Greece-Euro Crisis: A Background
In 2001, Greece became the 12th European nation to get the membership of the EU, and endorsed the Euro as its single currency of the continent. The country got the EU membership that would put Greece strongly placed in Europe. Nevertheless, even then a number of economists were afraid that the Euro's stability could be affected by the inclusion of weaker countries from the European region.
With the aim of qualifying for Euro membership, Greece was required to adopt stringent austerity steps, mostly through massive cuts in public expenditures. When the euro was launched in global financial markets in 1999, Greece was discarded of the Eurozone for not meeting the EU's economic metrics.
For Greece, the membership in the Eurozone implied that bond markets no more required to be alarmed about high inflation or devaluation in the region. Besides, it reduced the interest rates as a result the Greek government could refinance its debt as the country was considered more economically sound. The total interest costs dropped by about 7 percentage points, and the under-pricing of Greece's default risks offered it with simple access to long-term borrowing. Public spending significantly spiraled on account of these reduced interest rates, and the country had strong GDP growth annually till the emergence of global economic recession of 2008.
In November 2004, the Greek Government acknowledged it had furnished wrong economic data to gain the member of the Eurozone, which showed Greece's budgetary shortfalls to be much lower than it actually were. Although, Eurozone member countries were expected to have deficits under 3% of GDP, the updated data and Greek media analyses implied that the Greek budget deficit in 1999 was in fact 3.38% (BBC News, 15 November 2004).
Moreover, the preliminary austerity economic steps applied to decrease Greek debt were finally weak over time. Interest rates on the loans rose considerably, and evasion of tax and tariff continued to be noted at the critical levels. Ultimately, it became too costly to borrow commercially as a result of the high interest rates being enforced.
In 2009, the Greek economic revival was considered to be as transitory, as the 2008 global economic slump hit the common people hardest, as well the whole world. The Greek tourism and shipping industries, the two leading industries, were both critically affected and the revenues from them dropped to 15% in 2009 (Samaras, 2009). As well, government financial and trade deficits rose significantly, and borrowed finances were not put into income-generating funds that would likely to create better future development, improved economy, as well creating new resources to repay the debt (Nelson et al, 2011). Greece's public debt rose from US $228.5 billion in 2004 to US $356 billion in November 2009. The matter became worse when the Greek government updated its 2009 budget deficit estimates to 12.7% of GDP, above twice the earlier estimate of 6%.
With the Eurozone started to experience a major debt crisis in 2010, Greece became the focus of economic woes. It had the highest level of public debt in the Eurozone, and the biggest budget deficits that were estimated to be about US $500 billion (World Economic Outlook, 2011). Nevertheless, the Greece budget deficit as a percentage of GDP began to reduce later, from 15.8% in 2009, to 10.6% in 2010, and in 2011, as estimated by the Greek Government, the country's deficit dropped to just about 9% of GDP (Reuters, 2011). The analysts Nelson et al (2011) stated that Greece was the first Eurozone member that was affected by the intense market pressures, and the first to seek financial assistance from other Eurozone member countries as well as the IMF.
There was much fear of a sovereign debt crisis amongst investors regarding Greece's capability to fulfill its debt obligations in 2009, when Greek’s government revised 2009 budget deficit estimate to more than twice what it had been estimated earlier, and it revealed a significant rise in government debt levels. The economic recession as a result of the global economic slump had detrimental effects on Greek public finances as the government expenditures on public programs, swelled, whilst tax revenues reduced. The Greek Government announced general government gross debt rise from 106.1% of GDP in 2006 to 129.3% of GDP in 2009, and then to 144.9% of GDP in 2010. In spite of the fact a sharp default on Greek debt was predicted to be in the near future, Eurozone and the IMF agreed that a default would be critically dangerous, and must be avoided anyhow. Though Greece comprised of just 2.5% of the Eurozone economy, a default by Greek government could stimulate a major global setback of other Eurozone countries with high debt levels as investors would definitely lose faith in them. Consequently, it would make key European banks exposed to Greek debt and other risky investments in Eurozone nations incapable to revive from such a major loss on those investments, and as such necessitate a bailout from other financial organizations.
Greek-Euro Crisis impacts on Greeks & the World: An Introduction
The global economic slump of 2008 was considered as most catastrophic to the economic and financial welfare of the countries, institutions, and people all over the world. Those realizing the gains of the economic prosperity unexpectedly saw the world in economic chaos, with the descending worsening of world financial markets that resulted in the continuation of the economic crisis. Ever since 2009, a lot of investors have shown their apprehensions that a massive debt crisis would endanger the EU countries.
The EU countries asked Greece to take austerity steps in her economic system with the aim of reducing debt and slash her expenditures. The earlier steps to deal with the debt crisis have motivated on offering the Greek government a multi-billion euro bailout packages for applying austerity measures. Yet, the mainstream Greek people forcefully rejected these stringent steps. They showed displeasure with these austerity steps and made violent protests (Hewitt, 2010). However, the Greek Government was able to secure the needed bailouts in 2010 and 2011, which downgraded the country’s debt rating.
