October 5, 2015
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Greece Crisis


The Greece crisis continues to occupy a center-stage in the global financial markets as of June

  1. The crisis has been brewing for more than six years. The debt crisis originated from the Greek government’s excessive and wasteful expenditure. When Greece became the 10th member of the European Community on January 1, 1981, its economy and finances were in good shape, with a debt to GDP ratio of 28% and a budget deficit below 3% of GDP. But the situation deteriorated dramatically over the next 30 years.
  • After 2008, GDP growth rates were lower than the Greek national statistical agency had anticipated.
  • Huge fiscal imbalances developed during the five years from 2004 to 2009. The output increased in nominal terms by 40%, while central government primary expenditures increased by 87% against an increase of only 31% in tax revenues

The salaries of the workers in the public sector rose automatically every year, instead of being based on factors like performance and productivity. Pensions were also generous. A Greek man with 35 years of public-sector service could retire at the ripe old age of 58, and a Greek woman could retire with a pension as early as 50 under certain circumstances. As a result of low productivity, eroding competitiveness, and rampant tax evasion, the government had to resort to a massive debt binge. Greece’s entry into the Eurozone in January 2001 and its adoption of the euro made it much more easier for the government to borrow because of the declining greek bond yields and interest rates .For instance, the yield spread between 10-year Greek and German government bonds plunged from more than 600 basis points in 1998 to about 50 basis points in 2001. As a result, the Greek economy boomed, with real GDP growth averaged 3.9% per year between 2001 and 2008, the second fastest after Ireland in the Eurozone .But that growth came at a steep price, in the form of rising deficits and a burgeoning debt load. This was made worse by the fact that these measures for Greece had already exceeded the limits mandated by the EU’s Stability and Growth Pact when it was admitted into the Eurozone. Greece’s debt to GDP ratio was at 103% in 2000, well above the Eurozone’s maximum permitted level of 60%. Also, Greece’s fiscal deficit as a proportion of GDP was 3.7% in 2000, also above the Eurozone’s limit of 3%.

After the financial crisis of 2008-09, investors began demanding much higher yields for sovereign debt issued by the PIIGS (Portugal, Ireland, Italy, Greece, and Spain) as compensation for this added risk. By January 2012, the yield spread between 10-year Greek and German sovereign bonds has widened by a whopping 3,300 basis points, according to research by the Federal Reserve Bank of St. Louis.

As Greece’s economy contracted in the aftermath of the crisis, the debt-to-GDP ratio peaked at

180% in 2011. The final nail in the coffin came in 2009, when a new Greek government led by Papandreou’s son George came into power and revealed that the fiscal deficit was 12.7%, more than twice the previously disclosed figure, sending the debt crisis into higher gear.


Greece is still a safe country to travel to. Greece attracts more than 16 million tourists each year, thus contributing 18.2% to the nation’s GDP in 2008. The same survey showed that the average tourist expenditure while in Greece was $1,073, ranking Greece 10th in the world.[148] The number of jobs directly or indirectly related to the tourism sector were 840,000 in 2008 and represented 19% of the country’s total labor force. In 2009, Greece welcomed over 19.3 million tourists a major increase from the 17.7 million tourists the country welcomed in 2008.

The direct contribution of Travel & Tourism to GDP in 2013 was EUR11.2 billion which is 6.5% of GDP. In the year 2014, the contribution of Travel & Tourism to GDP in 2014 was EUR11.8 billion which was7.0% of GDP. This primarily reflects the economic activity generated by industries such as hotels, travel agents, airlines and other passenger transportation services (excluding commuter services). The direct contribution of Travel & Tourism to GDP is expected to grow by 3.4% pa to EUR16.2bn (7.4% of GDP) by 2024.


The future of its economy and its ability to provide high and rising living standards to its citizens depend on growth-enhancing reforms and not simply restraining in spending or obtaining debt relief. It is high time to recognize that Greece’s economic challenges are rooted in its problems of competitiveness, productivity and social inclusion. The power to address these issues does lie with Greece.

The Global Competitiveness Report of 2014, showed that the country was indeed making measurable improvements in the functioning of its goods and labour markets. Improvements to the business environment and moves towards the liberalization of professions were injecting competition into markets and making them work better. The country was also getting its macroeconomic house in order, addressing such tricky issues as raising the retirement age and reforming the civil service.

Greece was finally returning to growth after years of recession. Yet since the beginning of the year, Greece has been rolling back reforms, halting privatizations and reintroducing barriers to efficiency. This backsliding is not just bad for negotiations with creditors but also for Greece’s long-term economic prospects.



  • Raising the age at which one can qualify for a state pension to 65 for everyone. Women had previously been able to retire at 60.
  • Increasing the number of years of contributions to the social security system to qualify for a full pension. This goes up from 37 to 40 years between now and 2015.


  • Ending the extra two months salary routinely given to civil servants at the end of the year for those earning more than 3,000 euros per month.
  • Cancellation of bonuses such as holiday reimbursements.
  • Average salary reduction of 7% in publicly owned businesses.


20% reduction of the minimum wage for younger workers.


  • New taxes imposed on luxury goods, such as cars, swimming pools, and yachts.
  • Special levies on profitable firms and individuals with high earnings


  • VAT increase from 19% to 21% on most consumer goods.
  • 20% increase in duty on alcohol.
  • 63% increase in duty on tobacco.

