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An Essay on the Reasons of the Debt Crisis in Greece
The Greek government debt crisis was the sovereign debt crisis faced by Greece within the aftermath of the financial crisis of 2007–08. Widely known within the country because the crisis, it reached the populace as a series of sudden reforms and austerity measures that led to impoverishment and loss of income and property, furthermore as a small-scale humanitarian crisis. In all, the Greek economy suffered the longest recession of any advanced laissez-faire economy thus far, overtaking the US Great Depression. As a result, the Greek form of government has been upended, social exclusion increased, and many thousands of well-educated Greeks have left the country.
There are various reasons for the general public debt in Greece. These are divided into internal and external. Internal reasons are understood as those who is influenced by the Greek state itself with political or economic measures. The external reasons, however, can’t be influenced directly or not in the least by Greece.
The national budgets of the member states showed high deficits even before the one currency. These developed into debt and will transform state bankruptcy. This also applied to Greece. Compared to Germany, Greece had accounting deficits amounting to 14.5% of GDP. On the opposite hand, Germany with a surplus of 7.5% of GDP. Some high-exporting countries within the eurozone had more savings than investments. For others, the other was true. Within the accounting, whose components are often put together from the exchange goods, the services, the first income and also the secondary income, this fact is mapped. the actual fact that an economy produces quite consuming foreign and own goods, points to an accounting surplus. Thus, such an operating economy builds up foreign assets. For countries with an accounting deficit, the entire thing is strictly the opposite way around. With them, more foreign and own goods are consumed than produced. The external debt of the Greek state already went up between 2001 and 2007 as results of accounting deficits. Decisive factors were also falling prices and therefore the associated increase within the yield on Greek government bonds. Thus, the liquidity of the state was directly threatened. Excessive borrowing by Greek companies and households was chargeable for the event of sovereign and foreign debt. The loans couldn’t be got the foremost part. Bank failures, a loss of confidence and a pointy collapse of the economy followed. As later seen in an exceedingly rising debt, clear handicaps for the general public household were connected.
The huge reduction within the competitiveness of the Greek economy is one amongst the most causes of the crisis. Here, labor costs have risen significantly faster than productivity. In 2011, pension increases represented 11% of Greece’s GDP, the best within the eurozone. The privatization of enterprises and thus also the private economic activity was strongly impeded by the general public administration. Compensating for slumps in exports with improvements in services was also unsuccessful. As a result, the Greek state lived far beyond its means and has become immensely indebted. A failed economy and structural deficits are therefore sometimes the most causes of Greek financial problems.
What Greece had no direct influence on were the external causes. The change of currency has given many member states positive and negative consequences. However, the Greek state soon had to appreciate that seemingly positive consequences quickly developed as negative ones. These supposedly positive effects include easier accessibility to capital and therefore the reform of the Greek banking sector. Before the reform, there was an upper limit of € 25,000 for line at one credit institution. This was lifted to realize a homogenization within Europe. Thus, banks were able to issue consumer loans in unlimited amounts. Further reforms, like the reduction of the reserve requirement of 12% to the standard 2% within the EU cleared the way for easier borrowing conditions, resulting in higher private sector debt and a deteriorated banks’ risk balance.
The adoption of the only currency led in opposition to the supposedly positive con-sequences to negative effects. The change automatically made the member states lose control of their own currency. Thus, the associated risk of insolvency followed, in contrast to highly indebted countries with their own currency like Japan, the USA or England. A rustic with its own currency should buy up government bonds of its own country at any time through its own financial institution. Practically, these countries cannot run into a shortage of liquidity because they’ll create the cash, they have to repay themselves. In a very monetary union, this possibility doesn’t exist. Additionally, a rustic within a monetary union also lacks the means of devaluing its own currency. This will correct one’s own competitiveness. For Greece, this may be invaluable.
Additionally, there’s the insufficient risk assessment of Greek debt. Theoretically, the over-indebtedness of a rustic should be prevented from the markets ahead. The markets are guilty of controlling and that they have the ability to try to do so. The individual valuation of a rustic and therefore the corresponding risk surcharge for one with high debt and deficit ratios result in high borrowing costs, thus preventing a dangerously high level of capital rising. Within the case of Greece’s crisis, this was neglected excessively. In Greece, more and more government bonds were in demand as a secure investment over an extended period of your time. That the chance rose with each new bond wasn’t considered. The more government bonds are issued, the upper the interest burden that results. Greece reached a stifling level of interest.
So, as this essay shows, there were several reasons behind the Greek debt crisis that started in late 2009. Overall, however, it was driven by the shocks of the global Great Recession, the structural weaknesses of the Greek economy, and the lack of monetary policy flexibility as a member of the eurozone.
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