The “GREXIT” Hypothesis

Note kindly translated by Anne-Marie de Grazia

The possibility of an exit of Greece from the Eurozone, whether it is wanted or imposed by circumstances, is becoming more and more likely by the beginning of next July. The fact that the Greek government and the Eurogroup were able to find an agreement for the four months ahead doesn’t change anything. The question will inevitably come up of either the annulment of part of the debt, or its transformation (in reality, a moratorium of about thirty years). However, we know that both of these hypotheses are rejected by Germany. It is therefore useful to look at a certain number of Greek parameters to get a real idea of what a « GREXIT » would amount to.

The fiscal question

The first point is about the fiscal question. It is said that Greece has lived « beyond its means » and that it must « pay » for its past errors. In reality, when one looks at government revenues, one notices that to begin with, the situation of Greece was not in 1995 different from the ones of Portugal and Spain, and that it furnished a considerable effort between 1995 and 2000 to reach the level of the Netherlands.

Chart 1

Government revenues in GDP percent

A - FiscaGr1

Source : IMF

This effort slackened between 2000 and 2004, but it resumed later on and presently Greece finds itself at the same level of government revenue (in percentage of GDP) as Germany, and a slightly higher level than Portugal and the Netherlands, and one that is even very clearly superior to the one of Spain. Of course, it remains below the one of countries like Italy and Finland. But nothing permits one to say that the fiscal effort of the Greeks has not been considerable, even if one can think that it is badly spread, and that proportionally the poorest part of the population is paying the most.

On the other hand, public expenses have always remained very high, even excessive. This stems in part from the problem of the Olympic Games of 2004, but not only.

Chart 2

Revenues and expenditures

A - FiscaGR2

Source : IMF

In fact, public expenses are seen to be exploding between 2007 and 2009, under the influence of three factors: on the one side, the anti-crisis measures of 2008, but also (and especially) the largesse of the (conservative) government aiming at winning the 2009 elections (which turned out a political failure) and on the other hand, the rise in interest rates which are beginning to create a « Ponzi effect » of the debt. Whereas economic growth is slowing down and nominal growth (growth in GDP X the inflation rate) is diminishing, the rise in interest rates, on an already high level of public debts, renders the weight of interests unbearable. In fact, this Ponzi mechanism (so called because it evokes financial pyramids in which the interests of the first depositors are paid for by the new subscribers) largely explains the regular rise of the public debt from 2009, and a very large part of the excess in public spending.

We know that Greece has reached a primary budgetary surplus (that is, without the reimbursement of the debt). This means that if Greece defaulted on its debt, estimating that the interests paid since 2009 have extinguished a large part of the latter, it would be able to finance its public spending on its own bases. In other words, if Greece defaults, and if it leaves the Euro, it no longer needs to borrow in order to wrap up its budget. This is a first point which we must keep in mind when we are talking about a possible GREXIT. The Central Bank of Greece would not need to monetize large sums, which excludes the risk of a hyperinflation which is often put forward by the adversaries of a Grexit.

Savings and investments.

But, one will object, Greece needs to borrow in order to invest. It cannot cut itself off from financial markets, which would happen in the case of an exit from the Eurozone. In fact, the collapse in investments has been such that, since 2013, domestic savings have been superior to investments.

Chart 3

Investments and savings in Greece

A - InvEpGR

Source : IMF

If one starts with the idea that fiscal receipts will be equal to expenses (and that there will be no need to borrow in order to cover a budget deficit) this point, well displayed in Graph 3, is important. In fact, until 1994, the spread between investments and savings is small in size. Quite the opposite, the spread becomes considerable beginning in 1999, most certainly because of the investments decided within the framework of the preparations of the Olympic Games of 2004, but it goes on growing afterwards. In 2009, the flux of savings is only 15 billion, when investments reach 37.5 billion. Presently, we have returned to a situation in which Greece is exporting its savings. This is linked with the brutal contraction in investment but it ALSO means that Greece can very well live « in a close circuit » from a financial point of view. This is an important factor when one seeks to evaluate the possibility of a GREXIT.

The question of the current account balance.

We are reminding here that the current account balance confronts imports and exports of goods and services. We can see that the situation of Greece is characterized by a slight deficit, the country exporting circa 20-25% of it GDP. On the other hand, later on, the deficit of the current account balance is taking an astronomical free fall, particularly between 2004 and 2007, that is, under the conservative government. This situation is also explainable by the chocking off of Greek exports because of the increase in the value of the Euro. Greece exports over 60% outside the Eurozone. The rise of the Euro which one then observes strangles exporting industries and services. Greece has returned, in 2013-2014, to an equilibrium but at the cost of a dramatic contraction in imports.

Chart 4

Current account balance
A - BalComGR

Source : IMF

We can see here that a devaluation of 20% to 30%, made possible by an exit from the Euro, would have extremely positive effects on the economy [1]. The effect of increase in the volume of GDP would be important. Greece could therefore increase its imports (particularly in capital goods) without compromising the equilibrium of the current account balance.


This confirms an intuitive analysis. Greece is TODAY far readier for an exit from the Euro than it was in 2009 or 2010. Such an exit, accompanied by a default on the debt and a devaluation of 20% to 30% would have as an effect to rapidly and profoundly energize the Greek economy. This would certainly lead to important productivity gains which would permit, beginning in 2016, considerable increases in salaries without compromising the recovered competitiveness of the Greek economy.


[1] Artus P., « Dévaluer en cas de besoin avait beaucoup d’avantages », NATIXIS, Flash-Economie, note n°365/2012, 29 mai 2012,


Jacques Sapir

Ses travaux de chercheur se sont orientés dans trois dimensions, l’étude de l’économie russe et de la transition, l’analyse des crises financières et des recherches théoriques sur les institutions économiques et les interactions entre les comportements individuels. Il a poursuivi ses recherches à partir de 2000 sur les interactions entre les régimes de change, la structuration des systèmes financiers et les instabilités macroéconomiques. Depuis 2007 il s'est impliqué dans l’analyse de la crise financière actuelle, et en particulier dans la crise de la zone Euro.

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