EY study: Economic consequences of a Grexit
This study conducted by EY Greece, in collaboration with Oxford Economics, one of the leading British consulting firms specializing in matters of international economics, examines the consequences of an orderly Grexit for the Greek economy. The objective of this study, which was completed in late May 2015, is to provide a balanced and independent analysis of the economic consequences of a potential Grexit from the Eurozone on businesses and investors.
Our analysis is not based on the extreme scenario of a disorderly exit with complete debt repudiation. The consequences of such a scenario are impossible to assess, as it would lead to a dramatic fall in GDP, prolonged uncertainty and volatility and an exit from the Schengen Treaty and even the European Union, while the time frame of a return to growth conditions and prosperity cannot be accurately predicted with any degree of certainty.
On the contrary, the paper is based on the scenario of a negotiated exit from the Eurozone, following agreement with the EU and the country’s creditors. Even in this “best case scenario”, the consequences for the economy and society would be severe. The analysis is based on forecasts performed by Oxford Economics based on this scenario, while our main working assumption is for 2015 as the base year.
We maintain that no simple and quick way exists to resolve the country’s economic problems. Leaving the Eurozone would incur immeasurable costs to households and businesses, even as it would leave Greece politically and economically isolated and vulnerable. It is unlikely that any boost offered by exit, devaluation and default, could be sustained in the long term, as Greece would still be left with huge debt levels which would limit the potential for fiscal expansion. More specifically, even in the ideal scenario, under which debt would be reduced by 50%, Grexit would not mean an end to austerity, as high debt levels would act as a constraint on the government, allowing no space for a relaxation of fiscal policy.
Unless Greece builds its export sector from ground up, through difficult and targeted structural reforms, any quick fix on competitiveness via currency devaluation would not be sustainable. As such, even in the event of an orderly exit which would result from a negotiated agreement, the economy could suffer severe turmoil in the build-up and aftermath of an exit.