Grexit: What It Means, How It Works, History

What Is Grexit?

Grexit, an abbreviation for "Greek exit," refers to Greece's potential withdrawal from the Euro-zone, and a return to the Drachma as its official currency instead of the Euro.

Understanding Grexit

Grexit gained notoriety in early 2012 and remained in the financial vernacular for years after that. Many pundits, and even some Greek citizens, floated the idea that Greece should withdraw from the eurozone as a viable solution to the country’s debt crisis.

Leaving the euro and bringing back the Greek drachma was thought to be a way to allow Greece to recover from the brink of bankruptcy. A devalued drachma could encourage overseas investment and allow other Europeans to visit Greece on the cheap by paying in the more expensive euro currency. In this way, proponents argued that the Greek economy would suffer in the near term, but could eventually recover with far less assistance from other eurozone countries and the International Monetary Fund (IMF), perhaps even quicker than via eurozone bailouts.

However, opponents argued that a return to the drachma would lead to a very rough economic transition and far-lower living standards, which could result in even more civil unrest. Some in Europe worried that Grexit could even cause Greece to embrace other foreign powers that might not align with the interests of the eurozone.

Opponents to Grexit have seemingly won out, at least in the years since Grexit entered the discussion. As of 2021, Greece remains in the eurozone, with help from bailout loans in 2010, 2012, and 2015. Although the term Grexit doesn't make headlines as often anymore, some have argued that Grexit remains an eventual possibility. Greece continues to attract foreign investment and has implemented many austerity measures.

Origins of Greece's Debt Crisis

Grexit points to decades-old problems in Greece, such as high government debt, tax evasion, and government corruption. Greece first joined the eurozone in 2001, but its government revealed just three years later that economic data was falsified so the country would gain entry.

When the global financial crisis struck, it laid bare many of Greece’s structural problems. Greece’s gross domestic product (GDP) shrank by 4.7% in the first quarter of 2009, and the deficit ballooned to more than 12% of GDP. The country subsequently suffered a string of credit-rating downgrades culminating in Standard & Poor’s demoting Greece’s debt to junk status, which caused the country’s bond yields to soar, reflecting the severe financial instability.

Austerity and Bailouts

In exchange for receiving multiple bailouts to avoid bankruptcy, Greece had to agree to austerity measures. The first round of austerity in 2010 cut public-sector wages, raised the minimum retirement age, and increased fuel prices. Subsequent measures over the following three years reduced public-sector pay further, cut Greece’s minimum wage, reduced pension payouts, gutted defense spending, and raised taxes. As a result, unemployment rose to nearly 28% in the fall of 2013, far higher than the 11% average for the Euro-zone as a whole.

One criticism of the bailouts has been that little of the money has gone to help Greek citizens directly. Rather, it has mostly passed through Greece and helped to repay Greece’s debt-holders, most of which are banks in other European countries. Germany, for example, has been the largest contributor to Greece’s bailout packages, and its banks also are the largest investors in Greek bonds.

Greek Recovery

The economic and financial uncertainty in Greece has improved markedly since the worst days of the crisis. In August 2018, government officials announced the country had successfully exited the last of its bailout programs. Ending the bailout programs allowed Greece to begin selling 10-year bonds in 2019 for the first time in nine years. This event marks a milestone in Greece's recovery as it allows the country to raise money and continue its long journey to regain economic sovereignty.

The economy appeared to be entering a period of modest recovery from its significant economic troubles of 2010-2016. However, like so many other countries, Greece experienced a deep recession in 2020 as a result of the global COVID-19 pandemic. Unfortunately, this led to an increase in the country's already exorbitantly high public debt. Experts estimate that a full recovery will only be feasible beyond 2021.