There were several contributing factors that led to the downfall of Greece into their economic crisis. These factors include: Greece becoming part of the Eurozone, Greece’s unethical conduct, and the hit of the 2008 financial crisis in the United States.
European Union, Eurozone, and the EuroWhen Greece joined the European Union, they simultaneously adopted the Euro as their official currency, leaving the Greek Drachma behind. This connection came with several advantages. They were now able to be connected with other countries that have stronger economies. Also, they now had the ability to receive lower interest rates when acquiring debt.
Since it became cheaper for Greece to borrow money, their government borrowing and public spending grew astronomically. Their pension funds were distributing more money than collecting. They had increases in projects and reforms, infrastructure developments, and surpassed their budgets on non-essential projects.
A great example of this overspending would be when Greece hosted the Athens Olympics in 2004. Greece expected costs to be around $5.9 billion, however actual costs totaled to $15 billion.
This was a 154% difference in projected and actual costs. To further worsen Greece’s situation, their overspending stimulated inflation. This overspending, however, did not bother Greece as they believed their economy would soon grow and help them get out of debt. This was not the case, and Greece continued to spend/borrow more than what they would collect/repay. When Greece’s economy did not pick up, Greece’s aid would then have to come from the European Union.
It is also important to note, when Greece adopted the Euro, they gave up their national sovereignty. Therefore, the only entity who could print more Euros to help Greece would be the EU. However, the problem with this was that since the European Union’s currency (Euro) involves several more countries than only Greece, the EU’s options to help Greece were very limited.
Resulting in only more borrowing from Greece.Greece’s Unethical ConductAs previously mentioned, the Euro was not the only factor leading to the Greece financial crisis. The hidden and very critical contribution to the financial crisis was Greece’s unethical conduct. A popular and highly unethical practice was illegally not paying or underpaying the taxes required by citizens of Greece, also known as tax evasion. It was so popular that it was said to be a national sport. This behavior was practiced by big businesses, small business, wealthy individuals, and poor individuals.
This common practice led to around 30 billion Euros of uncollected taxes per year for Greece. Another unethical practice by Greece was manipulating and falsifying their financials to show inaccurate data, also known as ‘cooking the books’. For several years European regulators did not suspect Greece’s financial turmoil, as their financials stated otherwise. They were practically hiding their extreme deficits, and no one seemed to notice. It was not until the 2008 financial crisis in the United States that forced Greece to reveal their true numbers and deficits. BodyThe Financial CrisisThe 2008 Financial Crisis in U.
S.The Greek financial crisis refers to the crisis which affected Greece and threatened the entire Euro zone. It began in 2009 due to financial crisis which was being experienced in the United States. The collapse of the housing market in the U.S.
was the catalyst that began the crisis for Greece. Europe was one of the main investors in the mortgage backed securities that helped sick the U.S. economy and as such were lending money rather recklessly. In 2008 when the housing market bubble popped, Europe lost big and began attempting to collect from Greece. When Greece was unable to repay, the Greece financial crisis began.Member of the EurozoneOne of the contributors to the financial crisis in Greece was their adoption of the Euro.
When Greece abandoned the currency for the Drachma, they also relinquished their control over monetary policy. That is to say, that they were now unable to print their own money. While the European central bank controlled Greece’s monetary policy, Greece still maintained control of their fiscal policy.Greece’s DebtThis led Greece to begin to overspend, and increased an already growing budget deficit. By 2009 Greece was running a budget deficit of 12.9%. The EU rules state that the budget deficit should not exceed 3%, and at 12.9%, it was well above that.
The deficit caused Greece to be subjected to high interest rates on their loans, and further contributed to the financial crisis. This in effect caused the rating agencies to lower the credit rating of Greece.Possible BailoutIn 2010 Greece’s financial crisis became so severe that the European Commission and the IMF to bailout Greece with 110 billion dollar bailout.
Additional help came from the European central banks buying of Greece debt. This allowed the banks access to capital. These three financial institutions became known as the Troika. During the time of the Greece financial crisis, the looming threat of the collapse of the Eurozone was the main factor of the intervention by the Troika.
