Greek Economics Crisis

Individual Assignment - Economics for managers (EMBA, Semester -1 ) By: Nirin Parikh

PRN # 15020848012 email: nirinparikh.e17@sibm.edu.in

 Background of Greece Economy

 Starting from Charlemagne in the 8th century CE many European emperors had a grand vision to unite Europe. That resulted in over 1000 years of incessant warfare. After the second world war, unification attempts shifted from the power of the gun to the power of the currency. European powers along with the USA worked on a strong economic integration to prevent another world war. The first move was initiated in 1951 by a group of 6 countries - France, West Germany, Belgium, Netherlands, Luxembourg and Italy. These continental powers saw most of the action both the world wars. Thus, the economic integration started from there. The West European countries were next to each other, similar in their development and incomes and thus the integration was quite successful. However, in 1981 Greece was admitted into EU. This was unusual as Greece was way behind Western Europe in development. Greece was comparable to other eastern European countries and none of Eastern Europe was admitted into EU. For Western Europe, Greece was important for its historic connections as the center of the Byzantine empire. For Greece, the entry was important to protect itself from Turkey. Ancient history clouded all logic. Greece was admitted to EU and later became a part of the Euro.

Overview of European Union(EU), Euro, Eurozone  

Before understanding Euro. First let’s know what is the European Union, which is known as EU in the short form.

European Union (EU)

The EU is an economic and political union of twenty eight countries. It operates a single market which allows free movement of goods, capital, services, and people between member states. Each of the countries within the Union are independent but they agree to trade under the agreements made between the nations. Twenty two of the member states also belong to the Schengen Area, which is comprised of 26 European countries that have abolished passport and border controls at their common borders. Of the countries that are not part of it, Bulgaria, Croatia, Cyprus and Romania all intend to join, while the United Kingdom and Ireland have opted out.

After the Second World War there was a new movement to create unity between Germany and France, which would ultimately lay the foundations for the European Union four decades later. The EU can trace its origins from the European Coal and Steel Community (ECSC) and the European Economic Community (EEC), formed in 1951 and 1958 respectively by the Inner Six countries of Belgium, France, West Germany, Italy, Luxembourg and the Netherlands.

History of Euro

The currency was introduced in non-physical form (traveller's cheques, electronic transfers, banking, etc.) at midnight on 1 January 1999, when the national currencies of participating countries (the eurozone) ceased to exist independently in that their exchange rates were locked at fixed rates against each other, effectively making them mere non-decimal subdivisions of the euro. The euro thus became the successor to the European Currency Unit (ECU). The notes and coins for the old currencies, however, continued to be used as legal tender until new notes and coins were introduced on 1 January 2002 (having been distributed in small amounts in the previous December). Beginning on 1 January 1999, all bonds and other forms of government debt by eurozone nations were denominated in euros.

The designs for the new coins and notes were announced between 1996 and 1998, and

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production began at the various mints and printers on 11 May 1998.[18] The task was large, and would require the full three years and a half. In all, 7.4 billion notes and 38.2 billion coins would be available for issuance to consumers and businesses on 1 January 2002.[19] In 7 nations, the new coins, struck in the run-up to 1 January 2002, would bear a 2002 date. In Belgium, Finland, France, the Netherlands, and Spain, the new coins would bear the date   of striking, so those 5 countries would be the only ones to strike euro coins dated 1999, 2000, and 2001. Small numbers of coins from Monaco, Vatican City, and San Marino were also struck. These immediately became popular collector's items, commanding premiums well above face value. New issues continue to do so to this day. Overall, roll-out of currency was smooth with few problems. Nations were allowed to keep legacy currency in circulation as legal tender for two months, until 28 February 2002.

The eurozone, officially called the euro area, is a monetary union of 19 of the 28 European Union (EU) member states which have adopted the euro (€) as their common currency and sole legal tender. The other nine members of the European Union continue to use their own national currencies.

