The Economic Crisis in Greece
Greece was originally given large amounts of money by the EU to reform its economy so it could become a productive member of the European Community. When Greece joined the Euro, hopes were high that a new strong currency would turn Greece into a wealthier more prosperous nation. Loans were much easier to come by, as many investors saw members of the Eurozone (European countries on the Euro) a sound investments. With credit easily available, many individuals and businesses took out large sums of money in light of good economic times. In the years following the Athens Olympics in 2004, it seemed the EU’s investment had finally begun to pay off. Low interest rates led to more spending which helped boost the Greek and global economy. Improvements on infrastructure for the 2004 games and increased availability of credit helped boost the Greek economy by around 4%. In these years, Greece finally met the EU budget crisis criteria. However, in the following years, government revenues from tazxes decreased, while government spending remained high with the security of a strong global economy. Overspending led to a growing national debt, which once again exceeded EU regulations. In 2009, the global recession struck and Greece was severely hit. The national debt spiked to over 15% of Greece’s GDP, shocking many other European nations. In 2010, emergency measures reduced the debt to 9.4%, still over triple the EU limit of 3%. Unemployment rates also exceeded eurozone averages at 12%.
The recession itself was initially kick-started by the failure of the American bank Lehman Brothers. Lehman had borrowed extensively and as a result owed billions to companies and other banks. The bank’s collapse lead to billions of dollars of losses to corporations around the globe, and the resulting economic downturn progressed into a full blown recession. Many other banks such as AGI failed, starting a downward spiral for the United States economy. As the United State’s recession turned into a global recession, Athens announced that its debt was double what was originally reported. Investors and bond traders quickly cashed in their loans to Greece, causing interest rates on Greek bonds to soar.
The Central European Bank began buying Greek, Portuguese and Spanish bonds shortly after the plan was announced. Economists stated that speedy economic recovery would only occur if governments were committed to being fiscally responsible (2fact). However, despite the efforts to attract foreign investment, many investors have shied away from riskier investments (such as bonds from Greece). Stock markets continued to fall due to concerns of Greece’s collapse spreading to other countries.
With the failure of Greece’s economy and the impending fall of the Irish, Portuguese and Spanish economies, some economists say that the euro may cease to exist within the next few years. European affairs expert Defarge states that “This is a very deep crisis for the euro and all of Europe because what we have is a terrible debt and deficit problem that virtually all European nations share and no collective structures to deal with any of it.” Some experts speculate that problems in Greece, Ireland, Spain and Portugal will devalue the euro to the point where it will collapse in on itself. Another expert, Hancke, notes that “The problem is that monetary union was never followed up by political union to coordinate budget and taxation practices and create euro-zone institutions and capacities to help member economies adapt to changes and turmoil. The result is member governments are left very few ways to deal with the current attack on Greek debt and the severe pressure that it’s putting on the euro.” It may come to a point where only the economically sound countries remain on the euro, kicking out Greece and other problem countries. This situation might occur if the value of Greece’s bonds were reduced to nothing, which would negate any attempts to save the sinking Greek economy. At that point, economists speculate that other struggling countries would follow suit and only the core members of the eurozone would remain, which would have lost its founding principle of uniting Europe economically.
As it stands today, Greece may have to leave the euro to keep itself from drowning further in debt. The interest on Greece’s long term bonds stands at a staggering 15%, which would be unsustainable for most countries even under good economic times. For Greece, the high interest rates mean that it almost certainly can’t recover on its own unless drastic measures are taken, and it seems that the Greek are moving in that direction. In early May, German magazine Der Spiegel reported that Greece was considering leaving the euro. Such a move would allow Greece to print more paper money to devalue its own currency. The move would be very costly for Greece in the short term, and the human sacrifice among the lower classes would be enormous, but the move would hopefully prove beneficial for Greece in the long run as it did for Argentina when it broke from the dollar in the early 2000’s. Aside from devaluing their currency, leaving the eurozone would also leave behind very tight fiscal and monetary controls and regulations which are currently stunting Greek economic growth.
Europe as a whole is struggling to contain the economic troubles of Greece. As Greece moves to restructure its debt, many warn that the restructuring would affect the credit rating of other European nations, as well as a downgrading on the rating of Greek banks. But Greece is suffering in the harsh economy and under the stringent measures it has adopted to reduce government spending. The rest of the eurozone is also suffering with the effort of containing economic chrysies. Specialists say that the cost of bailing-out Greece, Ireland and Portugal is manageable for the other eurozone countries since the countries make up a fairly small portion of the zone’s total output. However, specialists say that rescuing Spain and Italy in the same manner as Greece, Ireland and Portugal would be extremely costly for the eurozone. As conditions worsen in Spain (which already has suffered large budget and a 21% unemployment rate) the euro continues to fall as investors look away from the riskier European bonds to the safer United States government bonds.
As expected, the value of the euro has dropped amidst the chrysies in Greece, Ireland and Portugal. Even after bailing-out Greece with almost 135 billion euros, the value of the euro continues to fall. With no central bank in the EU, countries were forced to rely on private banks, increasing the risk for future debt issues. Even with more credit flowing, most economists speculate that buying up Greek, Italian, Portuguese and Spanish bonds will not work as a long term solution to the current crisis. As the euro fell last year, it dragged down the dollar and other global markets with it, stirring up fears across the globe of a deep global recession.
With such heavy cuts in social services and a raise in taxes, many Greeks have taken to the streets in protest of the government’s actions. The major protests began in lieu of the proposed austerity measure cuts. The strike was successful, on May 5th, 2010, airplane, train and ferry services ceased to operate within the country. Schools, hospitals and businesses also closed their doors to the public. Approximately 100,000 people marched through the streets of Athens. A group of protestors attempted to storm the parliament building. The protestors clashed with the riot police, who through the use of teargas, flash-bangs and smoke grenades managed to control the crowd. As the austerity measures failed to improve conditions in Greece and a new political issue arose, dissatisfaction in the Greece public grew, leading to more strikes in 2011. As of May 2011, there have been continued riots against the harsh austerity measures put in place. The peaceful protests have taken in place in many of Greece’s most populated cities and very much resemble other protests of 2011. The internet has once again played a large role in these protests, with much of the coordination being done via social network sites like Facebook, where the riots in Athens and Thessaloniki (Greece’s 2nd largest city) are being coordinated.
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