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Greek Economic
Crisis
Likely Causes, Mechanics & Outcome
Greek Economic Crisis
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Greece an Overview
Greece is a democratic and developed country with an advanced high-income economy, a high quality
of life and a very high standard of living. A founding member of the United Nations, Greece was the
tenth member to join the European Communities (precursor to the European Union) and has been part
of the Eurozone since 2001.
According to World Bank statistics for the year 2013, the economy of Greece is the 43rd largest by
nominal gross domestic product at $242 billion and 52nd largest by purchasing power parity (PPP)
at $284 billion Additionally, Greece is the 15th largest economy in the 27-member European Union.
In terms of per capita income, Greece is ranked 38th or 40th in the world at $21,910 and $25,705
for nominal GDP and PPP respectively.
Greece is a developed country with high standards of living and high Human Development Index. Its
economy mainly comprises the service sector (85.0%) and industry (12.0%), while agriculture makes
up 3.0% of the national economic output. Important Greek industries include tourism (with 14.9 million
international tourists in 2009, it is ranked as the 7th most visited country in the European Union and
16th in the world by the United Nations World Tourism Organization) and merchant shipping (at 16.2%
of the world's total capacity, the Greek merchant marine is the largest in the world), while the country is
also a considerable agricultural producer (including fisheries) within the union.
In 1979 the accession of the country in the European Communities and the single market was signed,
and the process was completed in 1982. Greece was accepted into the Economic and Monetary Union
of the European Union on 19 June 2000, and in January 2001 adopted the Euro as its currency,
replacing the Greek drachma at an exchange rate of 340.75 drachma to the Euro. Greece is also a
member of the International Monetary Fund and the World Trade Organization, and is ranked 24th on
the KOF Globalization Index for 2013.
Agriculture
(3.71%)
Industry
(16.46%)
Service (79.83%)
GDP Breakdown of Greece 2013
Greek Economic Crisis
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Greece Economic Timeline
Year 2001
1. Greece Accepted Euro (€) as their official currency. Exchange rate 350.75 drachma per Euro. Analyst
fear that inclusion of weak nations may affect the new currency.
2. Eurozone tells Greece to improve their economy.
3. Eurozone have certain laws to follow for being a member country.
. Debt Criterion - The ratio of Government debt to GDP must not exceed 60% at the market
prices. Or if the debt-to-GDP ratio exceeds the 60% limit, the ratio shall at least be found
to have sufficiently diminished and must be approaching the reference value at a
satisfactory pace.
. Deficit Criterion - The ratio of the annual general government deficit relative to gross domestic
product (GDP) at market prices, must not exceed 3% at the end of the preceding fiscal year.
. Long-term interest rates (average yields for 10yr government bonds in the past year) – Shall
be no more than 2.0% higher, than the unweighted arithmetic average of the similar 10-year
government bond yields in the 3 EU member states with the lowest HICP inflation.
Year 2004
1. In February 2004, the ruling party changed. The newly elected government checked in the
datasheets and official announced the overhaul. It admits, it lied to Europe about their budget deficit
figures. Their budget deficit figures at below 3% benchmark since 1999.
Year 2005-2006
1. The new government approves changes to new labour laws, including end of jobs for life in the public
sector triggers the industrial actions.
2. The cost of hosting Olympics was too huge.
3. Government tries to impose small austerity measures to get economy back on track.
4. Austerity measures worked for Greece and GDP growth was 4.1% that year.
Year 2007-2008
1. New PM agenda national unity a priority.
2. Pension cuts were imposed. Before that pension funds could have grown to twice of GDP if not
controlled.
3. Later that year constant strikes put more pressure on the government policies to stabilize the
economy.
- Policies changes and harsh measures are taken back.
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Year 2009 (Debt Crisis deepens)
1. Greece credit rating was downgraded by world’s three leading rating industries due to fears of
defaulting on ballooning debt.
: A- to BBB+
2. The estimate of budget deficit was made 10% by the new government but rose to 13%.
3. PM announces tough spending cuts.
Year 2010
1. Government imposed deficit reduction plans, with target set to 2.8% of GDP in 2010.
2. EU agrees to pay financial assistance along with IMF of €110 Billion for 3 years.
: Explicitly punitive interest rates.
: To encourage quick returns
3. 10 year borrowing cost rose to 8.7% showing the desperateness for money.
