The Greek debt crisis has hit the headlines for the last two years now. While this is not the first time this has occurred, nor is Greece the first state to suffer such a crisis, a sharp focus has nevertheless has been accorded to the current state of affairs. The Greece crisis has exposed political, institutional and governance breakdowns, a reflection of many similar predicaments facing many nations all over the world. The crisis has aroused new efforts among stakeholders to avert such occurrences in the future. The euro’s financial structure weaknesses have also been exposed by the crisis and this could be the appropriate wake up call to other trading blocs to revise their terms of association.
Greece is in a debt crisis. Economic experts have described it as the worst ever since1974 (Bliss, and Braga, 1990).The crisis began in late 2009, owing to International and national factors. As a player in the international trade arena, the state was negatively affected by the global financial crisis of 2009.The problem was compounded further by uncontrolled government spending. In lay man terms, the government spent more than it generated. The state’s public service enjoyed one of the best remuneration packages in Europe and this eventually became unsustainable. Furthermore, the retirement age was too low accompanied by generous benefits which overstretched the budget to its optimal limits. In addition to the state’s reckless spending, the country suffered from massive tax evasion by unscrupulous businessmen which greatly limited revenue avenues. The government resulted to heavy borrowing from big European banks to the tune of billions of dollars (Close, 2002). In an effort to keep in line with the monetary demands of the European Union, the Greek government constantly availed the wrong economic statistics and in turn continued to spend beyond its limits eventually leading to a large deficit that was estimated at 120% of the Gross domestic product (GDP) in 2010, one of the highest in the world at the time. This came after fifteen years of sound economic progress (BBC, 2011a).
Prior to the recession, the government had been accused of over-lending. This trend spiraled to an extent of the loan to savings ratio exceeding a hundred percent in the first half of the2009 fiscal year. Based on data from European Union, the economy of Greece had a budget deficit of 15.4% of the gross domestic product in 2009 which resulted in a rise in borrowing costs. This affected investors in the country who recorded massive drops in their profitability. The industrial sector recorded an eight percent drop in production between early 2010 and early 2011 due to the crisis (Money Control,2011). The crisis also affected the garment industry which Greece has relied on in her entire development history (Orrieux, 1999). The retail trade sector also recorded a 9%drop in turnover between 2010 and 2011 an indication of low spending rates by a majority of primary consumers. The building industry which had recorded a boom in previous years prior to the recession also reported a 7.3% drop in trade volumes. With almost all sectors affected, the job market suffered extensively with unemployment rates shooting from as low as 7.2% in mid 2008 to36.1% in late 2010 (Money Control,2011).
This paper will focus on the crisis since it began in 2009 and the earlier years leading to the collapse, its effects up to date and the expected effects in the coming years to Greece, her people and the European Union. The paper will also analyze the importance and effects of the crisis to the people. The context of the crisis will be analyzed from a professional point of view as discussed in professional sources such as journals and scholarly articles. The most workable solutions to these problems as proposed by various scholars will also be given. Revolts have sparked all over Greece for the last many months as people demand the resignation of the government following its failure to curb the skyrocketing rates of unemployment, high cost of living and numerous cuts on social benefits the people enjoyed before.
Greece has received a bailout in an effort to save her economy from collapsing but still suffers from large debts owed to banks. It is therefore inevitable that Greece will require a second bailout almost equivalent to the first.to compound the problem further, a part of the original bailout is still withheld by the International Monetary Fund (IMF) amounting to €12bn since indicators point to the Greek government being unable to fund its programs in the coming financial year. Currently the country has a debt of €330bn, with expected deficits in the coming years. This means the country will need to borrow further. Economic experts say that Greece requires up to about €120bn in the next two fiscal years to stand a chance of reducing the deficit at least to manageable levels. Other experts however argue that no amount of funds will help save the situation as it is and default will eventually have to occur. The high possibility of this default is fuelled by the fact that the highest percentage of the debt is held by banks in Europe (Stein, 2011). A restructuring of the nation’s debt load would have an adverse effect on the banking industry as it would suffer great losses. This could also spread further problems to Portugal and Ireland, who are in the process of finalizing their austerity programs so as to receive additional aid from international aid agencies such as the International Monetary Fund (Wearden &Inman,2011).
The financial crisis affecting Greece may affect the populace further since among the conditions imposed for the second bailout to be effected include a ten percent cut in public spending and a further 33% reduction in the public service wage bill. This adds more misery to the citizens who are already reeling from hikes in taxes and earlier wage cuts. The citizens have therefore turned their anger to the politicians, particularly after the prime minister was unable to convince the parliament to avert the cutbacks. The most probable solution proposed by the political opposition, the New Democracy is to privatize the state corporations including PPC, the leading government electricity producer. This, they argue will generate the necessary funds to pay the debts instead of overtaxing the populace BBC, 2011b).
Leading economists led by Nouriel Roubini propose that the quickest solution to the financial crisis facing Greece is to default on its debts, which will in turn have it struck from the European Union league. This, they argue will allow Greece to quit the single currency which has a high value. By acquiring the financial independence, the state may opt to devalue her currency in order to make her exports cheaper and competitive in the international market. This proposal has been criticized, since withdrawal from the bloc and the subsequent devaluation of currency, would result in deposit holders emptying all their accounts. This would in turn affect majority of Greek banks capital layout. The biggest blow to the bank would be their inability to borrow from the European Central Bank, a service only enjoyed by banks within bloc member states. Furthermore, the Maastricht treaty does not allow a Eurozone state to leave the euro but a clause allows for splitting of the euro for weaker members to use the weaker fashion of the euro. This therefore looks as the most probable solution (Hotten, 2011).