EU Countries Vs Year to Adopt Euro

Austria  Belgium  Finland  France  Germany  Ireland  Italy Luxembour

g 

1999  1999  1999  1999  1999  1999  1999  1999  Netherlands  Portugal  Spain  Greece  Slovenia  Cyprus  Malta  Slovakia 

1999  1999  1999  2001  2007  2008  2008  2009 

Estonia  Latvia  Lithuania 

2011  2014  2015 

Eurozone (euro area) Preceding national currencies of the Eurozone

Country

(Currency) Rate Fixed

On Yielded

Austria (schilling)

13.7603 31.12.98 01.01.99

Belgium (Franc)

40.3399 31.12.98 01.01.99

Finland (Markka)

5.94573 31.12.98 01.01.99

France (Franc)

6.55957 31.12.98 01.01.99

Germany (Mark)

1.95583 31.12.98 01.01.99

Ireland (Pound)

0.787564 31.12.98 01.01.99

Italy (Lira)

1,936.27 31.12.98 01.01.99

Luxembourg (Franc)

40.3399 31.12.98 01.01.99

Netherlands (Guilder)

2.20371 31.12.98 01.01.99

Portugal (Escudo)

200.482 31.12.98 01.01.99

Spain (Peseta)

166.386 31.12.98 01.01.99

Greece (Drachma)

340.75 19.06.00 01.01.01

Slovenia 239.64 11.07.06 01.01.07

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(Tolar)

Cyprus (Pound)

0.585274 10.07.07 01.01.08

Malta (Lira)

0.4293 10.07.07 01.01.08

Slovakia (Koruna)

30.126 08.07.08 01.01.09

Estonia (Kroon)

15.6466 13.07.10 01.01.11

Latvia (Lats)

0.702804 09.07.13 01.01.14

Lithuania (Litas)

3.4528 23.07.14 01.01.15

Nine countries (Bulgaria, Croatia, Czech Republic, Denmark, Hungary, Poland, Romania, Sweden, and the United Kingdom) are EU members but do not use the euro. Before joining the eurozone, a state must spend two years in the European Exchange Rate Mechanism (ERM II). Denmark and the United Kingdom obtained special opt-outs. The euro is also used in countries outside the EU. Four states – Andorra, Monaco, San Marino, and Vatican City have signed formal agreements with the EU to use the euro and issue their own coins. Nevertheless, they are not considered part of the eurozone by the ECB and do not have a seat in the ECB or Euro Group.

Greece was accepted into the Economic and Monetary Union of the European Union by the European Council on 19 June 2000, based on a number of criteria (inflation rate, budget deficit, public debt, long-term interest rates, exchange rate) using 1999 as the reference year. So, Finally Greece has adopted Euro in year 2001.

The Eurozone is mostly about currency, whereas European Union is a social cause, trade, and free movement of people, goods and services.

Greece Economic Crisis  

As a background to the crisis, Greece was one of the fastest growing economies in the Eurozone from 2000 to 2007: during this period it grew at an annual rate of 4.2%, as foreign capital flooded the country. But, growth was at the expense of deficits that were constantly hitting the roof. Greek Government had a Public Debt of 95 Billion Euros in 1995 which became inflation-adjusted 425 Billion Euros in 2013. The Greek Government's spending surpassed their tax or revenue collection beyond proportions. Now, from where does the government get the money when tax collection is really low? It borrows, and Greek government did borrow.

Borrowing proportions became so high that Greece's Debt-to-GDP ratio reached 1.98 i.e. 198%. That means, for every 1 Euro produced in the country, the Government owed 2 Euros to the lenders. As a cascading effect, such high debt of the government led to a crisis of confidence among the private lenders. Consequently, interest rates on loans by private lenders to the Greek Government shot up owing to the obvious risk of repayment failure.

European Central Bank has formulated that the Debt'to'GDP ratio of any Eurozone country must not exceed 60% or if it does, the ratio shall at least be found to have "sufficiently diminished and must be approaching the reference value at a satisfactory pace". In order to evade the ECB rules, Greek government did accounting shenanigans but it caught the ECB's eyes as Greece economy was spiralling out of hands. Trust in the government, as a result of this, further went down and interest rates on loans to govt. shot further up. So ECB and other Euro zone members forced 'austerity' measures on Greek government, which essentially requires the government to cut down its public-spending. Austerity is not easy as cutting down public spending includes pensions of retirees and other govt. obligations. Austerity is imposed by higher taxes on the public.

When government's monetary support in the form of monetary easing and infrastructural development goes down, the firms and industries start laying off people. Since taxes are

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high, spending capacity of an average person goes down and demand in the market plummets, which further pushes the firms to employ less and less workers, contributing greatly to unemployment. Fearing job losses, public tends to save more than spending their money which consequently lowers the overall economic output of the country.

It's a vicious cycle: Austerity leading to economy going further down, tax collection dropping and deficits increasing further up.