4. EU now announces more integrity and promises to help for the stability of Euro area. ESEF (Financial
stability service) was formed with a budget of €500 Billion to stop the panic in Eurozone and to gain the
market confidence.
5. In late 2010 other countries exposed to the crisis and opens up about their economic conditions. Some
of them are Ireland, Italy, Portugal and Spain.
6. Credit rating of Greece government bonds was further degraded to BB+ (junk status).
7. Government announces two more rounds of tough austerity measures (raising female retirement
age from 60 to 65) leads to mass protests and strikes.
Year 2011
1. Finance ministers asking for the extension of the bailout payment deadline. Government aims to
raise €50 Billion through privatization till 2015. PM imposed serious public sector employment cuts.
2. Eurozone agreed to give a debt write up of 50% but ask to further strengthen the austerity
measures. In reaction to this people stormed of and organized mass strikes and it forces PM to
announce referendum but after much criticism taken back the decision and announces resignation.
3. Euro area leaders agree to lower down the interest rates by 5% and increase the bailout plan to 7.5
years but asked for €50 Billion privatization plan.
Year 2012
1. New bailout of €130 Billion was announced.
2. During the election campaign parties try to implement anti-austerity measures in their agenda, but
people are against anti-austerity.
3. New PM was firm about the commitment towards the debt repayment. EU decide to unlock €49
Billion to rescue bankruptcy of Greece.
4. In late 2013, austerity worked for Spain and they got a GDP growth in that fiscal year.
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Year 2013-2015
1. Germany experienced a slow growth in 2013 due to huge bailout money sent to other
Eurozone countries.
2. Again a government changed and a coalition government was elected that supports anti austerity
which lifted the Greek spirits, Greece again sold government bonds and raised €100 million.
3. Greece failed to pay IMF debt repayment posing a threat to Eurozone and causing confidence
crisis for Eurozone.
Greece macroeconomic factors since 2000
1. GDP
X- Years
Y – Millions of US Dollars
Y
GDP Growth (%annual)
1 = 2000
13 = 2012
8
X – Growth (%)
6
Y - Years
4
2
Greece
0
Germany
-2
-4
-6
-8
-10
0
1
2
3
4
5
6
7
8
9
10 11 12 13 14
France
UK
Greek Economic Crisis
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Due to integration of Europe to form Eurozone and adopt a common currency Euro (€). Investors
showed more faith in countries like Greece because they feel bigger economies of Eurozone will
help the smaller ones at the time of crisis for the integrity of Eurozone. So the interest rates on the
government bonds decreased and Greece bought a lot of money which contributed to early
extensive growth in GDP at the start of 2000s.
2. Debt and Savings
X
X – Debt (% of
GDP)
Y - Years
X
X – National
Savings
(%GDP)
Y- Years
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As national debt piled up Greece was unable to save that much to pay off their debt so more debt was
borrowed and eventually country runs into bankruptcy. Eventually they need bailout to save the
country’s economy from further degradation which eventually pied up more debt and due to austerity in
recent years they experienced a growth in their national savings.
3. Unemployment
X – Unemployment
rate (% labor
population)
Y- Years
Unemployment rate was out of bound posing a serious threat to economy. This huge growth in
unemployment rate signifies that the bailouts received in 2009 and 2010 didn’t work toward the
economic growth but most of the money received was used to pay off the debt accumulated.
4. Expenditure and Revenues
X- Expenditure
(%GDP)
Y- Years
Greek Economic Crisis
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The net government expenditure of Greece increased over the years before the crisis but as soon
as the crisis deepens tough austerity measures were imposed and expenditure by government
declines which made their economy to further decline and deepens the crisis.
X – Revenue
(%GDP)
Y – Years
The net government revenue declined at the start of 2000s because they have a lot of money in
hand borrow at cheap interest rates. As soon as they realized about the piled up debt they started
collecting taxes but now it’s too late because there is already so much debt piled up. After the
crisis deepens in 2010 the tough measure were imposed and revenue collection was increased
eventually but at this time the economy of Greece had degraded so much that people were
unable to pay off their Tax revenue which caused decline in national savings and posed a
Threat to loan repayment.
Greece Crisis:
Government
Tax
Spending
Collection
In two ways situation can be controlled1. Lower down spending – which is politically not possible because
it was already promised.
Debt
Increase
Interest
Rates
2. Increase in taxes - Follow tough austerity measures which are less
comfortable and will slow down the economy which in turn leads to
tax decline and deficits.
