The Greek Debt Crisis and the Future for Greece’s Economy

The Greek Debt Crisis and the future for Greece’s economy Introduction After joining the European Union in 2001, Greece has been more capable to borrow money and has been recklessly increasing its public spending ever since. The outcome of this was a major debt deficit which later transformed into a risk of sovereign default. This could possibly result in major consequences for the global economy if a default was to occur. This essay will be structured by firstly examining the development of the Greek debt crisis and the response to the crisis. Thereafter the possible implications will be discussed.

Finally, the solutions to this crisis will be considered and to provide a conclusion. The Development of the Greek Debt Crisis In 2001, Greece was able to join the European Union by falsely reporting its debt levels; membership of the European Union meant that borrowing money became more capable. To take advantage of this trait, Greece increased its borrowing, public spending and focused on projects such as the 2004 Olympics, causing them to widen their deficit (BBC, 2010). In 2008, the world experienced the financial crisis which had a major impact on the global economy.

Greece experienced a decrease in real GDP growth of 2% in 2008 compared to 4. 5% in the two previous years (Ministry of Finance, 2010). In October 2009, George Papandreou was elected as the new Prime Minister and discovered that Greece has been understating its public debts for years. Due to the occurrence of the financial crisis and its increasing debt deficit, Greece was close to default which caused the investors to demand a higher yield on Greek bonds. The cost of borrowing for Greece increased dramatically and the financial position of Greece worsened.

If Greece was to default, a negative multiplier effect may be unleashed and cause the global economy to suffer. Despite its financial position, the Government stated that it would not turn to the International Monetary Fund for financial aid and ensured its citizens that it had money for its economy (Dedes, Lampridis and Paris, 2001). However, Greece did not attempt to reduce the gap in the deficit but instead expanded it. In 2009, the Greek economy went into recession; government debt percentage of GDP reached a colossal figure of 142. 8% in 2010 (Dedes, Lampridis and Paris, 2001).

The Prime Minister announced that there was corruption among the country and there was serious risk of bankruptcy. Furthermore, based on the actions of its government in relation with the statement, confidence rapidly decreased in the international markets for Greece. In addition, credit rating agencies such as Fitch and Standards and Poors downgraded the creditworthiness of Greece which aggravated its interest rates causing its ability to borrow problematic (Dedes, Lampridis and Paris, 2001). The financial position of Greece was close to default and a response was needed to combat this debt crisis and its weak economic position.

The Response to the Greek Debt In response to its debt, the Greek government designed and implemented a fiscal consolidation programme in order to stabilise and reform its economy; this was known as the “Greek Stability and Growth Programme”. It was submitted to the European Commission on January 15, 2010 (Kouretas, 2010). According to this programme, it involved actions to improve tax collection, to prevent tax evasion, to implement a special levy on profitable companies and to increase indirect taxes (Kouretas, 2010).

Furthermore, there will be a recruitment freeze in the public sector for the year 2010 and a 10% cut in general government expenditure on salary allowances (Kouretas, 2010). Despite the effort, the programme was not able to stabilise the economy; it was not capable to restore the market’s confidence. The Greek government had no choice but to resort to the International Monetary Fund. Due to the inability to borrow in the financial market, Greece began negotiating with the European Commissions and the Eurozone countries in order to construct a rescue plan.

On 25th March 2010, an agreement was made (Kouretas, 2010). The main features of the plan was to increase the VAT, increase indirect taxes, increase property taxes, freeze state pensions, public sector work to be cut by 5% and education spending to be cut €0. 2 billion (Kouretas, 2010). On 2nd May 2010, the 3 year €110 rescue plan was revised to establish further austerity measures in order to achieve the targets set by the European Commission and the International Monetary Fund (Kouretas, 2010).