Greece GDP Year on Year Greece Vs Eurozone GDP

Free trade areas and economic integration often makes sense among comparable economies. However, Greece and rest of EU were quite dissimilar. Greek companies could not withstand the competition, while the wages of Greek employees were rapidly rising to level with rest of EU.

Creditors lent money to Greek governments to keep up their appearance of a rich country. Creditors lent money due to the EU brand. Eventually Greek governments gorged on so much debt that someday the game was coming to an end. Starting from 2009, Greece has been unable to pay the debt and unable to restructure its economy. Going back to the example of poor lad, in the normal cases a poor lad could cut his expenses well and bring back to reality. However, being a part of the club he had little independence to do so. Greece had to put up with a strong currency and unable to weaken the currency to bring back

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competitiveness to its economy.

How Greece Accumulated So Much Debt

Socialist Population Vs Domestic Government

Democratic government in the year 1974 introduced a wide range of welfare schemes including increased allocation towards pension schemes, health care, additional layers of governance, hiring of more government staff and increase in the salaries of all public staff. Greek citizens are used to the idea of heavy government spending and were supportive of the idea of “Big Government”. They initially encouraged the role of the public sector in the economy. The socialist tendencies were the first step towards fiscal indiscipline.

Government spending on state pensioners more than doubled from €2.9 billion to over €6.6 billion in 2000—2009 (+€3.7 billion)

Taxation

The Greek taxation system has since long been accused of being overly complex in nature. This complexity is combined with high taxes. This combination has led to high tax evasion with the Prime Minister declaring in 2011 that Greece was losing around 30 billion Euros a year on tax evasion and evasion of social security contribution. That accounts for close to 14.6% of the GDP. The Greek government ran a budget deficit of more than 5% almost consistently through 1993, leading to a situation where the government has accumulated a debt that is more than the GDP of 170 countries including Greece. Had tax evasion been completely eradicated the government would be running a modest 1% budget deficit (in the year 2009) that is acceptable under any circumstances. Considering that the government has on an average been running deficits of around 5% between 2001 and 2008, had the government even managed to reduce tax evasion by 33.3% they would be presenting a balanced budget year-on-year (between 1993-2008). held the view that reduced taxes and an ultra-simple taxation system encourages 100% tax compliance and exponentially increases the level of private sector investment and kick-starts a virtuous cycle that eventually leads to higher tax revenues even at very low tax rates. This would lead to a tremendous increase in the income of the people as well as private and foreign investment. The income tax department’s judicial scope must be widened and special courts to try cases on tax evasion must be setup. Further Taking the more optimistic assumption, had the Greek government completely eradicated tax evasion they would have been presenting a budget surplus of 10% year-on-year (1993-2008). This surplus could have been used to reduce tax rates and simplify the taxation system. Reduced tax rates would have resulted in higher levels of foreign and private investment, creation of more jobs, encouragement to entrepreneurship and subsequently a growth in the economy that would have resulted in

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even higher government revenues allowing the government to invest in infrastructure that would lead to long term broad based growth.

Tax Evasion Culture

Greece is a unique case in terms of tax evasion. The citizens of the nation believe that if they are not getting public service commensurate with their high taxes, they would rather not pay. It is true, the public sector is bloated and inefficient and does not provide the service that such high taxes would command. With income tax rates almost close to 40% and indirect tax rate close to 20% the Greeks were supposed to be paying a tremendous amount in taxes. However they noticed that a substantial portion of the taxes was disappearing into the public sector in, amongst other things, the salaries of the employees. Specific to indirect taxes, bills are avoided in transactions, with the retailer and buyer both colluding to keep the transaction taxless and recordless. Thus unfortunately the Greek culture of paying taxes is morally skewed with the citizens resorting to an economically damaging form of resistance towards inefficient governance.

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Government spending focussed on consumption expenditure

Greek government expenditure is equal to 49% of the GDP or approximately 104 billion Euros year-on year. Government expenditure is categorised into two parts – investment exp. and consumption exp. Government expenditure stimulates further consumption and investment in the economy that stats a virtuous growth cycle. However every government tries to maximise its investment expenditure as this has a long lasting positive impact. The Greek government was spending a large portion of its revenues on interest payments. it is known that approximately 75% of non interest spending was diverted towards salaries of public sector employees, pensions and social benefits (of the entire population). After deducting interest and social benefits it may be concluded that less than 20% of government revenues were being diverted into long term investment expenditure. This figure works out to be around 21 billion Euros as compared to say 83 billion Euros on interest and welfare.