Greek Economic Crisis
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Greece could not sustain the market competitiveness after the integration for Europe to have a common
currency Euro (€). The net exports of Greece is declined by 1% from 2007 to 2014. While their GDP
suffered a loss of 26% from 2007 to 2014. On the other side countries like Estonia whose GDP had fallen 21
percent at the end of 2009 from its peak two years earlier, is now only 1.8 percent below its peak. When
Estonian GDP hit bottom, the decline in fixed investment accounted for 91 percent of the downturn. But
Estonian exports in 2014 were 39 percent higher than in 2007.
In the absence of independent currencies, and market depreciation to facilitate the return to competitiveness,
Greece need political economy reforms that reduce the costs of exporting firms and increase their
competitiveness on international markets. This has been the key driver of recovery and growth in a dozen or
more economic crises and restructuring events around the world.
Possible causes of the crisis:
1. Extensive borrowing
Before a part of Eurozone investors consider Greece a middle income country which implies
credit risk, but after joining the Eurozone the credit ratings of middle income countries of
Europe increased and investors felt these countries will be bailed out stronger economies of
Europe for the integrity of Euro (€). This sudden decline in interest rates on government bonds
led to extensive borrowing and not generating enough revenue to pay it back caused debt to pile
up and led to capital shortfall after that they require bailout money to pay up their debt.
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2. Tough austerity and frequent government changes
Greece has implanted a way too austerity to get the bailouts from the ECB and IMF. This
tough austerity has stagnated their economic growth causing further rise in unemployment rate,
banks stopped providing loans, standard of living decreased.
Greece’s social and political set up also needs to be blamed for the crisis.On the other side the
constant government changes made it impossible to have stable policy towards economic
growth and debt payment restructuring. Despite of this corruption has increased in recent years.
Greece has a very low productivity rate (though it has one of the longest working hours as a
country). It has a very inefficient government. Corruption is very high. Greeks retire earlier
compared to other countries. Too many people depend on the workforce to feed them, and there
are too few people who work.
3. Population decline in recent years.
Due to lower economic productiveness, low standard of living and high unemployment rates
Greece experienced a decline in population. The more economically productive population
is migrating from the country as there are no signs of GDP growth.
Greek Economic Crisis
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4. Single currency – EURO (€)
Another major reason for Greek’s financial crisis is ‘Single currency – The Euro’. If Greece
was not part of the Eurozone (EU), it could have printed the currency notes (Drachma, the
country’s pre-euro currency) and allowed its currency to depreciate, inflation to raise, make the
exports competitive, try to revive the economy by creating demand and jobs…similar to the way
the USA did after the 2008 global financial crisis. But the Greek Govt cannot do so, as they are
part of EU. Eurozone countries tries to maintain the Euro (€) stable against the Dollar ($).
UK in recent years uses its independent currency Pound (£) to pay off their debt rise by
printing more money and allowing its currency to depreciate, inflation rise and making markets
more competitive.
Inflation, consumer prices (annual %)
5
4.5
4
3.5
Greece
3
Germany
2.5
2
France
1.5
UK
1
0.5
0
0
1 2 3 4 5 6 7 8 9 10 11 12 13 14
Debt (%GDP)
1= 2000
180
13 = 2012
160
140
120
Germany
100
France
80
UK
60
Greece
40
20
0
0
1 2 3 4 5 6 7 8 9 10 11 12 13 14
Greek Economic Crisis
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5. Tax Evasion
A study in 2012 comparing Greek bank account data with government tax data found that the
true income of the average Greek person was about 92 percent higher than the income they
reported to the government. Tax evasion accounted for half of Greece’s 2008 deficit and a third
of its 2009 deficit. So, Greece’s budget management was bad and its tax evasion is a chronic
problem. Decline in tax revenue posed threat to gross savings.
X – Tax
Revenue
(%GDP)
Y- Years
Greek Economic Crisis
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Greece Debt breakdown -
Bailout Reasons 1. A significant part of greek bonds are held by financial institutions in Eurozone countries.
2. If EU failed to bail out Greece will trigger the crisis in whole Europe and poses a threat to Euro (€)
that will cause the confidence crisis.
But now other EU members helped Greece to every possible extent, now they got their own economic
problems to deal with. Now the solution that could work out for Greece is to forgive some of their debt
to rescue Eurozone and Greece itself.