Historically, financial crises have been followed by a wave of governments defaulting on their debt obligations. The global economic history has experienced sovereign debt crisis such as in Latin America during the 1980s, in Russia at the end of the 1990s and in Argentina in the beginning of the 2000s. The European debt crisis is the most significant of its kind that the economic world was seen started from 2010. Financial crises tend to lead to, or exacerbate, sharp economic downturns, low government revenues, widening government deficits, and high levels of debt, pushing many governments into default. Greece is currently facing such a sovereign debt crisis and Europe’s most indebted country despite its surplus in the early 2000s. Greece accumulated high levels of debt during the decade before the crisis, when the capital markets were highly liquid. As the crisis has unfolded, and capital markets have become more illiquid, Greece may no longer be able to roll over its maturing debt obligations. Investment by both the private and the public sectors has ground to a halt. Public sector debt has increased substantially as the state had to rely on official assistance to payroll expenses, fiscal deficit and fund social payments. This paper provides an overview of the crisis, outlines the major causes of the crisis, examine alternative solutions to the problem
Greece has emerged as one of the fastest growing economies in the EU since the mid-1990s when it has recorded strong GDP growth, significantly outperforming EU averages. Greece was one of the fastest growing countries in the Eurozone with an annual growth rate of 4.3 percent from about 2000 to 2007 compared to Eurozone average of 3.1 percent. The low interest rates and the liberalization of the financial sector lead to a significant expansion in consumer credit and demand. The demand also lads to large scale investments which are responsible for the above mentioned growth. Due to this economic success, the difference in real per capita income between Greece and EU-15 has decreased drastically. Greece needed to borrow money to maintain its economic progress because of the unsustainable rapid growth and less productive in foreign investment. This situation was different when in 1960 to 1973, financial statistics reveal solid budget surpluses were existed but since then only budget deficits were recorded. In 1974 to 1980, the general government had an era with moderate and acceptable budget deficits which is below 3 percent of GDP. However, this was followed by a long period with very high and unsustainable budget deficits in 1981 to 2013 which is above 3 percent of GDP. This part will describe several causes of the sovereign debt crisis in Greece.
Entrance into the euro zone meant that Greece, as the other members of the euro zone gave up one of the tools a country has to reduce its budget deficit (devaluation). The appreciation of the euro resulted in a loss of external competitiveness in the Greek economy, which leads to a persistent deficit in the current account. An appreciation of the real exchange rate increases the purchasing power of domestic incomes in terms of imported goods. There were more imports and less exports result in a slowdown in economic activity. The budget deficit increases and also public debt. Increasing interest rates because of the increasing demand for funds by the public sector which depresses again economic activity. The increasing Greek debt was the result of growing budget deficits triggered by the appreciation of the euro and the consequent loss of competitiveness experienced by the Greek economy. Many industries in Greece and other peripheral countries are not competitive at the rate of exchange and that is why these countries run increasing current account deficits.
Greece was affected by the 2008 year crisis particularly hard because it’s main industries such as shipping and tourism were sensitive to changes in the business environment. When Greece entered the euro zone in 2002, its rapid growth in tourism industry began to decrease. This is because one of the main reasons was the enormously high prices for the prices for the trips and services for the visitors. Greeks decided to overcharge the tourist and at the end the tourist started to choose often a close other place such as Turkey which has beautiful places with an excellent service and much lower price. This situation has added one huger problem to the previous one.
Furthermore, in 2004 Greece was hosting for the summer Olympic Games. The costs for this event were huge because the government had to build new facilities such as airports, roads, hotels and the stadiums around the Athens. Greece also had to complete new transportation plan of rebuilding the Athens infrastructure and clean up the whole city. Hosting the event cost almost 9 billion euros or 11 billion dollars at today’s exchange rate, making the 2004 games was the most expensive ever at that point. Greek taxpayers were on the hook for 7 billion euro, which did not include the cost of extra projects such as a new airport and metro system. The cost created a high budget deficit in the next year, beside the decrease in tourism. There were differences between the Athens Olympic Games and 2000 Sydney also 2008 Beijing that Greece was not as wealthy or large as Australia or China to absorb losses on Games. Most of the countries which hosted the Games were at the time economic powerhouse and not developing countries such as Greece.
