Essay on the Economic Crisis in Greece

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Greece is a country in South Eastern Europe consisting of 2 mainland peninsulas and thousands of islands throughout the Aegean and Ionian Seas. It is 15th largest economy among the 27 Europe Union. Greece is a developed country with high standards of living and high human development index. Participation in the European Monetary Union was a landmark development for Greece. It bestowed on its government and private sectors a rare historical privilege: the ability to borrow in open financial markets on the same terms as other Union members, without the encumbrance of exchange risk. The Greek financial sector (stock exchange, mutual funds and commercial banks) flourished. Domestic financial flows (credit, savings and stockholding) boomed. Investment and growth accelerated. On the eve of EMU membership, Greece was nothing less than a star performer in Europe. But by the year 2009, as a result of international and local factors, Greek economy faced its most severe crisis. On June 30, 2015, Greece became the first developed country to fail to make an IMF loan repayment. At that time, debt levels had reached €323bn or some €30,000 per capita. Debt relief has been a contentious issue for creditors, with the IMF and EU lining up on opposite sides. Greece became the center of Europe’s debt crisis after Wall Street imploded in 2008. With global financial market still reeling, Greece, in October 2009, announced that it had been understating its deficit figures for years raising alarms about the financial soundness of Greece. The IMF has insisted that Greece cannot meet its budget goals without easing its debts. The two weeks since June 26th, when Alexis Tsipras, the Greek prime minister, abandoned talks with the EU and IMF on a further bail-out and called a referendum on their terms.

This essay shall go in detail of how the Greece, country having 38th rank in the world for nominal GDP, became 1st developed country to be a bad-debt. The study also analyses why there still has been crisis even if it received billions of bailouts. Most eurozone leaders now believe Greece has no place in the euro. Even those genuinely supportive concede that things may not go their way. At the heights of debt crisis, many experts worried that Greece’s problems would spill over to the rest of world. If Greece defaulted on its debt and exited the eurozone, they argued, it might create global financial shocks big collapse for the whole world. The essay also deals with the effects of introduction of euro in 2001 among the eurozone countries and how this introduction increased the labor costs in Greece relative to other countries like Germany.

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From Privilege to Curse

Participation in the European Monetary Union was a landmark development for Greece. It bestowed on its government and private sectors a rare historical privilege: the ability to borrow in open market on the same terms as others union members, without the encumbrance of exchange risk. To gain that status, Greece had undertaken successful stabilization policies in 1996-2000, bringing under control the long-standing public deficits, domestic inflation and the drachma exchange rate. The Greek financial sector flourished. Domestic financial flows boomed. Investment and growth accelerated. On the eve of EMU membership, Greece was nothing less than a star performer in the Europe. Nine years later the privilege became the curse. In October 2009, Greece announced that it had been understating its deficit figures for years raising alarms about the financial soundness of Greece.

Greece’ Economy from 1997-2010

For the years 1999-2010, a number of observations can be made. First, there were periods during which the private debt increased substantially whereas there were other periods during which the private debt has been reduced with a great speed. Second, during periods of economic booms, private debt has risen by an accelerating rate. Third, for the whole period the increase in private debt was higher than percentage increase in public debt. Forth, during 2005-07 there was an average increase in private debt of eurozone countries of approximately 35% of GDP. In contrast during the years of economic recession 2008-09, private debt slows down and public debt accelerates. “Greece is likely to default over the next three years because budget-cuts would not be enough to reduce the nation’s tax burden”, - Pacific Investment Management CEO Mohamed A. El- Erian said on 27 October 2010. “It is Greece’s interest to default as long as you can contain the contagion to other countries and it is done through orderly restructuring and reprising to retain competitiveness”, - he added.

Excessive Borrowing

Despite Papandreou’s governance often being criticized for building the foundations for the crisis during the 1980’s, the government has also been heavily criticized for excessively borrowing at low interest rates made available to Greece as a result of the accession to the eurozone, which allowed Greece to borrow at sharply reduced interest rates. In response to the announcement that Greece was to join the eurozone, the nominal interest rate declined from 20% in 1994 to less than 3.5% in 2005.

The accession of Greece in the eurozone imposed an analogous effect upon the interest rate mechanism. As a result of minimized risk upon accession to the single currency, along with high liquidity in the credit market, both the public and private sector found themselves in a prominent position to secure finance at low interest rates which were applicable to all eurozone economies, regardless of concerns relating to a particular economy’s indebtedness.

