As Greece exits from euro zone, it has marked a new chapter in the world history. It all started since it joined euro zone and their economy went muss in 2009. According to the data, their budget deficit was 12% of G.D.P. costing them various future loans. Unlike to repay its sovereign debt, in 2010 the austerity package ( where the taxation is high and wages are low) was introduced.
After 2 years, their budget deficit added 3% of G.D.P. and economic crisis got worsen. In few months, Greece might had debt default. To evade from this baffling, they welcomed more austerity measures by owing 240 billion euros of emergency fund to European Union and I.M.F.
So, how did actually Grexit come true?
After debt of 240 b. euros, to stabilize the crisis interest rates went higher. Banks were, capitalized by now but, not running. Therefore tax revenue fell, unemployment rose, riots began and political system disrupted. They did not just have economic crisis, also governance crisis. To fight back they had 2 options: to exit from euro zone or to default. For this solution, a referendum was passed and the decision was to be made by the citizens. After this heart throbbing moment, Greeks have made their choice. With colossal valor, Greece decided to leave euro zone and start their own currency ” Drachma”. They turned their ousting into a fickle salvation .
How is this going to impact Greece?
That ends the hated austerity measures, allowing Greek government to hire new workers, cut 25% of unemployment rate, leading to more inflow of money. Gradually, wages will grow up, taxation will rise and revenue will improve. Boosting their economy it would convert its euro based debt into drachma, print more currency which will lower its exchange rate versus the euro. This may reduce its debt. As it will lower the cost of exports, more tourists would attract to a lower cost vacation destination. But foreign owners would suffer losses as property will get cheaper, debasing the value of repayments in their own currency. Some banks may even go bankrupt ( reminding the case of Lehman brothers ).
Dropping drachma value could trigger hyperinflation, as the costs of imports would be sky-high. It will have hard time to attract foreign investors. The only countries hoping to lend Greece are Russia and China. Eventually, it would find itself back to where it is now. On the other hand, the value of euro itself might weaken as currency traders use the crisis as a reason to bet against it.