Structural Defects

Tourism and shipping dominate the economy as these are areas where Greece has an exceptional natural advantage due to geography. Greek performance in other sectors is not

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impressive and certainly not enough to rival advanced European neighbours such as Germany, France and Italy. Despite this Greece was able to attain an impressive per-capita GDP of $29,000 which placed it at 17th in Europe, ahead of 27 other European countries including Portugal and Poland. (Below data published in year 2013 that Greece per capita income has fallen down to level of year 2004)

Fraudulent Government and Fiscal Indiscipline

Most important reason for Greece to accumulate the gigantic mountain of debt that was the precursor to the crisis we now refer to as the European Sovereign Debt Crisis. Successions of Greek governments are culpable for accumulating debt beyond levels that the Greek nation was capable of paying. The Greek economy is a paradox. It stimulated the economy through several years of stable economic conditions to arise at a situation when the government is withdrawing expenditure in a recession while all other nations are stimulating the economy. The Greek economy is in a place where it suffers the double blow of the recession and withdrawal of government expenditure at the same time which exacerbates the recessionary nature of the economy. In 1974, with the advent of the democratic government that pandered to a population with a socialist mindset the government introduced a host of welfare schemes. Since the government had introduced welfare schemes that the taxation revenue could not cover up it secretly borrowed every year from a host of private and foreign investors. The finance ministry presented a budget with little deficit while secretly borrowing on the side. The Greeks were oblivious to the government’s secret undertakings and obviously believed that the economy was in a healthy condition. The government’s borrowing programs did however suck credit from the market leading to decreased supply for the private sector which pushed up the cost of borrowing. As the government was usually considered a safe borrower by its lenders, it never suffered from higher interest rates while the private sector found it harder to borrow. As and when the debt burden loomed too large the government would resort to monetary expansion or currency devaluation both of which would reduce the value of the debt. The Greek government debts were denominated in domestic currency (before 2001) so that devaluation of currency would reduce the value of the debt in foreign currency. Inflation, spurred by monetary expansion would have a similar effect, reducing the real value of the debt while leading to the growth of the economy. Since 1993 however the government has consistently carried a public debt to GDP ratio of more than 100%. Cooking up the fiscal accounts however allowed the government to keep borrowing more from across the world at reasonable rates. The political dimension must be understood. Whenever a new government would ascend to power they would be presented with the legacy of the debt burden. The ruling party leaders would have the option of drastically cutting back on a large portion of the welfare measures undertaken without fiscal backing or it would have the option to keep quiet about it and continue borrowing. Drastically cutting back on the welfare would have been political suicide though it was the only sensible economic option to follow. Throw open the nation’s messy public finances for all Greek citizens to see and explain the need for drastic fiscal measures. This would require political courage and astute leadership. Unfortunately for Greece its leaders decided to take the easier path and continued borrowing even as the gap between revenue and expenditure mounted, the interest burden mounted and the public debt to GDP ration expanded. When the revelation finally came in 2008-2009, it was already too late.

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European Regulators - Big Failure

