The Greek Debt Crisis: Causes and Effects

It was not more than a month ago when all the newspapers were flooded with news of Greek Debt Crisis. “How Greek Economic Crisis is affecting the World?”, “Why such crisis in Greece?” were usual newspaper headlines. We all have heard about Greek crisis but not all of us are really aware of actual the causes and impacts, so here we are explaining the same.

Greek debt crisis or the Eurozone debt crisis resulted failure of euro, the single currency which tied together 17 European countries. In recent past world has witnessed the Greek, Portuguese, Ireland and Italy’s blink of financial collapse, threatening to bring the entire Europe down and thus the entire world. Before we talk more about present Greek situation lets discuss about some historical aspects. In most of the European history all the countries had war among themselves, which finally resulted in various business barriers. There were many trade barriers, tariffs and different currencies, which made the conditions worse for business across the borders. It was only the world war-II era when Europe as a whole suffered devastation, in such worst conditions the best way to improve was to remove trade barriers and increase business among different countries. Within next few decades all European countries joined hands to reduce trade barriers and cost of doing business, which finally resulted in formation of European Union with 27 countries signed Maastricht treaty. In 1999 one of the major obstacle that was different currencies removed and whole European Union accepted Euro. Each different country stopped controlling their monetary policies which was now controlled by European Central Bank (ECB), although they controlled their fiscal policies which lead to such crisis. At this stage lets clear the differences between monetary and fiscal policies, monetary policy refers to those policies which controls the money supply and interest rates for borrowing and lending the money whereas fiscal policies are those which controls the government’s expenditure and tax policy.

Before Euro countries like Greece had to pay high interest rates (about 18%) to borrow money, as lenders were not that comfortable to give too much money to such countries but now as it is a part of European Union & follows new monetary policies the amount can be skyrocketed. Suddenly smaller countries had access to huge amount of money which they never had access before and the interest rate were as less as 3%. Joining European Union was like having a guarantor like Germany, which make lenders feel comfortable and lenders believed that in case of any problem Germany will step in and repay the debt. Due to this assurance Greece increased its deficit spending, politicians for their own sake made promises of more jobs and high pension, all of this could only be done with new money which they borrowed from lenders. This finally resulted more and more borrowing to repay the debt and unbalanced fiscal policies. Countries like Greece could survive only if they could borrow money. Things were going smoothly but due to sudden collapse in US housing market the availability of money for Greece reduced exponentially. Which resulted in well-known Greek debt crisis.

After 2008 Greece had no one who can lend some money to Greece. This situation finally resulted in reduction in government’s spending, people working in public sector were fired from the job, universities, hospitals, and schools all faced major unemployment. Government being the largest spender in any economy constitutes a ton in market’s performance, which all fallen down as government reduced spending. There were agitation, protest, riots and mistrust among the people which worsen the situation. Greece borrowed much more than it could actually pay and increasing load of repayment was squeezing the country. Everyone looked at Germany for help being strongest economy among the European Union countries Germany stepped in with some conditions, Germany asked to impose Austerity measures. Austerity measures refers to condition where a country agree to reduce its spending and borrow and pay the debt back, although it seems to be the best solution but it is not, no one want austerity and the reason behind it is that reduction in government spending leads to slow down the economy growth which leads to lowering down the income of people and thus payable tax reduces which further reduces government’s income and this leads to a serious problem. Germany also wanted Greece to cut unnecessary expenditure on hefty pension. In response to all this pressure Greek government imposed capital controls and what is called ‘bank holiday’, it limited the money people can use in a single day, that leads to a huge collapse in the economy. There are budget cuts and huge unemployment hit Greece.

On July 5 2015, Greek people vote on a referendum on debt bailout conditions. A large majority of Greek citizens voted to reject the bailout terms (a 61% to 39% decision with 62.5% voter turnout). This caused indexes worldwide to tumble, as many are now uncertain about Greece's future, fearing a potential exit from the European Union. On July 13, after 17 hours of negotiations, Eurozone leaders reached a provisional agreement on a third bailout program to save Greece from bankruptcy. But a final deal needs further negotiations, and requires ratification in several national parliaments.

#politics