening situation with the euro, despite drastic cuts in public spending, tax rises, and labour market and pension reforms.

The German government says there can be no "substantial changes" to the terms of Greece's bailout. Michael Fuchs, the deputy leader of Angela Merkel’s political party, said that if Greece cannot cut costs by 40%, then “it’s very clear that they have to just leave the euro”.

By mid-September, Greece aims to reach an agreement about cutbacks for 2013-14. Preliminary reports by the central European authorities suggest that Greece has grossly underestimated its overspend. The world will have to wait for the September report on Greece’s progress to see whether this is an accurate representation of Greece’s current position. Worryingly for Greece, Merkel has revealed that she doesn’t think a Grexit would have much of an impact on the remaining eurozone countries.





Next up!

In PART 4 of our eurozone report , we look at:
  • Why Spain’s economy is in such a precarious position.
  • How Spanish people have reacted to Spain’s austerity programme.
  • The impact of a potential Grexit on Spain.