Financial Crisis in Greece: Origin and Aspects

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Introduction

Greece faces economic hardships caused by both internal and external factors. There is hope for recovery through various proposals available. Unfortunately, citizens and authorities in Greece do not agree on which method of recovery is suitable. This essay seeks to establish the nature and origin of the crisis, Greece’s advantages and disadvantages in the Eurozone, and Greece’s fiscal policy.

Nature and Origin of the Financial Crisis

The current financial tragedy has its roots in the Eurozone financial crisis of 2008, which led to a sudden increase in public debt in developed economies. Greece became a victim of this tragedy due to three key factors (Kouretas). First, a weak political structure characterized by corruption and mismanagement of public resources led to a rise in public debt. Greece had the highest public debt in the Eurozone as it went beyond the 100% mark (Kouretas). Secondly, a lack of accurate prediction by financial markets concerning the infamous semi-prime mortgage credit crisis of 2007 in the United States of America led to a downgrading of Greece and other peripheral states and consequent withdrawal of Greece and other states from international bonds market (Kouretas). Lastly, Eurozone governments showed no interest in bailing out Greece, as did the European Central Bank due to lack of political union (Kouretas).

Benefits Greece Derives from Being Part of the Euro Zone

Greece derives several benefits by remaining a member of the European Monetary Union. Embracing Euro enables business people and customers in Greece to compare the value of goods and services among member countries (Simmons). In other words, this would increase integrity in business circles because of transparency in prices of similar commodities. Consequently, it will enhance cross border trade and add to competitive forces among member countries. Consumers are bound to enjoy lower prices, thus increasing consumer welfare (Simmons).

Another related school of thought states that embracing the Euro lowers exchange rate anxiety, which would, in turn, result in a lower cost of doing business for corporations and tourists. This leads to increased profits by corporations leading to high dividends for shareholders and increased revenues for Greece government (Makris). Reduced cost of doing business translates to increased trade in Greece and enhances competition for products and financial services (Indiana University). Increased competition would force corporations to invest in research and development, leading to better goods and services and increased productivity. In the end, member countries would certainly encourage specialization and a further rise in production (Indiana University).

Adopting a common currency makes it easier to secure foreign funding, especially within the Eurozone. This would cushion Greece from the further financial crisis and encourage foreign investors to establish multinational corporations in Greece (Tavlas). Such local and international investments in Greece would lead to increased job opportunities for the largely unemployed citizenry coupled with improved salaries and wages. In the end, savings levels would increase, thus providing financial companies with funds for issuance of credit to investors and Greece government as well (Tavlas).

Effects of Leaving Eurozone on Monetary Policy, Fiscal Policy, and Debt Financing

Leaving the Eurozone and reverting to Greek currency, the drachma, would force Greece to devalue the drachma. This would increase liability on the part of the government since the current debt is set in terms of Euros. Devaluation of a currency leads to high inflation levels in a country and probable civil strikes. Debt already owed to foreign countries and institutions would be too large in terms of local currency (Makris). Since the government needs revenue to fund programs, the government of Greece will impose more taxes on citizens and cut down its yearly budgets. Further, reverting to the drachma would probably force the government to default on local loans leading to financial losses by the financial service providers in Greece (Makris). Other than the default, the government would over-rely on internal funding leading to increased credit rates and lack of economic growth since common people would find it hard to borrow from banks.

Works Cited

Indiana University. The Euro and Greece Explained. 2011. Web.

Kouretas, Georgios P. The Greek Crisis: Causes and Implications. 2010. Web.

Makris, Miltiadis. The case for Greece not exiting the Eurozone. 2013. Web.

Simmons, Amy. A Greek exit: How would it work? 2012. Web.

Tavlas, George S. Benefits and Costs of Entering the Eurozone. n.d. Web.

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Financial Crisis in Greece: Origin and Aspects

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