The accession of Greece to the eurozone and the implementation of the currency peg in Argentina had the initial effect of increasing economic confidence and resulted in the considerably lower interest rates observed in both countries. The situations observed in both countries as a result of the loss of national monetary policy bears great similarity, with both countries experiencing high levels of debt, uncompetitive economies and the implementation of severe austerity measures reinforces this by stating that: “Argentina in the 1990s and Greece in the 2000s were able to access serious amounts of hard currency on the open markets, the results should have been predictable. In each case, there was a decade-long consumer and public sector spending boom, followed by a cataclysmic economic crash”. The effective loss of national monetary policy in both countries resulted in overconfidence in both country’s abilities to pay back debts. Subsequently, this led to increased accessibility to lending at low interest rates that led to increased borrowing in both the public and private sector. Furthermore, competitiveness was severely affected by the irresponsible overspending.

Bailouts by Troika

Greece has been receiving financial support from euro area members states and International Monetary Fund (IMF) to cope up the financial difficulties and challenges since May, 2010. The international aid package, negotiated with so called Troika (European Commission, European Central Bank and International Monetary Fund), was 110 billion euros over three years. Of the overall amount 80 billion euros was made through euro area members in 2010. In 2012, after months of tortuous tense negotiations, second bailout for Greece finally became a reality when euro area members formally authorized the first instalment of 39.4 billion euros where the worth of total bailout was 130 billion euros. In mid of August 2015, Greece receiving much needed funding from third eurozone bailout worth about 85 billion euros. As previous bailouts, Greece’s UE partners set tough conditions, demanding more austerity. It must fulfil the MoU in the name of bailout. The MoU demanded ‘prior actions’ aimed at boosting revenue and call on the government to:

  • End fuel tax benefit for farmers;
  • Scrap a range of tax exemption;
  • Clarify who is eligible for minimum guaranteed pension at age of 67 and start phasing out most early retirement;
  • Overhaul social welfare to achieve savings of 0.5% of GDP;
  • Deregulate the natural gas market;
  • Open up restricted professions;
  • Reduce travel allowances and perk for state administration staff.

In 2016, Greece had agreed a deal to unlock a further 10.3 billion euros in loans from its international creditors. The bailout aims to: put privatization back on track, modernize and slim down the state administration, tackle tax evasion and fraud, open up regulated professions to competition, and cut pension costs to make the welfare system sustainable. Greece's banks remain in a fragile state - they depend on emergency ECB funding and cannot borrow in capital markets. Strict capital controls remain in force - Greeks are limited to withdrawing €420 a week from their accounts. The banks were closed for three weeks in June-July, to prevent a bank run by anxious customers, who feared economic meltdown and 'Grexit' - exit from the eurozone. The controls put a severe brake on economic activity. With regard to Fund involvement, the view expressed by the IMF in its report was that it would have been better if the crisis could have been resolved within the eurozone, but neither the authorities nor the EC or ECB had the required program experience.

Why Has Still There Been Crisis?

But the question arises if Greece had received Billions in bailouts, why there still has been a crisis. The money was supposed to buy Greece time to stabilize its finances and quell market fears that the EU itself could break up. While it has helped, Greece’s problems have not gone away. The economy has shrunk by a quarter in five years and unemployment is about 25 percent. The bailout money mainly went towards paying off the international loans, rather than making its way into the economy. And the government still has a staggering debt load that it cannot begin to pay down unless recovery took hold. The government would then need to continue putting in place deep economic overhauls required by the bailout deal Prime Minister Alexis Tsipras brokered in August, as well as unwinding of capital controls introduced after political upheaval prompted a run on Greek banks. Greece’s relations with Europe are in fragile state, and several of its leaders are showing impatience, unlikely to tolerate the foot-dragging of past administrations. Under the terms of bailout, Greece must continue to pass deep-reaching overhauls, many of them that were supposed to have been passed years ago.

The Global Effect

Now what can be the effect of crisis on the global financial system? In the European Union, most real decision-making power, particularly on matters involving politically delicate things like money and migrants, rests with 28 national governments, each one beholden to its voters and taxpayers. This tension has grown only more acute since the January 1999 introduction of the euro, which binds 19 nations into a single currency zone watched over by the European Central Bank but leaves budget and tax policy in the hands of each country, an arrangement that some economists believe was doomed from the start. Since Greece’s debt crisis began in 2010, most international banks and foreign investors have sold their Greek bonds and other holdings, so they are no longer vulnerable to what happens in Greece. Some private investors, who subsequently ploughed back into Greek bonds, betting on a comeback, regret that decision.