The Maastricht Treaty was signed on the 7th of February 1992 and was subsequently the basis for the formation of the European Union. It specified ‘convergence criteria';economic criteria that regulated the entry of only economically sound countries into the European Union. The criteria relevant to this scenario are ‘Annual Government deficit’ and ‘Government Debt’. While the Maastricht Treaty stipulated an annual government deficit rate of under 3%, the government debt was supposed to be under 60% for entry to the European Union. At the time of entry to the European Union (EU), Greek government debt exceeded 100%. Between 2001 and 2007, at a time when Greece was part of the EU its annual government deficit exceeded 5% every year.The Eurozone average deficit was 2%. Consequent to its high government spending the Greek economy grew at an average rate of 4.3% per annum as compared to 3.1% p.a. for the Eurozone.Debt, interest rates and trust are mutually dependent. Debt depends upon interest rates. Interest rates depend upon trust. And trust depends on the ability to repay. Lenders discharging debt to Greece in the period between 2001 and 2007 assumed that the Greek government was adherent to the criteria set by the Maastricht Treaty. The treaty’s criteria ensured that only fiscally healthy nations were admitted into the EU. Thus when Greece was admitted it was naturally accepted that the regulators of the European Union had taken the necessary steps to ensure that Greece was compliant. Thus trust was generated by entry to the European Union. It may be inferred that the creditors trusted the European Union regulators. Thus they assumed that Greece was fiscally sound and lent at low rates that would generally go to very strong European economies like France and Germany. The low interest rates fueled the demand for debt as the Greek government continued borrowing, either to finance deficits or to roll-over maturing debt that it was in no position to repay. In 2004 the European Commission initiated an excessive deficit procedure against Greece when Greece stated that for the year 2003 the deficit was 3.2%. At that time it was noted that the quality of the public data was not satisfactory and that Eurostat had not verified the figures at the time of joining the EU. Subsequently it was exposed that Greece had been violating the 3% limit every year since it joined the Euro and its public debt had been above 100% at the time of joining the EU. The European Commission finished their proceedings in 2007 convinced that permanent measures had been taken and that the country’s deficit would be 2.6% of the GDP in 2006 and 2.4% in 2007. The Commission also proclaimed that it was satisfied with the Greek statistical organisations that had pledged to improve the quality of their data. However the European Commission must be blamed for ignoring the vast mountain of debt that Greece had already built up by that time. Had the Commission paid closer attention to the alarming public debt situation it would have consulted the European Central Bank as well as the governing council of the European Union and concentrated efforts in the period of 2004-2007 would have perhaps allowed the Greek government deficit to come down to a more acceptable 75% of GDP. The Greek economy was growing so the government had more leeway to reduce budget layouts and to reduce a few unnecessary social welfare schemes. It could have reformed the economy and aggressively taken up tax evasion as a priority issue for fiscal health. It wasn’t to be however. There was no focussed pressure on Greece to reform and show results. The 1997 Stability and Growth Pact stated that if a country exceeded the deficit and after that did not adhere to the European Union’s corrective measures then it was liable to be fined 0.5% of its GDP. Sadly this rule was never implemented. 30 instances of excessive deficit procedures have been taken (in the European Union) but never has financial sanction been imposed. Had financial sanction been imposed on the Greek economy, or other stringent measures taken, the debt burden could have been controlled. The European Commission again woke up in 2009 (a good 5 years after it had imposed deficit proceedings) to the fact that the Greek budget was not under 3%. The data that the European Commission received revealed a fiscal deficit of 3.5%. This figure was subsequently revised to 12.7% by the Greek government and to 13.6% by international agencies. Between 2004 and 2009 the European Commission had failed to take action against a rising fiscal deficit fueled by creditors that trusted

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these very same regulators to ensure fiscal discipline in the European Union.

Measure Taken to Prevent Crisis  

1) Banks can be closed periodically, All credit institutions in Greece, including branches of foreign banks, are affected.

2) The finance minister may shorten or extend the bank holiday period. 3) Daily cash withdrawals will be limited to 60 euros. The limit can be changed by the finance minister. 4) Payments via debit or credit cards to accounts within Greece and online banking transactions within

Greece will be allowed but payments and transfers to accounts outside Greece are prohibited. 5) Cash withdrawals at ATMs with bank cards that have been issued by foreign banks will be allowed.

Withdrawal limits may be set by the finance minister. 6) All other transactions will not be permitted. 7) A special committee will approve banking transactions deemed necessary to safeguard a public or

social interest, including medical expenses or pharmaceutical imports. 8) Pension payments will be exempt from capital controls. 9) Interest surcharges on due payments will not be allowed during the bank holiday period. 10) Banks breaching the rules face fines of up to 10 percent of the amount of any transaction violating the

control measures.

Consequences of Greek Crisis

There is no doubt that the most characteristic feature of the Greek social landscape in the current crisis is the steep rise in joblessness. The unemployment rate had fluctuated around the 10 per cent mark in the first half of the previous decade. It then began to fall until May 2008, when unemployment figures reached their lowest level for over a decade (325,000 workers or 6.6 per cent of the labour force). Thereafter it started to rise, gathering pace as the recession deepened. In May 2013 (the last month for which data were available at the time of writing 1 ), the number of jobless workers was almost 1.4 million and the unemployment rate at 27.5 per cent. That compared to 26.3 per cent in Spain, 17.2 per cent in Portugal, 13.5 per cent in Ireland and 12.1 per cent in Italy. More than one-third of all workers in Greece are self employed, the highest proportion in the EU. This is a fairly heterogeneous group, comprising farmers with often small land holdings, as well as shopkeepers, other traders, freelancers and also members of the liberal professions (law, medicine and engineering). It also includes dependent work disguised as self employment.