There was much apprehension and the uncertainties of a Greek "disorderly default" and the general impact that might happen in the Eurozone. The European banks had a stake of about 27% of the Greek debt of $100-$120 billion, and a consequent default would make certain that the majority of this debt would not be repaid to the bankers.
The Reasons of Greek-Euro Crisis
It was noted that the monetary imbalances, the foreign trade deficits, the weak competition, the mismanagement, the fiscal scams and the phony markets were the sources of the economic and social ills experienced by Greece. The country was assessed in the same position similar to the old Eastern Bloc communist countries joining the European Union lately. Similar to the other European countries, the worldwide economic crisis harmfully impacted the Greek budgetary balance as a result public revenues and expenditures. The public revenues dropped as a result of the reduced consuming expenditures and the reduced foreign trade business as a result of the crisis. The public expenditure in contrast rose because of the cost of intervention to economical system and the rising social insurance expenditure.
The Greek Rescue Package
If Greece were not a member of the European Union, the step that it would take would perhaps devalue her currency and open its economy, eliminate its debt in local currency by means of inflation and streamline its foreign debt by shrewd bargaining. Nevertheless, the EU clauses and the single currency prevented these options.
The different solutions were proposed in Greece for these economic troubles. One of the proposals was the devaluation of the currency. Greece would continue with the Euro however it would control the foreign deficit by creating the prices of domestic commodities and services. The other proposal was the dual currency system. Greece would continue with the Euro however would seek domestic balance to avoid foreign balance. Nevertheless, these proposals were not accepted by the Greek government.
Although the looming crisis in Greece had shaken the Eurozone community, the fact that Greece had just 2-3% share in the European economy by its GDP of 330 billion dollar believed that the crises in the country could be averted without developing into the EU (Tilford, 2010). It was however, considered that the Greek economic crisis would not be so pervasive as to generate major problems to EU countries.
Greece proposed its stability program to the EU in 2010. The program envisaged that the budget deficit would reduce to 5.6% in 2011 and to 2.8% in 2012 and to 2% in 2013. It was thought that the reorganization process aimed to cuts in expenditures and increase in tax revenues would offer new source of income to the Greeks.
The program was similar to the general framework of all the contemporary rescue packages. It comprised of the tax rise on oil products, the cuts in public expenditure, no wage increase in public sector in 2010, the recruitment suspension. The European Union supported the package. It also advised the Greek government that the deficits should be reduced drastically especially and the financial system should be consolidated rapidly.
However, the Greeks did not support the Greek austerity programs and there were massive general strikes in 2009 and 2010. Whilst the Greek austerity program was advanced, the EU announced a rescue package of 30 billion Euros for Greece in 2010. The Greek government announced that it required the aid of 45 billion Euros from the International Monetary Fund. Hence, both the EU and IMF endorse the rescue aid package of 110 billion Euros for Greece.
In accordance with the agreement between the EU and IMF, it was announced that the IMF should partially help Greece with the fraction of amount nevertheless the bulk part of the aid should be provided by the European countries. The rescue package was tied to the firm requirements demanded especially. It required the approval of all EU countries as well with the affirmative views of the European Commission.
In spite of the Greek rescue plans, the anticipated grow with the economy could not be accomplished. Whilst the jobless ratio in Greece attained 15%, the budget deficit reached more than 10% although the target was 8%. The debt burden of Greece rose although the reductions were made in public expenditure. Besides, the Greek government constantly borrowed at high rates. Moreover, there were uncertainties over the Greek capability to repay its debts. Apart from the rescue package of 110 billion Euros, it was thought that it would require an extra aid of 30 billion Euros annually in 2012 and 2013.
Conclusions
The Greek debt crisis has critical consequences for the Eurozone and other global financial markets generally. The economists think that other Eurozone member countries experiencing critical austerity steps and large debt repayments might consider Greece as a case example in the modern economic framework of a recession hit country.
References
Hewitt, G. (2010). "Eurozone Approves Massive Greece Bail-out." BBC News.
Nelson, Rebecca M., Belkin, P. & Mix, Derek E. (2011). "Greece's Debt Crisis: Overview, Policy Responses, and Implications." Congressional Research Service Report For Congress. 18 August: 3.
Samaras, Harris A. (July 2009). "Greece Unlikely To Escape Its Worst Financial Crisis of Modern Times!" Pytheas Market Focus.
Tilford, S. (2010). “Europe Cannot Afford a Greek Default”. Financial Times, January 14, 2010.
"Greek 2011: Budget Deficit To Be Around 9pct/GDP: government." Reuters. 11 November 2011.
"International Monetary Fund." World Economic Outlook. (November 2011). Using forecasts for 2011.