The rescue plan involved strict austerity measures and according to Oliver and Sparks (2010), “€530 million was cut from health and pension funds, €400 million from defence, €50 million in doctors’ overtime pay and €80 million from education budgets”. Furthermore, the unemployment figures reached to 25. 1% in July 2012 (BBC, 2012). The tough austerity measures were not popular among the citizens and often caused protests outside the Greek parliament. One could criticize the austerity measures as Adams (2010) suggests that “[t]he problem is that the more austerity is imposed, the more economic activity contracts.

Tax revenues fall and demands on the social safety net rise, increasing the deficit and the debt rather than reducing it. As the government imposes still more austerity, social unrest increases”. In agreement, although the aim of the rescue plan was to stabilize the economy, it could cause a considerable decrease in demand for its goods and services and force the economy into a deep recession (Kouretas, 2010). On the other hand, one could argue that the austerity measures have focused on the wrong goals, it had concentrated too much on raising the taxes as opposed to reforming the state and freeing the economy (The Economist, 2012).

However, in the defence of the European Union, it is only a monetary union as opposed to being an economic union with a federal budget (Kouretas, 2010). Future Implications of Greece’s Debt Now let’s consider the future implications of Greece’s debt. If Greece remains within the euro, it will be difficult to increase its economic activity considering the effects of the austerity measures. Typically, a way to increase economy activity is through the devaluation of the currency and therefore competitiveness increases.

However, since Greece is a member of the euro, it does not have the capability to devaluate the currency therefore one would suggest abandoning the euro and reintroducing the drachma (Adams, 2012). Consequently, the outcome of abandoning the euro would be catastrophic on the Eurozone economies. Taking into consideration of the Eurozone countries, it will not let one of its member countries to default and escape its debt obligations as it will cause phenomenal economic costs for the rest of the Eurozone countries.

Moreover, it will have worse effects for those in a weak financial position such as Spain, Portugal and Italy. As The Economist (2012) suggest, a Greek exit may cause “bank runs, capital flight and soaring bond yields in Portugal, Italy and beyond”. If Greece exits the euro, investor’s confidence in the euro will diminish even further. This will result in the borrowing costs for the Eurozone countries to soar, countries such as Spain, Portugal and Italy may seek bailout and rescue plans from the European Union since they will be struggling to pay for its public services (The Telegraph, 2012).

The current Prime Minister Antonis Samras suggests if there was to be an exit in the euro, the living standards would fall to 80% during the first few weeks (BBC, 2012). In addition, banks would go bust, businesses would go bankrupt, there would be protests due to savings being frozen which could disrupt the tourism industry and the costs of imports could double (BBC, 2012). The Economist (2012) suggests that “Greece could face hyper inflation and become a failed state”. Moreover, if Greece leaves the European Union and reintroduce its national currency, it will face larger debt payments as a result of the devaluation of the drachma.

Furthermore, due to market confidence, it will be close to impossible for Greece to borrow from international markets therefore it will be difficult for the country to finance its budgets. On the other hand, the devaluation of the drachma will lead to greater competitiveness, especially in the tourism industry. However, the assumption of social unrest and political protests from the exit of the euro may detract tourists. In the view of the lenders, they are opposed to the introduction of a national currency in Greece since it would be complicated to fully repay its €350 billion debt in Euros to its investors (Cabannes, 2011).

Additionally, considering the future of the euro, businesses may cut investments and redirect their finances elsewhere causing further problems for the Eurozone countries. Solutions Although the effects at first are substantial, one could argue that abandoning the euro could be beneficial for Greece in the long term. In my opinion, it is a realistic solution to abandon the euro and restore the economy with the devaluation of the drachma through competitiveness. Furthermore, one could criticize Greece for being overdependent on the Troika.

Moreover, the choice of solving its debt with further bailout loans may result in a backfire as it is solving debt with more debt. The Economist (2012) suggests that Greece’s rescuers should give them a final choice, in order to receive funds and a reduction of its debts, Greece should implement the reforms supported by actions. However, if Greece fails to do so, it would receive no financial aid and therefore a default would be unavoidable. If Greece resorts to continued austerity, I believe that it is of utmost importance to utilize the funds effectively by prioritizing its objectives.