The bailout came with conditions and austerity measures. Some of these austerity measures included raised taxes, and spending cuts in the area of defense, health education, social security, and pension. These austerity measures came at the cost of the population being in a state of unrest. Protesters took to the streets and marched on parliament. In 2011 the European Union agreed to a second bailout of 109 billion Euros. This bailout came with even steeper austerity measures. During this tumultuous time, Prime Minister George Papandreou resigned. In 2012, parliament approved another bailout for Greece.
February of 2012 would see this bailout of 130 billion Euros take effect in February. October of same year would see yet another austerity plan passed for 13.5 billion Euros. These austerity measures would see further pension cuts and raised taxes. The unemployment rate took a turn for the worse from the financial crisis in Greece. The unemployment rate reached 28% and became an all-time high for Greece. For people under the age of 25 the unemployment rate hits 61.
4%. A byproduct of this was the shrinking of the economy. By June 2017 Greece had accrued 309,136 billion Euros of debt.How did this crisis impact the rest of the world?Impact on the European UnionThe European Union was a combination of different countries joining together to form one currency called the Euro. Upon doing research on the countries involved in the Eurozone, I found that as of 2017 the countries are Austria, Portugal, Belgium, Cypress, Estonia, Spain, Finland, Germany, Greece, Ireland, Luxembourg, Lithuania, Latvia Italy, Malta, The Netherlands, Slovakia, Slovenia, and France. Greece did not join the Eurozone until January 2001, after being rejected at first. I can sense a matter of issues with this configuration. There are some countries that cannot sustain themselves as well as others, therefore if one country would hurt, so would others in the European Union.
Knowing the European Union, and how it sustains its government is a crucial aspect of the Eurozone. Greece was being unethical in their spending habits taking on too much debt, having GDP drop from 242 billion dollars in 2008 to 179 billion dollars in 2014. The fall in Gross Domestic Product caused the Debt to GDP ratio to increase, worsening Greece’s’ debt crisis standpoint.Impact on the Eurozone Economies The unemployment rate in Greece equaled to around 25 percent.
Unemployment is not considered unless you are actively looking for work, therefore 25 percent is undervalued, but is the only means of validating a proper census in the world by gathering data. If one country goes down, the rest are affected. This is the reason why in November 2015, the European Investment Bank lent Greece 285 million euros. An investment like this can boost the unemployment rate but this was still not enough to cover the debt that Greece has endured, but did help to some extent. There is some useful information brought by an economist named Paul Krugman who said that Greece can actually make it through this crisis if they exit the Eurozone, also known as Grexit.
This would be considered a term similar to Brexit, which was the withdrawal of the United Kingdom, but instead called Grexit. If Greece were to leave the Eurozone, they would have the Drachma as their currency. This money was used to pay off Greece’s international loans.It was stated that some Eurozone countries’ interest rate spreads were dramatically increasing, Greece being the country with the highest spread, at around 25% in 2011. These spreads were comparing 10-year government bond rates with that of Germany, due to the fact that they were the leading country in the EU. Although, the United States had a higher debt to GDP ratio after 2007, the Eurozone was still considered to be the worst off, having a substantial sovereign debt crisis. Even Standard & Poor’s downgraded Greece’s credit rating, putting Greece in a higher risk investment which results in less borrowing.
Many depositors were taking out their money from the banks, and caused the banks to close down so no further release of money to the public would be considered. In doing so, it saved other surrounding countries like Portugal and Italy to suffer. But the Greece economy is dependable on the EU thus far. It is to my consideration that a country like Greece should proceed with a Grexit, to better solve the issues of monetary policy, and have their own currency to have a certainty that cash will be available to be less fragile, thus integrating the fragility issue towards monetary union that Greece has. This will allow other European countries to decrease their Debt to GDP ratio, and allow Greece to gain more independency.
Solution to the CrisisPossible SolutionsThe financial crisis in Greece has reached the moment of truth on whether to accept the EU’s last offer of policy conditions for a bailout disbursement (Ries, 2015). The world financial market states that Greece would not make billion Euro payments that owes the IMF. The European Central Bank is in fact denying the emergency liquidity assistance to Greek banks as of this date (Ries, 2015). Some of the problems have been evolving for years and have broad consequences for Greek economy and the rest of Europe. The European Union, European Central Bank and the IMF are thinking of paying out the funds for bailout money to Greece because of public demands. A great suggestion will be for Greece to leave the Euro if they want to survive (Ries, 2015).
