Policy Article

Between GREMAIN and GREXIT - A Stress Test for the Euro Area (original publication is German only)

Kiel Policy Briefs

According to the authors, improving institutions to stimulate entrepreneurial action and investment is the key for prosperity and growth in Greece. Without better institutions no other policy measures can improve the situation for the Greece population on a sustainable basis. As the current Greece government has clearly communicated it disagrees with the institutional reforms suggested by their foreign creditors; such reforms, therefore, would be doomed to fail due to the lack of ownership of the current government. The Eurosystem can protect itself from misuse of any country by implementing appropriate collateral requirements and by not extending ELA funding. Greece does not necessarily have to leave the euro area even when it is defaulting but would face a very tight monetary regime. However, a disordered exit from the euro area would be a dangerous and risky experiment for the country and would be very difficult to implement.

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