Macroeconomic issue in greece

 

 

 

 

 

 

Macroeconomic Issue in Greece

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Macroeconomic Issue in Greece

Background to Greece Economic Fallout

The year 2009 saw a budget deficit that was 15 percent above the Gross Domestic Product. There was widespread fear that the nation may default on its loans resulting in a spread on its ten-year bond. Ultimately, there was a collapse in the Greece bond market, shutting down the nation's ability to finance the debt repayment. From the year 2010 to 2012, the rates on the ten-year bond rose beyond 35% (Ozturk, & Sozdemir, 2015). 2012 was a relief for the nation as private bondholders settled for debt restructuring that enabling them to exchange 77 billion Euros worth of bonds for a 75% reduction in debt (Ozturk, & Sozdemir, 2015). By analyzing the Greece debt crisis, the cause and impact of it will be unearthed. The impact of the government's action and effect of the response is also evident.

Cause of the Greece Financial Crisis

The Greece crisis has a long history; issues began when the nation adopted the use of the euro as the nation's currency. Greece had been a member of the European Union but had been restricted from joining the eurozone due to the budget deficit (Papadimitriou, Pegasiou, & Zartaloudis, 2018). The budget failed to meet the Maastricht criteria. After being accepted as a member of the eurozone, the nation was able to enjoy a lower rate of interest, more investment capital, and loans. When Greece announced that it didn't meet the Maastricht criteria in 2004, no actions were taken against the nation since the EU desired to strengthen the euro in international markets (Papadimitriou et al., 2014).  Consequently, the debt continued to rise until 2008, when the crisis erupted.

Despite the lack of action by the EU to tame Greece for lying on the Maastricht criteria, there had also been a high level of borrowing by leaders. Government, over time, borrowed beyond the nation's capacity, and the level of public debt became too high (Ozturk, & Sozdemir, 2015). Investors were not willing to finance the Greek government, and the only way out was a financial bailout (Walker, 2019). Seeking for a bailout without consultation from other European leaders brought about the surge in the financial crisis.

Impact of the crisis

With the nation in a financial crisis, deep conversations were held in an attempt to seek a solution. Greece attempted to leave the EU, but this was stopped as it would only worsen the issue. For instance, other nations would be tempted to leave the eurozone, or the risk to global markets (Papadimitriou et al., 2014). Bailout programs were rolled out with the first one been received in 2010. Henceforth, the nation relied on international creditors to ensure that its financials remained afloat.

The financial bailouts had harsh terms on the nation. Deep budget cuts were needed, and Greece citizens saw a sharp increase in taxes. The lenders required that the government streamline the government, reduce tax evasion, and make it easier for foreigners to do business. Debt hangover may have aggravated the nation's economic downturn with repayments scheduled until 2060.       

Government Response to the Debt Crisis

Remaining in the EU

With the massive debt, the nation had to follow the terms of the creditors. Greece was therefore forced to remain in the European Union. Most of the banks would have gone bankrupt if there was no intervention in the form of loans from the European central bank (Walker, 2019). Loses in the Greece banks would have threatened the sovereignty of other banks within the European Union.

Tax Capturing Techniques

As per The New York Times, (2016), the government also encouraged the use of credit and debit cards as a way to pay for goods or services; this is aimed at reducing the amount of cash-only payments. Taxpayers were granted tax allowance when their payments were made electronically (The New York Times, 2016). The paper or electronic trail would make it easier for the government to audit. The move attempted to stop companies from avoiding the payment of VAT and income tax. Moreover, established businesses were required to have a point of sale system (POS), thus accepting payments via cards. The use of cards has increased VAT collection.

Impact of Greece response

            The need to seek clearance from top authorities has increased the level of bureaucracy. With the crisis the government has shrunk, the level of political patronage has increased, resulting in slower response time (Amaro, 2019. The nation's bureaucracy has brought about a delay in the sale of state-owned assets. Thus 50 billion Euros are still held as assets.   

            With the need to have a paper trail, tax evasion has gone underground. More people are forced to operate in the black economy, which currently comprises 21.5 % of the GDP (Ozturk, & Sozdemir, 2015). Few people are paying a higher amount of taxes but receiving less from the government. Most of the jobs available are either part-time with less pay (Walker, 2019). Financial institutions have recuperated, and they are making fewer loans to existing businesses. The introduction of capital controls means less amount of money circulating in the economy.

Conclusion and Recommendations

            Just like other nations that have fallen into a financial crisis, the Greece crisis was caused by unaccountability from the leaders backed up by imprudent financial decisions. From the start of the issue. Greece had been locked out of the eurozone due to financial inefficiency. The use of deceit to get into the eurozone opened a Pandora box that set the nation into debt for generations to come. As a way to the future, it is ideal that public awareness is created, and there is financial transparency in the government. From the case of Greece government, it is evident that fraudulent transactions, a fake credit rating played a significant role in the rise of the national debt. With the crisis, citizens are bound to suffer for long.

 

 

References

Amaro, S. (2019, March 14). Greece's financial crisis still evokes pain and fear on the streets of Athens: 'We just have to smile, pretend.' Retrieved from https://www.cnbc.com/2019/03/14/greece-financial-crisis-still-evokes-pain-and-fear-in-athens.html.

Ozturk, S., & Sozdemir, A. (2015). Effects of Global Financial Crisis on Greece Economy. Procedia Economics and Finance, 23, 568–575. doi: 10.1016/s2212-5671(15)00441-4

Papadimitriou, D., Pegasiou, A., & Zartaloudis, S. (2018). European elites and the narrative of the Greek crisis: A discursive institutionalist analysis. European Journal of Political Research, 58(2), 435–464. Doi: 10.1111/1475-6765.12287

The New York Times. (2016, June 17). Explaining Greece's Debt Crisis. Retrieved October 6, 2019, from https://www.nytimes.com/interactive/2016/business/international/greece-debt-crisis-euro.html.

Walker, T. E. & A. (2019, July 5). Greek debt crisis: 'I wasn't paid for two years.' Retrieved October 6, 2019, from https://www.bbc.com/news/business-48845145.