Effects of Global Financial Crisis on Greece Economy

It is possible to say that the current situation of Greece is a possible result of wrong policies applied in the last 25–30 years. This process is closely related with financial extravagancy and insufficiency of Greece government, unfair and infertile taxation system, unsustainable retirement, low competitive power, populist practices of political parties and organizational and political problems in EU and eurozone. Greece became tenth member of the European Community in 1981 and launched the euro as local currency (Clarke & Claire, 2010). The passage was thought to be more beneficial and to accelerate the modernization of economy. However, although the passage to the euro, at first, had such positive effects as development, high inflation and credibility of economy policies, it was seen that it brought about some negative causes as well (Kouretas, 2012). Remarkable increases in public spending, together with wrong political choices, caused serious problems in competitive power of country and big financial instability.

For many years, Greece managed to contract debts with low interest rates by playing on basic economic indicators thanks to accountancy support provided by Goldman Sachs. When the process before the crisis is taken into consideration, it is seen that the rate of Greece debts to its GDP is one of the highest in Europe.

This rate particularly increased after 2000 and surpassed 160% and far beyond Maastricht criterion (60% of GDP). When compared to Spain, Portugal, Italy and Ireland, the situation can be seen clearly. The international competition power of the country significantly eroded. In addition to all these, probably the most attention-grabbing elements which ignited the wick of the crisis are the government’s approach and statements that increased the uncertainties and raised worries about the low reliability of financial statistics and the real extend of financial problems and their possible financial results. It can be said that the EU countries were late to read the indicators and failed to support Greece as the crisis escalated in the country.

Before the crisis and in the process of the crisis while most loses were expropriated, most revenues were privatized. It can be said that tax payers are responsible for more than 80% of Greece’s debt. High-cost measures with regard to public debt stock led to large fiscal deficits. The rate of public deficit to GDP in Greece has always been higher than averages in European area since its entrance into the eurozone. One of the most important problems Greece has experienced in recent years is decrease in tax revenues of the government. Tax revenues have perpetually been lower than expectations. When budget income and outcome of Greece and EU are compared, budget income in Greece is seen to be lower than the average of EU27 and EU17 and budget deficit is seen to be high. It is argued that there are serious levels of tax evasions due to inadequacy of pressures and deterrent measures created by the high wage costs and heavy social security load.

Quite a big part of foreign debt of Greece is public debt. In the last two decades, a dramatic increase is seen in Greece’s foreign debt. Greece loaned foreign debt at the rate of 4.1% of GDP every year during 1990s. This increased to 10.2 % during 2000s. However, the state could not effectively use the financial resources coming from foreign debts to increase the production capacity and nor could it realize the structural reforms to increase competitiveness. While Greece was at 83rd place in Global Competitiveness Index in 2010, it declined to 96th place in 2013. The erosion in competitiveness as well as chronic weakness of Greek economy explains the structure of current deficit and why the export performance is lower than the other European countries. Greece imports more than it exports; in other words, it consumes more than it produces. The state provides some of its financing with foreign debt. The current account balance, which was in the rate of –7% of GDP in 2001 with the effect of decline in competitiveness, realized as the level of –15% of GDP in 2008. In the following period, this rate was about –10%. In 2001, current account balance of Greece was about –29.3 billion dollars, that is –9.8% of GDP, which is threefold of Maastricht Criteria. In the same period, this rate was 1.1% in Ireland, –3.2% in Italy and – 6.4% in Portugal.

When compared to previous periods, although the inflation rates were low in Greece between 2001 and 2009, they were at relatively high levels according to the EU criteria. In Greece, both prices and high increases in wages in comparison with the eurozone have reduced the competitiveness of the country. In Greece, the inflationary pressure strengthened during 2010. The increases in VAT rates and the special consumption tax led to the realization of the inflation rate in 2010 as 4.7%. In 2011, there was a decline and the inflation rate was 3, 3% power. An important portion of foreign debt is used for import directed at consumption.

Between 2000 and 2007, Greece had one of the fastest growing economies in the eurozone. In this period, the country’s economy increased more than 4% on average. Greece’s economy entered a serious constriction period, especially after 2007. It can be said that the negative effects of the crisis were seriously felt in the European Union and the eurozone experienced the greatest recession of its history in 2009. Afterwards, although this rate turned to positive, it has not exceeded the level of 2s%. After 2007, the Nominal GDP rate in Greece has continuously been negative value.

