Greece, the weak link in the eurozone, is struggling to pay its debt as its people and its creditors grow more restive. The tumult poses a challenge to the euro and the Continent's goal of economic unity. If Greece goes bankrupt or decides to leave the 19-nation eurozone, the situation could create instability in the region whoose consequences will reverberate around the globe.
Greece's debt crisis has a highly complex backdrop rather than just being about whether the tiny country with it's rich mythological history will default on its debt or leave the eurozone. The crisis is like the historical canary in a coal mine, warning of the dangers facing other heavily indebted countries.
Greece's debt crisis has a highly complex backdrop rather than just being about whether the tiny country with it's rich mythological history will default on its debt or leave the eurozone. The crisis is like the historical canary in a coal mine, warning of the dangers facing other heavily indebted countries.
What really happened in Greece?
After Wall Street imploded in 2008, Greece became the epicenter of Europe's debt crisis. With global financial markets still reeling, Greece announced in October 2009 that it had been understating its deficit figures for years, raising alarms about the soundness of Greek finances. It admitted that its budget deficit was 12.9% of GDP; that's more than four times the EU's 3% limit. This scared off investors who lowered Greece's credit ratings. It also drove up the cost of future loans, making it even more unlikely that Greece could find the funds to repay its debt.
To avert the financial calamity that Greece was already heading towards, the IMF, the European Central Bank and the European Commission issued the fist international bailout for Greece, that is, a total of 120 billion euros. However, the bailouts came with certain conditions. Harsh austerity terms were imposed that required deep budget cuts and steep tax increases. They also required Greece to overhaul its economy by streamlining the government thereby, ending tax evasion.
The bailout was supposed to buy Greece time to stabilise its finance, however, it didn't work as expected, as the economy had already shrunk by a quarter in five years and unemployment was about 25%. This was mainly because the bailout money primarily went towards paying off Greece's international loans, rather than making its way into the economy.
After Wall Street imploded in 2008, Greece became the epicenter of Europe's debt crisis. With global financial markets still reeling, Greece announced in October 2009 that it had been understating its deficit figures for years, raising alarms about the soundness of Greek finances. It admitted that its budget deficit was 12.9% of GDP; that's more than four times the EU's 3% limit. This scared off investors who lowered Greece's credit ratings. It also drove up the cost of future loans, making it even more unlikely that Greece could find the funds to repay its debt.
To avert the financial calamity that Greece was already heading towards, the IMF, the European Central Bank and the European Commission issued the fist international bailout for Greece, that is, a total of 120 billion euros. However, the bailouts came with certain conditions. Harsh austerity terms were imposed that required deep budget cuts and steep tax increases. They also required Greece to overhaul its economy by streamlining the government thereby, ending tax evasion.
The bailout was supposed to buy Greece time to stabilise its finance, however, it didn't work as expected, as the economy had already shrunk by a quarter in five years and unemployment was about 25%. This was mainly because the bailout money primarily went towards paying off Greece's international loans, rather than making its way into the economy.
Many economists, and many Greeks, blame the austerity measures for much of the country's continuing problems, however the country's creditors, especially Germany place the blame on Athens for failing to conduct the economic overhaul required under its bailout. The only thing everyone agrees on is that Greece is yet again running out of money-and fast.
Some people argue that if Greece were to leave the currency union now, it wouldn't be such a catastrophe. Europe has put up safeguards to limit the financial contagion, in an effort to keep the problems from spreading to other countries. While others say that despite the frustration of endless negotiations, European political leaders see a united Europe as an imperative. They also worry that if Greece were to default and leave the eurozone, it could ignite turmoil in the financial markets that might stall the budding recovery in Europe and impede the United State's rebound.
Some people argue that if Greece were to leave the currency union now, it wouldn't be such a catastrophe. Europe has put up safeguards to limit the financial contagion, in an effort to keep the problems from spreading to other countries. While others say that despite the frustration of endless negotiations, European political leaders see a united Europe as an imperative. They also worry that if Greece were to default and leave the eurozone, it could ignite turmoil in the financial markets that might stall the budding recovery in Europe and impede the United State's rebound.
Well, we'll have to wait to find out what happens in the future for Greece.
Manvi Govil
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