The 'How' and 'Why' of the Greek Government debt Crisis
Post By Shantanu Saxena on 16-April-2015
With a glorious past, vast mythological references and, most important of all, the home to the legendary Greek Gods; It is fairly hard to believe that Greece lies on the verge of bankruptcy. Come 2016, the debt Greece is in is thought to increase to roughly €320 billion; about 174% of the country's economic output, which to say the least is dreadful for both the country and the entire European Union. But how did a country with such a dazzling past succumb to this huge a debt in the first place? The answer is indeed toe-curling.
The seeds were sown back in 2001, when Greece adopted the € as its currency. Greece had been an EU member since 1981, but its annual budget deficit was never low enough to satisfy the Eurozone's Maastricht Criteria. All went well for the first several years; Like other Eurozone countries, Greece benefited from the power of the euro, which meant lower interest rates and an inflow of investment capital and loans. However, in 2004, Greece announced it had lied to get around the Maastricht Criteria. Surprisingly, the EU imposed no sanctions! Why not? There were three reasons.
- France and Germany were also spending above the limit at the time. They'd be hypocritical to sanction Greece until they imposed their own austerity measures first.
- There was uncertainty on exactly what sanctions to apply. They could expel Greece, but that would be highly disruptive and possibly weaken the euro itself, sending the entire economy into a downward spiral.
- The EU wanted to strengthen, not weaken, the power of the euro in international currency markets. A strong euro would convince other EU countries, like the UK, Denmark, Sweden and Switzerland to adopt the euro.
As a result, the Greek debt kept on rising until the crisis erupted.
Another persistent reason to keep the Greek government from paying the debt is tax evasion. Every year, the estimated tax evasion in the country is almost €20 billion. The government has also been ineffective in implementing laws against it, with the government officials themselves involved in scams and corruption throughout. According to a study conducted in 2012, the Greek black market accounts for about 24.6% of the country's GDP, which without doubt is a lot of stolen money. With that kind of money being unaccounted for, it's no surprise that the debt kept on rising until it reached an amount that caught the entire world's attention.
Now, under the current circumstances, there are two scenarios that could unfold. First, either the EU could expel Greece from the Eurozone; but considering the fact that the members of EU have refrained themselves from taking this step even in the past, it is a very unlikely scenario. Also, with expelling Greece comes the danger of the euro taking another dive; and with the USD already at par with the euro, this is one scenario, that if avoided, is best for the economy of the entire world.
The second scenario is even more horrifying; a Greek default. It would have a more immediate effect on the European economy. First, Greek banks, already on the brink, would go bankrupt. Next, losses would threaten the solvency of other European banks, particularly in Germany and France. Even worse, the EU's central bank (ECB) holds a lot of Greek and other sovereign debt. If Greece defaults, it could put the future of the ECB at risk. Other indebted countries might decide, or be forced, to default. Without a central bank to bail them out, the EU itself may not survive. For these reasons, a Greek default would be even worse than the 1998 economic crisis caused by the Russian default.
So what is the best option for both the EU and Greece? Even the world's best economists don't have an answer to this lingering question. With €454 to be paid to the IMF by 9th of April, and many other payments accounting to about €4 billion come May, it is not surprising to watch the EU leaders meet so frequently in Brussels. The Alexis Tsapris led Greek government is doing all it can to come to terms with their payments in time. But will it be enough? Only time will tell.