Some of the possible solutions for Greece financial crisis will be to officially default, meaning that Greece will have a hard time borrowing from global credit markets but its leaders will need to form a durable government that will be able to demonstrate the ability to spend responsibly in order to win back the markets (New York Times, 2016).In addition, as stated before, they will need to drop the euro since the euro has become a huge obstacle to Greece’s financial health (Altman, 2012). In this case, the government could use inflation to reduce the value of its debts related to taxes and by issuing more currency it will makes prices and wages rise, and the amount owed to the debtors will probably stay the same but at least they won’t have to pay their tax rates debt. Greece should also raise taxes, their revenues are about 42% of GDP, by raising tax rates and improving tax collection, it could bring the government’s revenue more in line when it comes to its spending and eventually balance the economic budget (Altman, 2012). Greece should definitely cut some of their unnecessary spending, this could lead to recovering when it comes to governments jobs and spending in other areas they don’t need. For instance, they should liquidate some of their most valuable assets and sell them to other countries that will be willing to buy from them. Greece needs to stop bleeding by spending more billions towards the servicing of an unsustainable debt of loans that cannot afford to pay back when creditors keep charging them interest. Instead, the bank should arrange an affordable payment method for every month that could be afforded without a problem (Altman, 2012).
Most Recent Solution to CrisisOne of the most recent solution to Greek financial crisis is that the European has authorized a handling of $7.5 billion euros in bailout aid to Greece, the European union, European central bank and the IMF have put tough on disbursements of bailout money to Greece because of public demands, which in this case will allow the country to keep paying its bills in the upcoming months, It has also been forgiven of debt relief (New York Times, 2016).ConclusionHow is Greece doing today?Greece’s Economic ProgramOn July of this year Greece finally begins to see the light. First, the Euro group decided to unblock the payment of 8,500 million of the current rescue program.
Moreover, the international investors received with interest the public debt auction that marked the country’s return to financial markets after three years of absence. “This is the most important step to end this unpleasant adventure,” said the prime minister. After a big crisis that costed 27% of GDP, Greece has been growing three of the last four quarters. The European Commission has predicted that it will continue to grow 2.1% this year and 2.7% next year. The labor market also gives signs of improvement driven mainly by exports, transport and tourism. Actually, is still in a bad situation with a rate of 22%.
Growth ExpectationsMoreover, the European Commission decided to withdraw Greece from the procedure on which it punishes countries that do not comply with fiscal discipline. In addition, the IMF has just given a first yes, even conditioned, to inject into the country other 1,600 million euros. The European Commissioner for Economic Affairs, Pierre Moscovici states that Greece sees “the light at the end of austerity,”. One more good news to Greece is that the Standard & Poor’s has just raised the country’s outlook from “stable” to “positive.” However, not everything are good news. Not only is the social emergency still a problem for Greece, uncertainties about the economic future still worry the government.
The most important uncertainty is if the current rescue program, which should conclude in August next year, closes in a clean way without the need for a fourth European credit program. Next spring, a decision will have to be made and there are only two possibilities: either a generous restructuring of the debt or a fourth bailout. By then the German elections will have passed, and the new Government will have to take one or the other decision.
Greece is still rehabilitating the financial sector. This is essential to restore the credit and fostering growth. The government should take additional steps to safeguard the banking sector and facilitate the rapid relaxation of capital controls. Moreover, they should redouble efforts to ensure that banks are good capitalized before the end of the programs.Timeline of Events Greece’s debt dates all the way back to 1974. At the time, there was a sense of hope in the air for the military hierarchy that had been in control for several years collapsed and fell from power, which effectively restored democracy with the recall of Prime Minister Constantine Karamanlis.
Greece goes on to join the European Economic Community as its 10th member in 1981 under Karamanlis’ leadership. This “community” goes on to become what we know today as the European Union (EU) 11 years later in early 1992 by the signing of the Treaty of Maastricht. Shared foreign policy, judicial cooperation, and the launch of the Economic and Monetary Union (EMU) are among the top results of the EU’s inception. All of this is laying the foundation to establish a single currency for the European Union, which is a fundamental factor as to why some circumstances in Greece’s financial crisis exist. This single currency, the Euro, came to exist in 1999 in eleven EU countries with physical banknotes and coins circulating only three years later. However, because there are certain criteria that a country has to meet in order to adopt the currency, Greece cannot implement the Euro as its fiscal policy. To give perspective of the unfavorable position Greece was in, the standards that were unmet were inflation had to be below 1.