Some European Union member states, propose that the short-term reprieve would involve re-profiling the Greece debts to allow a longer pay back time for her bonds. This would give the country ample time to prepare for a default with the banks also benefiting through increased time to build enough capital reserves. Credit experts, however; say that this is also a type of a technical default (Zahariadis, 2010).
In short, bailouts for Greece are not handouts but repayable loans. This means the bailout is only meant to prevent a default by the state. The pressure of repaying the loans lies on the Greek, more so the next generation, should the government fail to clear the debt within the stipulated time( Al Jazeera ,2011).
Causes of the Crisis
The financial crisis in Greece did not occur overnight. Economic and social studies experts have linked the woes facing the country to her decision to join the European Union. At first the idea seemed attractive and rosy owing to the great successes that other regional blocs had registered in other parts of the world. By far, this seemed as the best model to overcome the perennial challenges that face d Greece and other European countries (Creighton, 2011). The benefits of being a member of a trade bloc were well publicized by the European media to an extent of creating euphoria in the entire region. The euro was meant to equate all the countries in the euro zone or so it was proposed. By this time; however Greece had a weaker currency than many other member states. While other member states retained their national currencies and focused on strengthening basic structures, Greece seemed to take a different route, easily making what professionals termed “lethal errors”. The replacement of her currency with the euro meant that large sums of the Drachma, the official Greek currency were being converted into small amounts of the euro. This acted to benefit countries such as Germany that had strong currencies. It therefore became extremely expensive for the businessmen and consumers in Greece to import commodities from the other member states but due to treaties governing the association, they had little or no option (The New York Times 2011). With the elimination of the exchange rate differential, the citizens found themselves with loads of currency but, the economy was not strong enough to compete with others. Over a period of ten years, exports from Germany alone had reached 130%.This slowly led to decline in productivity of local Greek industries.
The introduction of the euro also allowed Greece to borrow as much as possible with ease as a member of the Eurozone. This raised the credit rating of Greece, a relatively poor country to the same level as the northern European countries such as Germany and England (Margaronis, 2011).The plan was that should smaller economies like Greece face challenges they would be easily bailed out by their northern European counterparts in an aim to protect the euro and their economies. This gave Greece a platform to exploit and within no time, the Greek consumers and their government went on a borrowing spree, resulting in large unsustainable debts. The problem was compounded further by lack of adequate infrastructure, poor taxation systems and excess public servants. Massive tax evasion over the years by businessmen added insult to injury. The tax evasion scandal was so rampant that the government lost up to 26.1% in income in 2004-05.Farmers were the leading tax defaulters in some cases paying only a half of their taxable income. The government taxation system was so poor that the money it borrowed could have come from local taxation alone.
The government also preferred operating parastatals as opposed to promoting the private sector. In fact, the government owned and operated more than five thousand local enterprises ranging from electricity, telecommunications and water companies. These enterprises employed many civil servants and the government readily bailed out any firm that made losses despite the fact that the revenue was not ever enough. Over time the burden became unbearable, following the universal financial crunch, the Greece financial status came to the fore and the condition was regrettably terrible (Noam, 2010)!
The Greece debt crisis is man made and the blame lies squarely on those mandated to govern the economy of the country. It is very encouraging to hear experts giving suggestions on how Greece can effectively emerge from the economic mess she is in. Though these ideas are seemingly falling on deaf ears, hope is rife that simple adjustments in the way the administration tackles the crisis, could revive the economy. A major contributing factor to the deterioration of the economy is massive taxation evasion, a challenge that has been in existence for decades. Public officers are also said to be gambling with money from public coffers while under the protection of influential politicians (Wearden, 2010). Another solution would involve abolition of the liabilities from state corporations. The challenge of Greece is a universal challenge and should be tackled by all stakeholders. The problems facing Greece after years of living in denial should act as a lesson to other governments all over the world on the importance of openness (Nixon, 2011).
Now that the Greece challenge is receiving all the world attention, the chance to rectify all the ills both economic and administration based that had been ignored for decades to this end must be dealt with now. The Greece problem is a mere reflection of the challenges global financial structures have to tackle. The euro’s structure’s faults have also been exposed by this crisis. It is now clear the single currency adopted by the Eurozone, has no outlined mechanism to tackle such crises as the one facing Greece (D’Anieri, 2012). The proposal to leave Euro will not entirely solve the problems Greece is facing; instead it will be detrimental to all parties in the bloc. An entire operational overhaul is necessary in the way Greece handles her internal affairs to at least create a chance for economic revival. Similarly the euro secretariat must revise the structure of the bloc especially the financial issues to avert similar challenges in the future (Lynn, 2011).
An entirely new approach proposed to handle the Greek problem would involve formation of independent authorities that would focus on key areas of interest while reporting directly to the legislature and other stakeholders such as the creditors who have funded the reconstruction of the economy (Fox 2011). These authorities would also have the mandate to advise the government accordingly. The direst sectors requiring this assistance are the tax collection and assessment, anti-corruption initiatives, healthcare reforms and general populace welfare reforms. There is an urgent need to involve the civil society in dealing with challenges facing the citizens as well as address their grievances through the appropriate channels as opposed to resulting in unnecessary violent crashes with government agencies (Rosemary, 2011).
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