The Greek Economic Crisis

Introduction
The Greek debt crisis took place between 2000 and 2018, and this crisis started when Greece owed a huge amount of Sovereign debt to the European Union (EU) in the form of bonds. In 2010, Greece could not cope up with their bond rates and their budget deficit (i.e when the government expenditure exceeds the government revenue) reached 15% of its GPD an therefore Greece stated that it might default on the repayment of its debt. This incident would have destroyed the credibility and viability of the Eurozone. So to eliminate the default, EU itself loaned Greece enough so that Greece can continue with their payments (NOTE: since 2010 many private investors and different Europe authorities have given a loan to Greece which roughly amounts to 320 billion euros). Greece requested the EU to reduce some of the debt, but the EU leaders did not wanted to let Greece go unreprimanded so they struggled to agree on a solution. But the European Union decided on one thing, that Greece have to introduce some strict austerity measures in order to increase their revenue and cut their expenditure so as to make a significant change to reduce their budget deficit. One of the biggest were Germany and its lenders and they also excelled in austerity measures (NOTE: they saved 100 billion dollars over a time period of 4 years starting from 2010 and ending on 2014). The implementation of austerity measures was a necessary evil for Greece, as it helped Greece to repay its debt but it had to adopt the harshness of austerity measures such as -:
1 ) It lowered the trade barriers to improve its revenue through exporting goods.
2) It had to review and reform its pension system, which made a huge difference because pension systems had absorbed 17.5 percent of Greece’s GDP, which is highest among all the countries coming under the Eurozone. The austerity measures forced Greece to reduce its pension system by 1% of its GDP.
(3) The austerity measures imposed costed Greece 72 billion euros, that is 40 % of its GDP. Hence, Greece’s economy shrank 25% and unemployment rose to 25%, whereas the youth unemployment hit 50%. Political instability was at its peak , voters were giving their support to anyone who was offering them the easiest way out.
Also, Greece’s debt to GDP ratio rose sharply to 183% in 2017, which is its all time high.

CAUSES & IMPACTS

From 1974, Greece’s political system has been a duopoly, which simply means that there are only 2 major political parties in the country namely Panhellenic socialist Movement (PASOK) and The New Democratic Party. So basically, from 1981 PASOK was in power for the next three decades and over a period of time The New Democratic Party alternated power with PASOK, so in order to keep their voters content, both the parties implemented liberal welfare policies which made Greece a bloating and what you call as a “protectionist economy”( NOTE: protectionism basically means when a country is closed to international trade so as to save their local jobs and businesses safe from foreign competition). The parties spending lavishly to impress their voters effected Greece in the following way:-
1) The wages of the employees working for public sector were increased every year automatically without keeping a track of their efficiency and productivity.
2) Pensions were really generous, that is, a Greek man with around 35 years of government service can retire at the age of 58 and immediately after his retirement he will be a candidate of pensions allotted by the government and similarly under a similar scenario a Greek woman can retire at the age of 50.
3) One of the best examples of “how generous the Greece government was” is that they provided their employees with an extra month pay in December to help with their additional expenses, they received one half months pay at Easter and one half months pay when they took a vacation as well, they termed it as the 13th and the 14th month’s pay.

All of these factors plus low productivity and efficiency, reducing competition due to the rigid “ease of doing business” and frequent tax evasion led the government to resort to a huge debt. Also, Greece joined the eurozone in January 2001 which made it really easy for Greece to borrow money. This was because of the fact that Greek bond yields and interest rates deteriorated at a good pace with the collaboration of Greece with other rich EU members such as Germany. As a result of which there was a boom period for Greece between 2001 to 2008, that is, their real GDP growth gave an average of 3.9% a year between the above time period. But, this growth was unsustainable and this growth came at a price, that was the high fiscal deficit and a following huge debt load. Although, it wasn’t too tough to predict that Greece will go under such a crisis because in 2000 it exceeded the limits attached with EU’s stability and growth pact and that is Greece’s debt to GDP ratio was 103 % in 2000 whereas the maximum percentage permissible according to the pact was 60%. Also, its deficit as a percentage of GDP was 3.7% in 2000 whereas the maximum permissible percentage was 3%. In 2008-09 in the aftermath of the financial crisis, investors got shaken up and started focussing on the huge load of sovereign debt of the US and Europe. When it came to the investors minds that there could be a default in their payments then they started demanding higher yields as a compensation for the added risk.

THE BOTTOM LINE:
The Greek debt crisis had its origins in the fiscal profligacy of previous governments, proving that like individuals, nations cannot afford to live way beyond their means. As a result, Greeks may have to live with stiff austerity measures for years.