The Greece Crisis is one of the recent upheaval in the European economy which has been termed by the head of The Bank of England as the “most serious financial crisis since at least the 1930’s, if not ever.” The economy of the world as a whole has been adversely affected considering that the Euro was one of the most dominant currencies until the past two years. Issues from political instability in the country to the US recession crisis, all have affected the European Union and gradually led to this financial crisis.
The root of this issue sprouted at the beginning of this century when Greece joined the European Union. This was after two years of the introduction of the Euro in 1999. This Unification was built on fake budget records which were later revealed stating that the country was in a deficit of more than 3% of its GDP which did not actually meet the conditions of entering the Euro zone.
Several basic and simple conditions put together subsequently acted as catalysts in triggering this severe monetary burden. The first of these was the issue of over spending by the Greek Economy. As soon as Greece joined the European Union in 2001, it evicted Drachmas in exchange of Euros.
This brought them huge financial power and a very strong financial position. They overspent by drastically increasing the public sector wages. Coupled with the existing low retirement age and enormous benefits, an unplanned, continuous and high expenditure responsibility was brought on the government within a short period of time.
Secondly, there was a substantial tax evasion by the Greek population which meant that the government now earned almost negligible from tax revenues. The outflow of money was much greater than inflow. This further guided Athens into taking heavy loans from countries like France and Germany and these three factors began the vicious cycle of the Greece debt crisis.
This debt magnified after Greece hosted the 2004 Olympics and tried to overcome the problem by increasing VAT and taxes on demerit goods like alcohol and tobacco. This austerity budget resulted in an increase in GDP to 4.1% in 2006. This relief was short lived as the New Democracy government was overthrown by -Papandreou’s Panhellenic Socialist Movement Party in 2009.
The new government brought about reforms in order to triumph over this severity by increasing the rate of borrowing. The tax burden was shifted to the middle and lower income class of the country and public sector pays were reduced. This plan backfired as lower bonuses and increasing tax rates were resented by citizens and the country protested. To such an extent that suicides due to financial difficulty are reported till date.
Public sector workers demonstrated against the austerity measures taken by Papandreou. This caused the situation to go out of hand and caused Greece to globally accept the fact that the debt they were in was bigger than their economy itself.
Attempts to come out of these troubled times included numerous pleas for rescue packages ranging from €30 billion to €150 billion from the Euro Zone and the International Monetary Fund in the beginning of 2010 alone. Help was also sought from the US President, Obama by Papandreou while the latter was on a world tour.
The first plea was extended to the IMF in April 2010, which increased Greece’s bailout fund to €45 billion, but it was neither adequate nor properly followed up. Greece demanded more, so later that month there were rumours of a €120 billion bailout by the EU and IMF which, however, were only to bring peace in the markets.
Finally in May 2010, after months and trials of negotiations, the IMF, European Community and the European Central Bank agreed to release Greece off its debts over a three year period plan by offering €110 billion. However, whether this amount will help Greece out of this fiscal crisis or not remains debatable.
While Greece is still facing chaos and disorder, it has been predicted that Greece might have to exit from the Euro Zone after elections later this year in which the latest proposed rescue package is most likely to be rejected. The Greece Crisis has caused intense political, social and economical instability in entire Europe.
With Nicolas Sarkozy losing power in France due to his support for tightening the strings on the national budget and the increasing unemployment rates in Spain, it is likely for the European Union to see the exit of Greece and Spain from its fold. This will deepen the already existing financial crisis in the region and the ripples of the same will be felt across the world.
Saumia Bhatnagar
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