5%, their debt-to-GDP ratio below 60%, and the country’s budget deficit below 3% as per Maastricht. Greece met none. At the turn of the century (a year thereafter to be exact), Greece is finally able to adopt the euro as its currency. Thanks to Goldman Sachs’ wizardry of credit-swap transactions as camouflage, Greece managed to misrepresent its financials in order to be allowed into the Eurozone even though it had a deficit of over 3% and debt above 100% of GDP. In 2004, the Summer Olympics were hosted by Greece in Athens. This was a landmark event in their financial crisis as it cost more than €9 billion, which translates to $11.6 billion. This massive expense didn’t help Greece’s rising deficit and debt-to-GDP ratio for 2004 and triggered action from the European Commission in the form of fiscal monitoring for Greece into the following year.
In February of 2007, a global banking crisis is triggered by the collapse of the mortgage market in the US. The knockout of Lehman Brothers causes bailouts of banks in the US and Europe and borrowing costs to rise. In the midst of an even more unfavorable global financial climate, Greece still holds an undeniably large debt that is enlarging continuously which is cannot service. A change in leadership came in late 2009 when George Papandreou becomes the new prime minister of Greece. It’s only weeks later when the true figures of Greece’s budget deficit are revealed to be over 12% in excess of GDP, greater than previously forecasted. As if that was not bad enough, it’s later revised and raised another 3.
4%. Greece’s sovereign debt is downgraded to junk status a few month later in 2010 by credit-rating agencies. This calls for Greece’s First Bailout in May of 2010.
In order to prevent the country from going into default status, €110 billion are given to Greece as loans across 3 years by the IMF and EU. The agreement comes with austerity measures that include spending cuts and tax increases of €30 billion. Eight days later, the Securities Market Program is launched by the European Central Bank in order to create greater confidence in the market by purchasing Greece’s government bonds. Late 2011 brought a second bailout agreement into negotiation and Papandreou calls for a national referendum on it. After some support for the revised deal from EU and IMF, Papandreou resigns and Lucas Papademos becomes the leader of the government. At this point, said government is focused on austerity and structural reform. In only a few months, the European Union agreed to the second bailout.
This time around, Greece receives €130 billion with contingencies of a 53.5% debt write-down for private Greek bondholders and a new debt-to-GDP ratio reduction goal to meet by 2020. Greece’s financial chaos prompts a desire for fiscal integration. Almost every EU nation signed a treaty which presented tighter guidelines on budget discipline across the board. Later in the year, Greek citizens show their opposition to the second bailout agreement via voter turnout when it became apparent that fringe parties, who opposed the bailouts, were being favored over mainstream parties in Greece. At the end of the 3rd Quarter, the ECB introduces an unlimited bond purchasing program as a response to ease sensitive markets. A couple of months later in late November of 2012, the bailout was reviewed yet again presenting lower interest rates and debt-buybacks. July 17, 2013: this was the day that Parliament approved new austerity measures that did not sit well with Greeks.
These were a condition of the ongoing bailout forcing them to be placed into effect eventually, and the day had arrived. These measures included layoffs, wage cuts, tax reforms, and budget cuts. This set the ground for another round of bailouts of almost €7 billion, but it was all met with protest by labor unions going on strike.
Greece issues Eurobonds for the first time in four years in April of 2014 raising €3 billion in five year bonds; a sign of confidence for the market. In 2015, the ECB adopts Quantitative Easing to combat inflation in the Eurozone, but exclude Greece. Days later, a new Prime Minister is elected.
In June, Greece misses payment and the bailout expires making it the first ever country to go to default status with the IMF. A new deal agreement is presented and supported by Greek Parliament potentially leading to a third bailout later in the year. In August of 2015, the Third Greek Bailout was approved giving Greece €86 distributed through 2018. Today, creditors are still upset about the country’s debt and tension continues to rise over debt relief with no end in sight.