European Monetary Situation about the Greek Sovereign Debt Crisis - Assignment Example

Had Greece opted to fully pay its restructured debt and reduce government expenditure, then its economy would have greatly suffered. This is because full repayment of loans would reduce the amount of money flowing into the economy. This would escalate the interest rate as both the government, businesses, and individuals would compete to use the little money flowing into the economy.

The government would not adequately invest in infrastructure and even pay civil servants thus leading to an escalated level of employment. The government would be compelled to devaluate its currency to increase cash flow and this would increase exports and reduce exports into the country. In this case, Greece would have to suffer because of the ideological misconception fostered by the Economic and Monetary Union. This is the belief that possession of hard money can drive smaller economies to grow and march over other developed economies.

This revelation would influence Greece to opt-out of the Economic and Monetary Union. Consequently, other smaller European nations not wanting to suffer under similar programs would opt out of the Union leading to instability (Sēmitēs, Stiakaki, & Munro, 2014).On the other hand, if Greece were to fail to take the austerity measures and firmly hold against repayment, the country's credit rating would further plunge downwards. Sanctions against it by bodies such as the World Bank, The International Monetary Fund, and the European Union would have drastically impacted its economic prospects.

Such political sanction intended to pressurize Greece into meeting its obligations of loan repayments would grossly affect its trade relations with other European nations. The country would neither be in a position to trade with its European neighbors nor borrow funds to meet its budget deficits. There would increase tension in Europe as other countries like Italy which are equally burdened by heavy debts would dread the possibility of undergoing similar troubles. Instability in the European economy would be eminent as other countries equally burdened with debts would be anticipated to follow in Greece’s footsteps.

The imminent exit of Greece from the euro would be catastrophic. The Greek economy would be returned and stagnated. The country would have to get back to the production of its old currency and set up its central bank. The European Central Bank would be left holding an enormous Greek debt with limited options. The devaluation of the euro which would result from such a scenario would consequently result in mass retreat of investors seeking safer shores. Europeans would rash to banks to make withdrawals on their savings as international investors would opt to liquidate their assets (Sēmitēs, Stiakaki, & Munro, 2014).

Other weaker economies in Europe like Spain, Portugal, and Ireland would be viewed by investors as risks since they would also be in a position to exit. This would further weaken investor confidence in the Eurozone.