While job losses involved an unusually high number of workers, loss of earnings for those still in employment was also significant. Average real gross earnings for employees have lost more ground since the onset of the crisis than they gained in the nine years before that. Specifically, having grown by 23 per cent in 2000–2009, by 2013 average earnings had fallen below their 2000 level by 9 per cent. Only in the public utilities, where pay awards had been extremely generous in 2000–2009 (+57 per cent in real terms), did recent losses leave real earnings in 2013 slightly above what they had been in 2000 (+1 per cent). On the whole, earnings losses in 2009–2013 were over 26 per cent on average (in gross terms). The rising fiscal pressure implied that losses were even more pronounced in net terms. Earnings from self employment have also declined, but in that case reliable data are more difficult to procure.

The impact of the crisis on poverty by population subgroup has been asymmetric. With respect to age, relative poverty appears to have fallen significantly for the elderly. This result may seem surprising. Nevertheless, it can be explained by the fact that policies have reduced low pensions less than higher ones, while pensions as a whole were affected less by austerity than earnings and other incomes were affected by the recession.In contrast, relative poverty has risen for all other age groups, especially for children, reflecting the impact of job and earnings losses for people of working age. On the other hand, the rise in poverty was greater for men than for women. Inequality in Greece barely changed in 2010, went up somewhat in 2011 and increased significantly in 2012. In other words, the rise in inequality began a year or so after the onset of the crisis, and gathered speed as the recession deepened.

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The impact of the crisis on poverty by population subgroup has been asymmetric. With respect to age, relative poverty appears to have fallen significantly for the elderly. This result may seem surprising. Nevertheless, it can be explained by the fact that policies have reduced low pensions less than higher ones, while pensions as a whole were affected less by austerity than earnings and other incomes were affected by the recession.In contrast, relative poverty has risen for all other age groups, especially for children, reflecting the impact of job and earnings losses for people of working age. On the other hand, the rise in poverty was greater for men than for women. Inequality in Greece barely changed in 2010, went up somewhat in 2011 and increased significantly in 2012. In other words, the rise in inequality began a year or so after the onset of the crisis, and gathered speed as the recession deepened.

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Grexit: Possible Consequences

If Greece were to stumble out of the euro, the government would have to circulate a new currency overnight that would immediate depreciate in value against the euro. At least initially, it would result in chaos. Banks would totter dangerously, interest rates would quickly climb and companies would go bankrupt. The number of insolvencies would rise by 50 percent in 2015 and again by an additional 30 percent the following year, predicts Ludovic Subran, the chief economist for credit insurer Euler Hermes. Even the country's largest electricity utility company, state-owned PPC, would likely go bankrupt.

In order to prevent people from making a run on the banks, the country would have to temporarily introduce controls on money flows. Transfers abroad would be banned, limits would be placed on withdrawals from automated teller machines and supplier contracts

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would be suspended. It's possible that medicines and foreign food products would only be available on the black market and that they could be purchased exclusively with hard currencies.

One potential consequence of the devaluation would be that Greek government debt would rise from the current level of 175 percent of gross domestic product to 230 percent, analysts at Germany's Commerzbank believe. Athens would no longer be able to service the debt on a large portion of its loans and the country would be at least partially insolvent.

It's difficult to predict how people would respond to such a situation. Argentina's declaration of bankruptcy in 2001 was followed by violent riots and looting. The Argentina example also shows how long it can take for an economy to recover from a crisis like that. Tens of thousands of Argentinians, many of them well educated, left their country, and many Greeks would do the same. The faith of international investors would also be shaken. It is likely that the Greek government would have trouble raising money for years to come.

At the same time, a new, cheaper currency could also create some opportunities. It would suddenly make Greek exports a lot cheaper. The country could also make gains with cheap vacation deals. Currently, many holiday destinations in Greece suffer because prices are cheaper in neighboring Turkey, where the skies and seas are just as blue."The Greek tourism industry, in particular, would strongly profit from a Grexit," says Thomas Mayer, who formerly served as Deutsche Bank's chief economist.

The political damage, of course, would be much greater. A Grexit would represent a significant political defeat for European leaders. For the last five years, they have tried to keep Greece in the euro zone at almost any price. Were the country to leave the euro, there is a danger that it could begin to orient itself more toward Russia or China.

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