Debt Crisis in Greece

The Greek debt crisis occurred when Greece owed a huge amount of National debt to
the European Union. The debt crisis began in 2010, and since then European
authorities and private investors have loaned Greece nearly 320 billion Euros.

How did it originate?

In 2001, Greece joined the Eurozone and began using Euro as its currency. Greece’s
monetary policy (how much money can be printed) is controlled by European Central
Bank whereas fiscal policy (how much and where to spend) is controlled by the Greek
Government. One of the reasons of debt crisis is fiscal profligacy; excessive and
wasteful spending of money by Greek government. Some even believe that, the labor
cost of Greece got much higher after joining the Eurozone which led to increase in
debt. Huge problem with tax evasion is also considered one of the factors of crisis in
Greece as it resulted in slow economic growth. The 2008 US recession also played a
vital role in worsening the economic condition of Greece as the only two of its biggest
industries i.e. tourism and shipping were highly affected.

The EU has made some fiscal rules for the Eurozone countries to be followed strictly
which was being broken time and again by Greek government. For example, there is
a rule that a country cannot have more than 3% annual budget deficit but reports
have shown that since 1990s, Greek government has been reporting budget deficits
and debts that were much lower than actual budget deficits and debts. Even after the
country joined the Eurozone, the facts were hidden until a new government in 2009
announced that budget deficit that year would be 13.9% of the total economic output.

After Greece revealed its economic crisis in 2009, the investors realized the amount
of risk (due to such high deficit) and started to ask for higher interest rates for loan.
Greece had no other choice then so; it accepted the increased rates which further
made its deficit problem worse. This again made investors increase the loan rate
which again increased the deficit and the cycle continued. The condition of Greece
was so bad, there was a fear that the whole Eurozone might fall apart.
What step did Greece take?

Greece took the austerity measures which means it raised the taxes, cut pensions
and other benefits which kind of worked for a few times as it helped to decrease the
budget deficit but the Greek economy contracted dramatically.

People had less money to spend due to cut in pension and higher taxes which led to
failure of business and fewer jobs. When this happened, tax revenue also shrank and,
in the end, nothing really got better.

What was the situation?

The lending and borrowing continued and the economic situation of Greece wasn’t
getting better. Around 30% of people lived in poverty. In 2015, the citizens of Greece
voted “NO” for austerity measures. This caused liquidity crisis in Greek Banks and
they had around only 500 million euros left and even ATMs were out of cash. Banks
imposed a 420 euros weekly limit on withdrawals. That prevented depositors from
draining their accounts and worsening the problem. It also helped reduce tax evasion.
People turned to debit and credit cards for purchases. As a result, federal revenue
increased by 1 billion euros a year. Later in 2015, the Greek parliament passed the
austerity measures despite the referendum so that they could receive the EU loan of
86 billion euro. Greece continued with austerity measures and in return EU kept
providing them loan. Greece used the fund to make debt payments. Slowly, Greece
was getting back to a better condition as it was able to issue bonds for first time in
2017 after 3 years. On 2018, Greek parliament passed new austerity measures which
helped the banks reduce bad debts and establish other economic markets. As of
January 2019, Greece has only repaid 41.6 billion euros. It has scheduled debt
payments beyond 2060.

Submitted By:

Sudarshan Gautam

Roll No.: 26

M.A. Economics, 1st Semester