Meghir, Vayanos and Vettas (2012) suggest that the Troika should concentrate on funding the agencies in control of important tasks such as tackling tax evasion which will aid the reformation of the Greek economy. On the other hand, if the funds to rescue Greece have been exhausted, it will eventually have to return to the drachma since it will run out of euros. The main cause for its debt position was due to the weak political system, if a default was to occur it can be treated as an admonition. As a result, politicians would view the situation seriously and begin to implement reforms.

Without the burden of the euro and the European Union, Greece could begin to form its own plans in order to restore its economy. Furthermore, in order to restore the confidence of financial markets, they would have to demonstrate responsibility and capability of their economic plans. However, due to default the global credit market for Greece would be closed for some time. As a result, one could suggest that Greece should focus on restoring its economy using available resources to stimulate economic growth.

There is a considerable amount of exploitable deposits such as oil, gas and other raw materials in some parts of Greece as suggested by foreign scientists (Dedes, Lampridis and Paris, 2001). Greece should take advantage of this to create jobs and inject growth into the economy. Furthermore, the state property in Greece amounts to €300 billion (Dedes, Lampridis and Paris, 2001). Dedes, Lampridis and Paris (2001), suggests that Greece could carry out a series of privatization in order to remove state companies with debt in order to reduce public debt.

In my opinion, it is in the interest of Greece to focus its loan on reforming its political system. Although, strict austerity measures have been implemented with the aid of a bailout loan, the political problems still exists within the government. The politicians were the main reason for the decrease in market confidence as they undermined the level of debt and demonstrated an incapability to implement reforms. I believe that if Greece has a just and strong political system, they will be able to stabilize their economy by implementing a restoration plan reinforced by actions.

My recommendation for Greece is to abandon the euro to reform its economy with its local currency. I suggest that Greece should also exploit its available resources such as mineral wealth, its tourism industry and currency competitiveness to produce economic growth. Thereafter, if Greece proves to be qualified it could apply to be a part of the European Union again but to stay within its own currency like Britain. Conclusion To conclude, the development of the Greek debt crisis has been examined.

It has been discovered that the debt crisis was caused by excessive public spending and reckless borrowing. Moreover, we have explained the response to the debt crisis and discussed the further implications for the future of Greece’s economy. In the interest of Greece, I advised to abandon the euro and to restore its economy by reforming its political system, devaluation of the drachma and to exploit its available resources. Due to the global scale of the effects a default may bring, questions could be raised about the future of the euro as a common currency.

If Greece chooses to default, the effect of contagion may be spread through the Eurozone and cause the possibility of a sovereign default in other countries weakening the euro. Bibliography 1. Adams, T. H. 2012. The Economist: When Greece exits the euro. [ONLINE] (last updated on 30 June 2012) Available at: <http://www. cobizmag. com/articles/the-economist-when-greece-exits-the-euro> [Accessed 21 November 2012]. 2. BBC. 2010. Greek financial crisis explained. BBC. [ONLINE] (last updated at 11:14, 6 May 2010) Available at: <http://www. bbc. co. k/newsbeat/10100201> [Accessed 21 November 12]. 3. BBC. 2012. What could happen next if Greece leaves the eurozone? BBC. [ONLINE] (last updated at 15:18, 18 June 2012) Available at: <http://www. bbc. co. uk/news/business-18074674> [Accessed 19 November 12]. 4. BBC. 2012. Greece unemployment hits a record 25% in July. BBC. [ONLINE] (last updated at 14:49, 11 October 2012) Available at: <http://www. bbc. co. uk/news/business-19911058> [Accessed 30 November 12]. 5. Cabannes, A. 2011. The European monetary crisis explained. [ONLINE] (revised February 2012) Available at: