In this article we will talk about history and we will use history books. In next several slides you will see bried history of Grece debt crisis till modern times.
What happened after ?
Greek governments have one after another failed to pull out through any sort of reforms. The Greek problem isn’t something of 2000’s, it goes dozens years back. But the problem has become most evident after the world financial crisis from 2008. Germany of all European economic giants pushes and pressures Greece to undergo serious reforms, and eventually, the Greeks had no other way but to obey to its EU partners. The problem Greece has is that what could happen if the country exits from the eurozone?
Before getting deeper into the story of the Greek Eurozone crisis, first let’s be reminded that the Euro, the currency of the European Union, became effective as of 1st of January of 1999, and Greece entered the eurozone in 2001. On 1st of January 2002, the Euro became officially money to be used in Greece, replacing the Greek money – the drachma.
Modern time – Outtakes of the Greek economic crisis
The leaders of EU member countries, in order to help improve its economy that suffered after the world financial crisis, concluded an agreement in 2008, to form a 200 Billion Euros stimulus package. Four countries were given special orders from the EU before becoming a candidate for receiving a portion of the stimulus package. The countries in question were Spain, Ireland, France, and Greece, and the orders were related to reducing each country’s budget deficits and show more financial stability. In October of 2009, after elections in Greece, won by George Papandreou’s socialist party, the country revealed its overspending and the newly elected government presented more than 300 billion Euros debts.
The dept was as much as 113% of Greece’s GDP, which is almost twice as much as Eurozone limits; 60% debt to GDP ratio. Greek corporate bonds and debt by the government were beginning to downgrade as credit ratings agencies acted upon the Greek debt revelation. High interest rates in turn affected higher costs for borrowing and lowered capital investment.
The European Union investigated the Greek excessive debt and pointed out harsh breaches in accounting procedures of the country. Greek budget deficit was in subsequence adjusted from 3.7% to a remarkably high 12.7%, four times more than the EU rules permitted.
2010 – 2 years after World Crisis
Early stages of 2010 saw whisperings about Greece leaving the Eurozone. However, at that time it did not affect the ECB (European Central Bank). After those rumors, Greece revealed its austerity plan to deal with its deficit. EU’s answer was pointed towards Greece cutting more debts, and in the meantime, protest and riots were looming over Greek largest urban areas. Also, the new government claimed it wasn’t in the need of EBC’s help.
EBC and IMF (International Monetary Fund) made an agreement to offer Greece 30 billion Euros emergency loans in April 2010. Greek debts grew to 13.6% by that time. Just a month after 30B Euros, the IMF injected into Greece’s economy another bailout package of 110B Euros.
However, all the efforts couldn’t help Greek economy to recover. In was 2011 and financial ministers of the EU prepared another 500B Euros. Shortly after that, European politicians raised voices in favor of ejecting Greece from the Eurozone. Greece responded by further cutting costs and spending and another injection in the form of 109B Euros was poured into Greek economy.
Joint forces of the ECB, IMF, and European Comission, together with Greek government agreed to resolve the country’s debt, which the Greeks didn’t see as something in their favor as it meant more austerity. The citizens responded with protests, and the atmosphere in the country was so harsh and dark as unemployment rate was nearing 30% and the bailout size touched 1trillion Euros.
Early elections through 2013, and 2014 didn’t help Greece to recover and persuade nation that austerity measures were the only chance to get the bailout money from Europe.
However, in 2014 Greece managed to issue new bonds and pulled to have its B- credit rating upgrade to B by Fitch.
Another election stroke Greece, as the nation cried for another early election. In December 2014, the country saw a drop of its stock market almost 13%. Failed early election led to announcing another round in January 2015.
May 2015. – first “No” from Greece
In May 2015, in an early election, the Greeks said NO to a duo of parties supporting EU ideas to solve the crisis. However, the attempt by Greece’s president to assemble all the parties – especially the centre-right “New Democracy” and centre-left “Pasok”, which in turn held power in Greece for several decades.
European media had given most chances for another round of election that were to be held in June, to be won by Syriza, which is group of left-winged politicians who were open against austerity. What raised concerns to Europe was the idea that should Greeks exit the eurozone, the contagion could spread to Spain and Italy.
The problems Greece has been facing actually goes way back. The length of this problem is accumulation of decade-long static foreign investment, weak performance in the public sector and fall in being competitive as a global force. The country has really complex business regulations and the tax code is rather dull. Greece came under the EU’s microscope after the Greece’s in 2004 new government revealed the previous cabinet’s faked expenses. It had revealed that the country had had exceeded the eurozone deficit threshold of 3 per cent.
The conservative establishment of the Greece’s government lead by Kostas Karamanlis had taken measures to restore the country’s economic credibility by raising taxes to try pull out the country from deep deficit and reforming entire tax system. Of course, slashing expenditure was one of the measures.
However, EU had called for more cost cuts, as well as did the markets. Common folks saw more difficulties. Thousands of companies were shut down, public places got empty. Simply, life of a common Greek was different – in a bad way. What tourists had known about Greece’s night life could only be seen on the weekends. Getting a bank loan became a real struggle and an adventure.
Number of people without job was crossing 20%, and half of unemployed were aged 18-35.
When the crisis was knocking at the door, ordinary people probably saw the austerity measures as something needed, and had Okayed it. Civil servants and farmers had put on strike, but the public at the time did not recognize it as necessary.
However, by the middle of 2015, the nation started feeling the pinches of austerity and voices of real concern started to be heard.
It has been expected that Greece would eventually exit the eurozone. But if Greece withdraws from eurozone to return back to its drachma, it could lead to disastrous result. Firstly, devaluation, falling of the banking system, and a total collapse of the country’s economy as the unemployment rate would rise due to banking system. Budget would not suit for civil servants pensions and public transport could be shut down.
What Greece can do is try to stay in the eurozone, and with billions of dollars injected by the EU try to rise from the financial mud, or accept the fact that it could exit, and prepare for it.
Staying would mean heavily leaning on the help from the EU, which in turn means it would have to obey more as it would have to attempt to convince markets it will be all right.
One of the former Greek politicians once said: We created this mess and we will solve it – in the Greek way”
Other path leads to print new drachmas which would do low on the market, and as it wouldn’t be solvent, Greece wouldn’t be able to buy enough oil and gas, medicines or food, which clearly, according to this second scenario, is not recommended.
Should Greece exit eurozone, it would damage Greek debt commitments. Those banks that have given loans to Greece would face a huge risk that another credit could crunch. Markets would then focus on Portugal, another country in line with severe deficit problems. Spain has already been seeing this problem of borrowing money, and another country to face it would put more pressure.
The politicians knew that people had wanted letting bailout packages go, accepting the Drachma back and thus putting an end to austerity measures and leaving Eurozone and the bailout packages. Anyway, Greece thus pushed the Euro to the lowest value compared to the USD.
However, everything suggested that taking Drachma back would damage Geek economy more than austerity measures and bailout packages would. One of the main suggestions pointed out that the new currency could be a good platform for creating a dangerous black market, which would leave the country off tax money and would severely damage the possibility to develop economy.
In the scenario of Greece exiting the Eurozone, the ECB would be taken responsible as the body that failed to maintain the credit value of the Euro. Concretely, after giving away one trillion Euros to help Greece stay in the Eurozone, the ECB itself would be stroke by a crisis.
Furthermore, European banks, as well as the global ones, would suffer losses. At that point, EU didn’t need Greece out of the Eurozone, and neither did banks globally.
At the same time, the Greek government didn’t really have other way out but accepting and adopting austerity measures imposed by the European economic powers.