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Greece is one of the nations that have been relishing a flourishing economy. The country has been known for its high income economy and was rated among the leading global giants regarding the standard of living for its citizens. The tourism industry was among the rapidly growing sectors that helped in boosting the economy. Apparently, the country experienced a significant economic expansion at the beginning of the year 2000, owing to the influx of a large number of tourists. Unfortunately, this growth came to a sudden halt when the global economy faced a crisis (Arghyrou and Tsoukalas 171). Consequently, the massive borrowings adopted by Greece to run its monumental projects were subjected to scrutiny. Upon the examination, it was realized that Greece had over-borrowed at a high rate that amazed even the European Union. Resultantly, with the global economic crisis, the country was unable to secure loans at cheap rates to sustain its economy. Nonetheless, the nation could not settle its debts. This essay, therefore, seeks to explore the circumstances that led Greece into this economic crisis, the impact it had on the local and international spheres and the policies that need to be adopted to fix the damage.
Background of the Country
Foremost, it is critical to delve into how Greece came into this debt crisis. When the economy was stable, Greece borrowed hundreds of billions of dollars to increase the economy of the nation. Ordinarily, this would be a prudent idea if the income tax revenue were sufficient to cover for the debt, which unfortunately, was not the case in Greece. As such, Greece accumulated debt burden amounting to approximately 133% of their GDP, projected to be between $300 billion and $413.6 billion, and the value has been gradually increasing with the shrinking of the economy (Arghyrou and Tsoukalas 173). Consequently, Greece has been subjected to the lowest credit rating in the European Union, making it expensive for it to borrow. In effect, there are speculations that the Greek government may be declared bankrupt and fail to pay their loans unless radical steps are taken.
Description of the Problem
The Greek debt crisis can be traced back to 2009 when the government claimed that the previous data on public debt and the levels of deficits were misreported. This pronouncement adversely affected the ability of the government to secure loans owing to the mistrust of creditors. Therefore, Greece was prompted to seek assistance from global financial institutions such as International Monetary Fund and the European Union agencies.
Causes of the Greek Debt Crisis
According to Brkić, Greece got into the crisis due to the substantial structural deficit (71). It implies that the government overspent on consumption than what it received from varied revenue sources. Accrued deficits by the government characterized government debt since the nation was forced to borrow from different sources to fund the present spending. Purportedly, Greece borrowed large amounts of money in 2000’s to finance its current expenditures. Unfortunately, the 2007-2008 financial crisis immensely affected the shipping and tourism industries, the primary sources of the Greek economy. Therefore, the ability to fund the consumption without opting for borrowing was jeopardized. Furthermore, the crisis arose due to challenges with statistical credibility. As such, the budget planning process was intricate since the GDP growth rate, the public deficit, and the debt that were reported differed from the actual figures. Therefore, the realization of this inconsistency in statistical data resulted in the regrettable consequences for Greece. Moreover, high levels of corruption and tax evasion are also attributed to the crisis (Fouskas 138). The government was unable to efficiently collect all revenues owing to corruption among the civil servants and continuous evasion of tax due to low social trust.
Impact of Greek Debt Crisis Domestically
The crisis left Greece with large amount of debt and massive unemployment in the previous years. Moreover, the larger financial institutions extended the bailout to pay off the global debt. It, therefore, means that the government is left with minimal to invest in the new economic reforms.
Impact of Greek Debt Crisis Internationally
The crisis can potentially ruin the global credibility of the European Union. Analysts report that failure to pay-off these debts by Greece can lead to the creation of risk in the global financial system. Besides, member countries of the European Union may be forced to finance the bailout package (Higgins and Klitgaard 11). Additionally, several financial institutions other than the International Monetary Fund could be adversely impacted by the Greek debt crisis.
Future of the Issue
Since Greece has opted to seek financial assistance from large financial institutions such as the International Monetary Fund and other European Union agencies to control their present debt, these funds should not be given without imposition of restrictions. Essentially, Greece should only be allowed for financial assistance after it has accepted to adopt austerity measures. That is, agreeing that it will opt for a significant budget cut in future. The austerity measures are critical in returning the nation to a state where the spending can easily be controlled to enable it to start servicing its debts.
In conclusion, it is apparent that the crisis in Greece is more than a mere debt crisis. Rather, it is more of a confidence crisis resulting from the misappropriation of both the international creditor’s expectations and the local consumers and investors. Therefore, to solve the issue, there is a dire need of bringing back the confidence on both fronts. However, the major challenge is that Greece has failed to tackle this confidence crisis. As such, Greece as a nation should prioritize measures to tackle this nasty circle.
- Arghyrou, Michael G., and John D. Tsoukalas. “The Greek Debt Crisis: Likely Causes, Mechanics and Outcomes.” The World Economy, vol 34, no. 2, 2011, pp. 173-191. Wiley-Blackwell, doi:10.1111/j.1467-9701.2011.01328.x.
- Brkić, Mislav. “Greek Sovereign Debt Crisis: Causes, Fiscal Adjustment Programs And Lessons For Croatia.” Croatian Economic Survey, vol 18, no. 1, 2016, pp. 71-99. The Institute Of Economics, Zagreb, doi:10.15179/ces18.1.3.
- Fouskas, Vassilis K. “Whatever Happened To Greece?” The Political Quarterly, vol 84, no. 1, 2013, pp. 132-138. Wiley-Blackwell, doi:10.1111/j.1467-923x.2013.12002.x.
- Higgins, Matthew, and Thomas Klitgaard. “Saving Imbalances and The Euro Area Sovereign Debt Crisis.” SSRN Electronic Journal, 2011, pp. 1-11. Elsevier BV, doi:10.2139/ssrn.1925018.