Lack of discipline due to populist welfare policies also created the causes of financial crisis in Greece. For example, three-times-a-year bonuses as well as a minimum retirement age of fifty. This policy is below the international average and the attendant entitlement for pension benefits that is inconsistent with the average lifespan. These policies led to increases in public spending, especially on wages, pensions, elderly aids and unemployment benefits which accounted for more than seventy five percent of Greece’s public expenditures. The average retirement age in European countries was sixty five years but in Greece it was 58 years. Disorganized public management, lavish amount of pension and expensive health care system also provided the basis to the crisis.
Greece is the second-biggest defence spender among the twenty seven NATO countries after the United States, according to NATO statistics. Despite its dire financial straits, the country’s military expenditure has risen during the global financial crisis. It spent 7.1 billion euros in 2010, compared with 6.24 billion euros in 2007. The United States is the major beneficiary of Greek military expenditure, with the Americans supplying forty two percent of its arms. In second and third place are Germany, with 22.7 percent and France with 12.5 percent.
At the beginning, currency devaluation helped finance the borrowing for the Greek government. However, the devaluation tool had been disappeared after the introduction of the euro in January in 2001. Greece was able to continue its high level of borrowing. Unfortunately, problems started to occur when the global financial crisis peaked, with negative repercussions hitting all national economies in September 2008. The global financial crisis lead negative impact on GDP growth rates in Greece.
A political perspective addresses the origins of financial crisis differently. Political considerations also affected the course of events after the announcement of Greece’s actual public debt. Some political leaders, especially German Chancellor Angela Merkel, have come under criticism that their indecisiveness in granting a Greek bailout accelerated that severity of the euro area crisis. After all, investors had been pricing, even well into the crisis, Greek and other European Monetary Union bonds assuming a bailout. Former Chancellor Helmut Kohl, one of the leading architects of the euro and the European Monetary Union, blames not only the Greek state but Merkel as well because her actions have been dangerous, and he believes will destroy Europe itself. This political perspective asserts that the EMU’S original protections against economic divergence among Eurozone countries were deteriorated by politically-based decisions later in the EMU’s history.
Greece has been facing significant challenges during the last decades. Greek society has been up against the challenge of an increase in the aging population. The latter has not been balanced by a corresponding increase in the birth rates, thus fewer and fewer people are entering the workforce. Only one in two persons will be of working age because the country’s population will be declining from 2020 and the share of population older than 64 will be doubled by 2050 to 31 %. The dependency ratio of people older than 64 to those between 15 and 64 will rise to an almost dramatic 77 %. Inequalities and oddities of the labour force compound a peculiar model of labour in Greece. It showed that a low male labour participation in the economy when the female labour participation is even lower. Greece’s productivity gap is in fact larger than the GDP per capita itself when comparing this country and the different European regions with the US. Greece has Europe’s lowest workforce participation rate with the number of employed and unemployed of the entire workforce at just 66% of the employable population. Major factor for this performance are structural stiffness and low mobility in the labour market.
Tax evasion is one of the major challenges facing Greece and it is evaluated as contributing towards the current Greek crisis. Government’s tax income in Greece is always below the expected level. The informal economy of Greece is larger than in any other EU country, leading to higher percentages of tax evasion than other EU member states. Tax evasion costs the state amounted to well over 20 billion dollars a year in 2010. The gap between the amount of Greek taxpayers owed and the amount of the paid was about a third of total tax revenue. In 2012, the state collected less than half of the revenues which amounted to 110.79 billion euros but the state collected just 51.99 billion euros or 46.93%. Lower tax revenues may lead to higher tax burdens on those who do pay. Moreover, to the extent that opportunities to evade differ by occupation and/ or sector of the economy. Tax evasion will also distort labour supply decisions although it is not always easy to confirm this assumption empirically.
Greece has been hiding the true nature of its deficits and its debt. Goldman helped the government quietly borrow billions in 2001, just after Greece was admitted to Europe’s monetary union. That deal was hidden from public view because it was treated as a currency trade rather than a loan. It helped Athens to meet Europe’s deficit rules while continuing to spend beyond its means. In 2008, Eurostat said Greece didn’t report the Goldman Sachs transactions when the agency told countries to restate their accounts. Instruments developed by Goldman Sachs, JPMorgan Chase and a wide range of other banks enabled politicians to hide their borrowing particularly in Greece, Italy and other European countries. Dozens of deals were concluded across Europe, banks provided cash in advance in return for government payments in the future, with the liabilities were kept off the books. Greece’s secret loan from Goldman Sachs Group Inc. (GS) was a costly mistake from the start. Credits given to European governments were disguised as swaps and did not register as debt. This situation had enabled Greek as well as many other European countries to spend beyond their means.