While the debt crisis continues its pressure on the real economy, layoffs and the number of unemployed as well as the cuts in public expenditures have increased as a result of severe austerity measures (Sesric Reports, 2011). Thus, this constriction brought up the unemployment problem seriously, the unemployment rate which was 7.6% in 2008 increased rapidly and it reached the level of 17.3% in 2011. This rate is estimated to be 23.8% in 2012. It is predicted that there will be an increase in employment and the unemployment rate will decrease if the reforms concerning economic structure and labor market are practiced as planned.


In response to extensive analysis, it is clear that substantial evidence is presented which gives credibility to both sides of the argument. However, after considering the evidence, it is a credible possibility that Greece could seriously consider a default on its debts and exit from the eurozone. It is apparent that a restructuring of unsustainable debt and reforms are necessary in order for an effective recovery to take place. The analysis uncovers the extent of the crises experienced by both countries, which demonstrates that although many similarities and trends are evident, the situation in Greece is incomparably worse.

The analysis has also demonstrated the complexity of both cases, with a number of individual, complex issues, which have inevitably contributed to the occurrence of events that took place. The circumstances that Greece faces are further complicated as a result of external pressures, which forms the main distinction between Greece and Argentina. For this reason, it has been proven difficult to reach a conclusion as to the most suitable solution to the crisis.

In order for it to be possible for Greece to eventually pay its debts, a number of issues needs to be addressed. Primarily, efforts to reform the structure of the Greek government needs to be considered further. Measures to improve competitiveness in Greece and entice foreign direct investment should be high on the agenda. In its current state, it is almost impossible for Greece to be able to repay its debt and recover from years of recession. The evidence suggests that an exit from the eurozone would be catastrophic for Greece, and the short-term negative implications would last longer than they did in Argentina, despite this Greece could pursue this option and eventually recover from the crisis, just as Argentina did.

Equally, the fundamental structural failings of the EU need to be addressed if Greece and other peripheral countries are to recover while retaining the single currency.


Greece became the center of Europe’s debt crisis after Wall Street imploded in 2008. With global financial markets still reeling, Greece announced in October 2009 that it had been understating its deficit figures for years, raising alarms about the soundness of Greek finances. Suddenly, Greece was shut out from borrowing in the financial markets. By the spring of 2010, it was veering toward bankruptcy, which threatened to set off a new financial crisis. To avert calamity, the so-called Troika — the International Monetary Fund, the European Central Bank and the European Commission — issued the international bailouts for Greece. The bailouts came with conditions. Lenders imposed harsh austerity terms, requiring deep budget cuts and steep tax increases. They also required Greece to overhaul its economy by streamlining the government, ending tax evasion and making Greece an easier place to do business.

At the height of the debt crisis a few years ago, many experts worried that Greece’s problems would spill over to the rest of the world. If Greece defaulted on its debt and exited the eurozone, they argued, it might create global financial shocks bigger than the collapse of Lehman Brothers did. Now, however, some people believe that if Greece were to leave the currency union, in what is known as a ‘Grexit’, it would not be such a catastrophe. Europe has put up safeguards to limit the so-called financial contagion, in an effort to keep the problems from spreading to other countries. Greece, just a tiny part of the eurozone economy, could regain financial autonomy by leaving, these people contend — and the eurozone would actually be better off without a country that seems to constantly need its neighbors’ support. Greece does hold some leverage, however. European leaders are keen to avoid a new Greek crisis before a British referendum on membership to the European Union in June, and will most likely need Greece’s help in tackling the Continent’s continuing migration crisis, which has been concentrated in the Aegean Sea. Since 2007, world economy has lived one of the biggest crises ever. The financial crisis began in USA and spread to the world and affected many both developed and developing countries. One of these countries is Greece. The combination of high rates of public deficit and debts to GDP, shrinking tax base and dysfunctional tax collection system increased fragility and liquidity crunch in Greece economy. The crisis not only accelerated the corruption in economy but it also revealed the chronic weaknesses in it.

It is clear that the discussion about the exclusion of Greece from the common European currency should have been made in 2001, when Greece adopted the euro as its local currency. The support, Europe gave to save Greece, is a price it should pay and it will go on paying. Greece is also aware of it. In fact, Greece is just the visible tip of the iceberg (Roubini, 2013). In the EU area, only the Greek economy or several countries such as Ireland or Portugal should not be regarded as problem. Unless a determined and extensive solution policy is established, other several European countries including France will be exposed to public debt crisis and economic crisis afterwards. This is an important element that threatens the integrity and future of the European Union. To solve the problems in Greece in a short time, there is a need for a structural reform about the sustainability, competitiveness and transparency of economy. This must not only be a change in economy but also in politics and society, and this change must be supported. In fact, this is not an economic problem but a loss of prestige. It will not be easy to regain this prestige.

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