Greece’s €240-billion ($342 billion CAD) bailout loan expires at the end of February. These are loans the country has taken over the course of several years in an effort to keep its economy afloat. The money was borrowed from the Eurozone and the International Monetary Fund (IMF). Now, Greece’s newly elected government is trying to strike a deal that would extend its loan without any new austerity measures. In fact, new Prime Minister Alexis Tsipras wants to reinstate 70 per cent of the services that were taken away when the bailout money was awarded. This is leading many to question Greece’s membership in the European Union (EU) and how it continues to be drag on the Euro currency. Some are suggesting it’s time for Greece to leave the EU – but what would that mean to the rest of the world, and to Canada?
What’s at Stake?
Greece represents a very small part of the world economy – less than 1 per cent. But its exit would be a huge blow to the EU, which is the largest economy in the world, even larger than the U.S. and China. The EU is made up of 500 million consumers and is the top trading partners for 80 countries, compared to the U.S. which is the top trader with 20 countries. If Greece exits the EU, it represents the first official failure of the economic body. A shake up would result in economic reverberations across the globe.
Will Greece Leave the Euro?
The EU as we know it today was formed in November of 1993, but its roots go back to just after the Second World War. Since then there has been sentiment in Europe to form an integrated economy that would work better together. In 1993 that economy was formally established and its own currency was introduced, which is the Euro. The major issue with this one currency agreement has been each nation has had the right to establish its own fiscal policy. That means countries like Greece, Spain and Portugal, who are facing the biggest debt crisis right now, have been making decision about their borrowing and spending without any input from the EU. The problem is nations like Germany have remained solvent while others have come close to failing, all of which affects the one currency.
The Effect on the Global Economy
What’s happening in Greece is not going to bring down the global economy – but it will cause some fallout within the EU. Keeping Greece as a member state could continue to devalue the Euro over the long-term. As well, the inclusion of failing states within the EU will lead other global economies to consider trade with the region to be high risk, affecting all nations within the union. Take for example, falling oil prices in Canada – Alberta is hardest hit, but the effects will be ultimately felt by all provinces.
The Canadian Reaction
European nations including the U.K., Germany and France are among Canada’s biggest trading partners. Our nation would be affected by a Europe-wide economic slowdown. However, we are still much more reliant on the U.S., with whom we do 75 per cent of our trading. We would be more affected if developments in Europe, and specifically Greece, affect theAmerican economy.
The Bank of Canada is due to make an interest rate announcement on March 4th. It’s widely forecasted the Bank could cut rate rates again, that would generally be based on Canada’s economic condition not what happens in Greece. The good news, the latest is talks with Greece and its international creditors are going well and a deal could be reached as early as next week.