It was not until recently that Greece was known for something other than its classical civilisation, contribution to ancient science and philosophy and the Olympics. But now, ask anyone about Greece and you will hear grave news regarding a crippling debt crisis that has engulfed the European nation.
Greece is considered to be a developed nation, with a high standard of living and attained a high rank of 25 in 2009 in the Human Development Index. Even though it has been plagued by rising unemployment rates, an inefficient bureaucracy, tax evasion and rampant corruption, the Greek economy has been developing at a steady rate from the early nineties and has the 25th highest GDP per capita in the world.
But now, Greece finds itself plunged in a huge debt crisis. Opinion is divided as to how Greece got itself into this mess but there is no doubt that urgent and drastic measures are required to haul the nation out of the crisis.
What went wrong?
During the years of the economic boom all around the world, the Greek economy coasted along, attracting significant capital inflows from all around the world. At this time, the wages and the prices of goods went up steadily. Greece relies a lot on imports from the rest of Europe, especially Germany.
Then came along the financial crisis of 2009. The crisis took its toll on many of the companies operating in Greece and this resulted in the plummeting of wages. But the price of the imported goods, mainly from Germany, remained at the previous high. Greece’s main industries are shipping and tourism, extremely sensitive to changes in the business scenario across the globe.
Earlier, the Greek government could have just adjusted the value of the Greek Drachma to the German Mark to account for the disparity between wages and prices. But, on January1, 2001, Greece made the Euro as its accepted currency, as did the rest of Europe. Thus, the only way to solve the disparity between Greek wages and prices were a huge inflation in Germany or an equally drastic deflation in Greece. As the Germans would never accept the first possibility, deflation it was.
Years of unrestrained public spending from the government and failure to implement financial reform left the economy vulnerable to the crisis. The Greek government had borrowed heavily to finance its public spending and thus accumulated a staggering debt, which is now larger than its own GDP. To add insult to injury, the Greek economy has shown a negative growth rate since the financial crisis. Fears of Greece defaulting on its international loans mounted and in April this year, the government requested a bail out and the IMF stepped in.
Some politicians, especially Angela Merkel, the German Chancellor, has gone on record to say that hedge funds and other speculators played a major role in the Greek crisis. She accused such entities of exploiting the situation in Greece to their advantage.
The way forward
Greece has accepted the EU/IMF bail out worth 45 billion euros. Germany too has chipped in with a bail out package. On May 1, a slew of austerity measures were put into practice by the government as a part of the IMF assistance. Greece’s credit rating has been given a BB+ (junk) rating by Standard and Poor’s, meaning Greece will be viewed as a financial black hole for quite some time by other countries. The Greek government has had to cut down on all its pre-election promises to devote every resource available to this pressing issue.
Greece has to achieve relative deflation now to regain some competitiveness in the future. This would mean that there will still be high costs associated with employment and output. More fiscal difficulties like spending cuts and tax increases are in the offing. The government has raised taxes on tobacco, alcohol and fuel, cut pensions and has raised the retirement age.
All these are part of the IMF package. The IMF will take over the economy and implement a few harsh changes designed to rescue Greece from its crisis.
The public reaction to the whole situation has been negative, especially after the IMF took over. Strikes have been rampant, with a few of them turning violent. Resistance from various sectors of the workforce is also feared. Airports, seaports, factories, government offices and schools have remained closed as people take to the streets. On May 5, a nationwide general strike was proclaimed. The strike turned violent and three people were killed and more than a hundred injured. The economy is already in a sorry state and such action from the citizens will only further impair the Greek economy.
The crisis has affected Europe as a whole. The Euro has slid down in value and the stock market has responded negatively to the whole situation. Angela Merkel, urged the German Parliament to pass the bail out package saying “Quite simply, Europe’s future is at stake”. Some analysts have blamed Greece’s choice of the Euro over Drachma as one of the root causes of the crisis. Also, some other European nations such as Spain are on the verge of a similar crisis, albeit on a smaller scale. All this has sent alarm signals all over the world and it will be some time before the European economy recovers to prosperity.
Aju Basil James