Where Does Greece Go From Here?
Overall, the economic situation in Greece is one of the worst in the Eurozone. It holds the lowest possible credit rating from Fitch, Moody's and S&P so its central bank can't sell its bonds to investors to generate new capital. Austerity measures have helped push its unemploment rate to 22.6 percent, the second highest in the Eurozone, behind Spain at 23.6 percent, and have largely stifled economic growth in the public and private sectors. Its debt-to-GDP ratio still hangs around 165.4 percent; and while the government has increased taxes, revenues continue to slide as economic conditions in Europe worsen.
Above anything, what Greece needs is a way to generate economic growth by investing in projects to turn its unemployment rate around and make goods and services less expensive until it's in a position to raise wages again. First, Greece should be allowed to reduce its VAT, or Value Added Tax, rate from 23 percent to 13 percent for all goods and services to which the current VAT rates apply. This reduction would cheapen the price of goods and services for consumers and businesses alike as consumers pay VAT to businesses when they purchase products and businesses pay VAT to each other for supplies used to manufacture what they sell. Lower costs make it easier for businesses to remain open or start anew, and help to buoy consumer spending despite lower incomes.
Second, and most importantly, Greece must remain in the Eurozone. While its European partners have been slow to assist, Greece is much better off remaining in the Euro because without it, Greece could end up like Iceland did in 2008. The return of a Bank of Greece-backed drachma would not improve Greece's overall financial health because there's no reason why investors would feel more confident in a Bank of Greece that could raise its own inflation at will when it has already demonstrated management problems under tight internal controls and an expanded balance sheet. Also, Greece would need to increase the money supply to levels that could cause hyperinflation in order to satisfy its cash flow concerns, which would leave it financially worse than it is now with the Euro.
Lastly, the ECB needs to pursue policy that will allow Greece to invest its bailout funds into long-term growth projects while directly overseeing the process to ensure the funds are applied appropriately. Infrastructure and transportation are always good places to invest, as improvements in these sectors can create jobs year over year and improve the efficiency of commerce between regions. Spending reductions and tax hikes have done little more than ruin the Greek economy and choke opportunities for renewed growth. As its central bank and chief monetary policy authority, the ECB has an obligation to guide Greece back to solvency, which will only happen by generating growth, not killing it.