The reliability of Greek government deficit and debt statistic has been the subject of continuous and attention for several years. There were some problems with unreliable data ever since Greece applied for membership of the Euro in 1999. Eurostat each year do reservation about the fiscal statistical number for Greece from 2005 to 2009. However, the result showed somewhat worse figure after a couple of year it got revised. The Greek government deficit for 2008 was revised from 5.0 % of GDP to 7.7 % of GDP. In 2009, EU reported the deficit was 13.6 %, but the final revised by the Eurostat showed the real deficit was 5.6%. Greece was the subject of harsh criticism from the European Union because of it statistic considered as lies and deception. At the end of 2009, the figure of the Greek government debt was also increased from 269.3 billion euro (113.4 %) of GDP to 299.7 billion euro (130 % of GDP). This problem can affect the trust among financial investors and it added pressure to the need for immediate improvement for the Greece economy.
Greeks, by contrast, see fraud and corruption as ubiquitous in business, in the tax system, and even in sports. And they’re right to: Transparency International recently put Greece in a three-way tie, with Bulgaria and Romania, as the most corrupt country in Europe.( http://www.newyorker.com/talk/financial/2011/07/11/110711ta_talk_surowiecki)
According to the Maastricht agreement, the budget deficit should be lower than three percent of GDP and overall debt below 60 per cent. However, in Greece it has passed the twelve percent barrier for the annual deficit and the overall debt one hundred and twenty percent of its GDP. Another option that Greece can take as an action to reconstruct its economy is defaults on its debt. A default would relieve Greece of the mountain of debt which estimated to be at 180.9% of GDP in 2014. Greece’s economy has already begun to shrink, and the longer the inevitable is prolonged, the worse off Greece’s economy will be in the future. However, the fear of contagion is still widespread and many are worried that a Greek default would create a domino effect of other nations following suit.
Greece can take the opportunity to protect all Greek banks and depositors. Greece also has to ensure that all Greek bank deposits, certificates of deposits, and pension payments are guaranteed. According to Sheetz, foreign banks and credit institutions would be the major losers in this situation, and lose most if not all of their investment in Greek bond debt. Other financial institutions would become vulnerable as well, such as the European, American and Asian insurance companies that would have to pay out credit default swaps to investors (who placed their bets against a Greek default). The financial institutions will then risk having low capital reserves with bankruptcy possible in the future if they have to pay out these insurance claims. Lindauer argues that Greek national banks may be one of the few winners if Greece were to default.
Greece could also leave the Eurozone and return to the drachma as its national currency. According to Landon, if Greece decides to leave or is forced to leave the euro, its debt write-off would be close to one hundred percent, and the effects would be much more severe on international markets. Greece would have an option to devalue its currency and become more competitive economically if the country decide to leave the Eurozone. Exports will arise as more nations and companies do business with Greece and Greek companies, which will bring in cash to the nation if it can devalue its currency. However, if Greece wants to leave the Eurozone, it could lead to a massive bank run by those with euro deposits in national banks who do not want their euro-denominated deposits changed into drachma.
Michelis argues that Greece has to fight the corruption by imposing stiff penalties to public officials involved in corruption cases. The penalties could range from high monetary fines to appropriate prison terms determined by the penal code of public courts. The government also has to eliminate the incentive for institutionalized corruption by eliminating the controversial law about ministerial responsibility form the country’s constitution.
Greece’s admission into the Eurozone in 2001 is a decision that some fellow member nations are beginning to regret Its long history of problems with its public debt was disguised by several years of strong economic growth, with one of the fastest growing economies from 2000 to 2007. Greece consistently outperformed most European nations in terms of annual economic growth. However, the Greek government debt crisis was triggered by the 2008 global financial crisis which brought light to Greece’s poor spending practices. Social, cultural and political factors have negatively affected the country’s economic and business performance. The current financial crisis and debts of enormous proportions is the end result of this situation. However, this situation can be reversed if necessary social, political and institutional reforms alongside reasonable macroeconomic policies are aggressively pursued in a through and pragmatic way. These reforms will require a focused policy framework with a strong development dimension and market-augmenting industrial targeting. The Greek government have to be the major actor that will initiate a new developmental agenda for the renewal of the Greek economy.