Greece is not experiencing this the first time. It has always remained a cursed entity in the Eurozone which always needed attention from Germany and other Eurozone countries. The story starts back when Euro came in to existence on January 1, 1999 with 11 countries replacing their national currencies with Euro. However, Greece was not considered to be a part of this group as it failed in fulfilling the two main conditions of Stability and Growth Pact.
So, what are these two conditions?
- Government Deficit: It should not be more than 3% of GDP annually.
- National Debt: It should be less than 60 % of GDP.
Greece had to follow these two conditions as it was followed for Germany and France. Needless to say Germany and France are the dominating countries in the Eurozone. It was not an easy way for Greece as the economy was not strong at that time. But the benefits of entering into the Eurozone were very huge because of tourism. Greece is considered to be one of the best holiday destinations among all the European countries and using Euro as national currency will help in doing businesses and transaction in the Eurozone. It led Investors and banks pump in money in Greece. The economy started reviving and it did very well in the 2000’s.
However, many sectors as expected did not get the expected benefit from the euro. On the other hand it created differences between economies in the Eurozone. Many countries had higher productivity rates than Greece which led production at a cheaper rate. As production went low, productivity decreased and labor wage went down thereby affecting the labourers. Now, if Greece wanted to have production it had to pay high labor charges which would have resulted in higher production cost.
It was not a big issue for Greece because it could sell its products at a cheaper price by devaluing its currency. This however was not possible because it did not have control over its currency – the Euro. On the other hand Germany which was the strongest economy and accounted for almost 20 % of the total Eurozone’s economy became stronger because of high productivity and low cost. Meanwhile Greece signed the treaty of Maastricht, which stated “no bailout policy” which meant that it would be Greece who will be responsible if it defaults and is not able to pay, other members will not be responsible to bail it out.
However, Greece had got a few benefits which no one anticipated at that time. As Greece was in the Eurozone and it was following the rules of the Stability and Growth Pact. Investors interpreted that the risk aversion of Greece is as equal to Germany. This led to heavy investment of money and that too at the cheaper rate. Greece borrowed heavily and invested in developing its infrastructure like roads, bridges and tourism. In 2004, it hosted Summer Olympics which did bring Euros and tourism in Greece. However, it was not a big benefit to the economy as the Olympic stadium is hardly being used after the Olympics.
Now, Greece had a lot of debt to repay back with heavy interest on it which was getting added every year. Meanwhile in 2004, Germany and France broke the two conditions of the Stability and Growth Pact and they rewrote the rules. So in a nutshell, no member of the Eurozone was obliged to follow these two conditions. This started making investors wary of the situation and they started taking money off from the country realizing that the risk aversions of Germany and Greece are not same.
In 2008, when recession happened Greece was not in a position to handle its debt and it did not have even enough money to pay the interest. It created a big issue for Greece because it could neither control Euro nor it could print extra currency.
There were only two options left for Greece:
- To grow economy: As explained earlier this was not possible because the production in Greece was at an all-time low.
- Introduce an Austerity program: By this, the government would spend less money and would increase taxes which would reduce the government deficit.
Greece went for the second option. On account of this, the government had to make many unpopular decisions like increasing retirement age, salary cut and freezing the new hiring process. This led to an increment in the unemployment rates.People started protesting on roads thereby creating a chaos and the government thus had to accept a bailout of $145 billion from IMF which would help Greece pay its bill for next 3 years. In return, Greece had to continue its Austerity program and start production at a cheaper rate.
The uneasiness and extra financial burden led in emergence of new party Syriza. This party promised to increase the minimum wage, high pensions, and raise the poor standard of living across Greece, practically by Europe writing off a large part of Greece's debt. Syriza wins the January 2015 election from an old government ruled by New Democracy. New Democracy was incompetent in carrying out years of austerity measures which lead to a deep recession by trying to meet the terms of the massive EU bailout.
The road ahead for Greece will not be easy as it has cost involved in going with one of the options in the referendum by either choosing Yes or No. On one side, to be in the Eurozone and ask for a bailout will have tighter monetary policy and low independence, and on the other side going with its own currency will shake its economy as its currency will get devalued lower than what is expected.
Well, needless to say there is immense pressure on the shoulders of Greek Prime Minister Alexis Tsipras in keeping the economy stable and improving manufacturing, export, tourism and currency of the Greek economy. In such a short span of time, there are a lot of decisions which need to be taken for bringing the Greek economy back to its stable position.
Kumar Prashant
The author is a student of Indian Institute of Management Raipur (Batch of 2016) majoring in Finance. He connects himself with guitar and free money finance. He enjoys his leisure time while playing, singing and writing short motivational stories. He can be reached at pgp14085.prashant@iimraipur.ac.in
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