Download Topic B : The Greece Debt Crisis

Topic B: The Greece Debt Crisis
European Union
By: Anisha Patel
Introduction
The Greek government-debt crisis (also known as the Greek Depression) a debt
crisis faced by Greece in the after math of the financial crisis of 2007-2008. This started
in late 2009, triggered by the Great Recession, structural weakness of the Greek
economy and previous data on governmental debt levels had been unaccounted for.
The government enacted dozens of spending cuts, tax increases and reforms from
2010 to 2016. However, this set off riots and nation-wide protests. The country required
bailout loans in 2010, 2012, and 2015 from the International Monetary Fund (IMF),
European Commission, and the European Central Bank. After a popular vote which
rejected further austerity measures and the closure of banks across the nation, Greece
became the first developed nation to fail to make an IMF loan repayment. At that time,
the debt amount reached an astonishing €323 billion.
The money was supposed to buy Greece time to stabilize its finances and quell
market fears that the euro union itself
could break up. While it has helped,
Greece’s economic problems have not
gone away. The economy has shrunk by a
quarter in five years, and unemployment is
about 25%. The bailout money mainly
goes toward paying off Greece’s
international loans, rather than making its
way into the economy. And the
government still has a staggering debt load that it cannot begin to pay down unless a
recovery takes hold. EU member nations must address this situation quickly.
Background
Up until 1974, Greece had a dictatorship form of government. The 1980’s marked
a time of major political shifts and massive spending to integrate the newly formed
democratic government. Although the spending was toward the newly established
government system, there was more spending than what Greece actually had.
In 2001, Greece joined the Euro zone. At that time, the introduction of the euro
reduced trading costs among Euro zone nations, increasing trade volume. In Greece,
this replaced the drachma and EU begins to offer Greek citizens loans. However, these
citizens were not able to pay back loans and to cope with the arising economic crisis,
Greek government cut spending on all public services except the military. The result
was less job opportunities and increasing unemployment rates.
In order to achieve economic success, the Euro zone has instated a rule that a
country in the Euro zone cannot have a budget deficit over 3% GDP. Greece made the
decision to hide the extent of it deficits from other Euro zone members for over two
years, until the 2004 Athens Olympic Games.
As the Great Recession (global recession of 2008) spread to Europe, funds lent
from core nations, like Germany, to peripheral nations, like Greece, began to decline,
which slowed down Greece’s competitive edge. Soon, Greece’s trace deficit rose
significantly. Both the trade deficit and budget deficit rose from less than 5% GDP in
1999 to almost 15% GDP in 2008-2009. Greece was looked as a higher economic risk
alone than a member of the EU, which implied that investors felt the EU would discipline
their finances and support Greece with their economic problems. In 2009, reports
showed that Greek money mismanagement increased borrowing costs, this meant that
Greece could no longer borrow to finance trade and budget deficits at an affordable
cost.
When countries reach a sudden stop in investment and have high debt, typically
they would allow its’ currency to depreciate to encourage investment and pay back debt
at a cheaper currency. This could not be possible because Greece used the Euro
currency. Instead of being more competitive, Greek wages fell almost 20%. This
significantly reduced income and GDP, resulting in a severe recession and
unemployment reaching 25%.
From 2011 to 2013, Greece’s situation began to grow worse despite the
government’s venture at restoring the economy. Seven austerity packages were passed
in spite of violent protests. Public services, government spending, and wages were all
decreased while taxes were increased to a maximum of 23% in order to pay back two
bailout loans.
This financial collapse will not only affect Greece, but will affect all nations in the
Euro zone. If Greece does not rebuild their economy soon or create a deal with other
European Union (EU) leaders, they could be pushed out of the Euro zone, which would
be called a ‘Grexit’. Some believe that a Grexit will have minimal significance on the rest
of the Euro zone, while some believe that a Grexit will be a large impact in the long run
rather than immediate. Charles Dallara, the head of the Institute of International
Finance who negotiated part of the debt rescue for Greece, had said, “The cost to
Greece, the cost to Europe and the cost to the entire global economy may still be
enough to cause Greek politicians and European politicians to pause before they pull
the trigger on a Greek exit."
In January 2015, the anti-austerity Syriza party won the Greek legislative
elections. Alexis Tsipras is sworn in as the new prime minister and announces a
referendum on a bailout agreement held on July 5th. On June 30th, Greece officially
defaulted on their IMF payment and fell into IMF arrears. This damaged Greece’s
credits ad placed their banking sector at risk. At the referendum, 61% of the voters
rejected the proposed measures made by the Juncker Commission.
International Involvement
There have been summits on the Greek economy and their bailouts. In addition
to full EU meetings, there have been ongoing negotiations and help from other nations
and groups on the Greek economy. Other Euro zone leaders have been involved in the
crisis by proposing and over viewing austerity proposals and expressing the extent of
helping out with the bailouts. The United Nations (UN) has not been involved with the
Greek crisis because it has been localized to the European Union so the UN is not
intervening. However, the crisis is worsening and if this begins to impact other nations,
the UN will have to step in
.
Guided Questions
1. How is your nation affected by this crisis?
2. Does your nation have any deals with Greece related to their economy?
3. What would be some effective measures to help Greece’s economy?
4. To what extent is the Euro zone compelled to bail out Greece?
http://www.nytimes.com/interactive/2016/business/international/greece-debt-crisiseuro.html?_r=0
http://www.bbc.com/news/world-europe33325886?ocid=global_bbccom_email_30062015_top+news+stories
http://www.cnn.com/2015/07/06/europe/greece-how-did-we-get-here/
http://www.cfr.org/greece/timeline-greeces-debt-crisis/p36451
http://www.telegraph.co.uk/finance/financialcrisis/9267333/The-Greek-crisis-inquotes.html