Greece the problem maker
In 2001 Greece joined the Euro. Everything went well at first and Greece was living beyond it’s mean even before it joined the Euro. After it adopted the single currency, public spending went through the roof. For example public sector wages increased by 50% between 1999 and 2007. In 2008 the financial crisis hit and Greece was facing major problems, because they had a huge budget deficit and kept on spending.
With the financial crisis the whole world’s growth slowed down and in 2009 the EU told Greece to reduce their budget deficit. Greece was in major trouble, because they had debt of 113% of GDP. There was no way out and there was a lot to be done to help Greece.
Policy response and the consequences
In May 2010, the EU and IMF provided 110 billion Euros of bailout loans to Greece to help the government pay its creditors. Greece kept on spending and it was not enough and in 2012 a second 130 billion Euros was agreed on. The EU and IMF insisted that Greece should cut their spending, tax rises and labour market and pension reforms. This had a devastating effect on Greece economy which already experienced a recession for four years. It is expected that the Greek economy will shrink a further 4,7% this year. The problem is without economic growth, Greece cannot rely on their own income and the debt write-off will not be enough.
Some of the consequences in short taxes are up, social benefits are down. The minimum wage was decreased. They cut state pensions and reductions in government payrolls. Unemployment increased to 21%. Their economy don’t grow and the living standard has decreased. There is a lot of consequences this crisis had on Greece, so the big question is when will they turn around?
Should Greece go on their own
If Greece don’t repay its creditors it will be a problem, because investors will be more nervous to buy bonds from highly-indebted nations such as Spain. If the investors stop to buy bonds, those governments will not be able to repay their creditors and have a spiral effect.
Greece owes a lot of money to various banks such as the French, Germans etc. If these banks that are already struggling to find enough capital are forced to write off money they will become weaker and the confidence of the entire global banking system will decrease. This will lead to a second credit crunch, where bank lending effectively dries up.
If Greece exit the Euro they can print money to finance government spending. This will lead to a second Zimbabwe. This will not work. These scenarios would be even worse if Greece were to left the Euro.