How will Euro zone Crisis affect the global economy?

In 21st century, when we are all a part of global market, if Greece falls can the world be left behind? The fall of Greece will be followed by the fall of Portugal, Ireland, Italy, Germany and Spain. With so many of its members defaulting, there are huge chances that Euro zone itself may collapse and if it happens so, then this will mark the beginning of the next global recession. The members will have no other option, other than to dissolve the European Union, forcing them to go back to their old currencies. When they go back to their old currencies, the loss incurred by the entire fiasco will be shared differently by the different member countries followed by high inflation rates within these countries. Going by the current position of global economy, most of the emerging and developing countries are under debts. With the outbreak of another recession, the burden of truth will ultimately fall on such countries. It will hamper their growth, increase their inflation rate and lower their credibility. In order to know how deep the roots of this crisis will go we must ponder upon the following thoughts;

  • Facing the same difficulties: Before European Union was formed, much of Europe was engaged in a war among themselves. There was no cooperation amongst them on how to conduct business with each other. There were many trade barriers which restricted smooth flow of business activities across the European borders. The European Union came up as the only solution for resolving these problems. It helped in reduction of cost of transfer of goods from one place to another within the Euro zone, facilitating profits for business houses and fuelling their growth engine. If EU collapses, all its member countries will have to face the same old difficulties that their ancestors faced. This will make trading with the Euro Countries a costly affair. All the imports and exports becoming costly will attract very less buyers towards them, ultimately leading their industries to a downfall.
  • Increase in rate of borrowings : With world entering into next global recession, developing countries and emerging countries who are highly dependent on borrowings from international financial institutes will receive funds at a much higher interest rate, which will automatically bring down their credit ratings. This will in a large way hamper their growth rate. Due to high rates of borrowings government will be able to spend less, creating a shortage of subsidies and other basic benefits.   
  • Collapse of the banking System : Every economy is basically supported by monetary and fiscal policies. Banks play a major role in forming the monetary policies. All the international lendings are supported by various international banks, which are backed by other banks and financial institutes from around the world. Whenever there is a credit crisis, people tend to immediately lose their confidence in the banking system. There is an immediate rush to withdraw cash from the banks. When everybody is out there demanding for their cash, banks will go bankrupt.  So when the banking system fails it brings down the entire economy with it.  
  • Downfall of various sectors of economy : When banks are left with no money, they wouldn’t be able to provide funds to firms for carrying out their business. Without the required cash sectors like manufacturing, real estate, industries and service sector will stop to function. This will lead to low production and create a huge gap between demand and supply of the commodity and result in increasing the inflation rate.
  • Increase rate of unemployment : When sectors like manufacturing, industrial and service fall flat on their face, the biggest impact is borne by the labour force working in these sectors. With less funding from the bank and huge demand for goods, the firms opt for cutting the cost of production. Which is generally done by reducing the labour cost.
  • Costly imports and exports: in times of recession, in order to recover from their debts countries increase the price of their imports, making exports for other countries costly. With the increase in prices of goods imported, the demand for such goods starts falling, again affecting the concerned industry and economy largely.   


Greece is the 45th largest economy of the world, with a GDP of $238 billion per annum and ranks 51 in purchasing power parity at $286 billion per annum. It stands to be the 13th largest economy among the 28 members of the European Union. Although Greece has performed poorly in handling it’s debts, it did show potential for growth back then. Service sector contributes 81% towards its

GDP, whereas industries contribute 16% and agriculture 3.5%


Shipping industry has been the tower of strength for Greece and still stands to be. the Greek merchant marine comes third globally both in the number of ships owned and in tonnage, and at times in the 90s Greece was first . Even after being hit by the adversities of both world war one and world war two, Greece’s shipping industry has not jus survived but also made significant recovery. After the second world war, the government of Greece promised to support the shipping industry by covering its insurance.  There has been a growth registered in it’s merchant fleet, and shipping has remained one of the few sectors in which Greece still excels.


Every year Greece receives approximately 16 million footfalls and is ranked 7th most visited country in the European Union and 16th in the world. It contributes 18.2 % to its GDP. Tourists are attracted towards various ancient historical places and museums owing to Greece rich cultural past. But in times of crisis, inflation has had a deep impact on its tourism business.  Tourism in Greece has now become much more expensive than it used to be before making tourist stingy about spending on a vacation in Greece.


Agriculture contributes 3.8% to national GDP and provides means of earning to 12.4% of it’s population. After entering the European Union, Greece’s agricultural sector has seen a lot of up gradation which has resulted in increase in its agricultural output. It majorly produced cotton, pistachios, rice, olives, figs, almonds, tomatoes, watermelons and tobacco. It comes 11th in terms of total amount of fish caught and ranks 1st in terms of fishing vessels among the members of EU.



The government holds the faith of an entire nation. A few bad decision by the government can bring a turmoil in it’s economy. As we can see from this case, government took not just few but many bad decision which led Greece into a debt trap. The weak fiscal policies did not match up to the monetary policy of the European Union, in result of which, Greece could no benefit as much as it could have, had they made their fiscal policy stronger. The government also ended up spending more on public expenditure and failed to generate much revenues. These created a deficit, leading Greece to borrow more money to meet their domestic expenditure.


As we learned from the case, having same monetary policy will not prove beneficial until and unless you have equally strong fiscal policies to match with it. Also it is important that all the members are brought under the administration of a single institute which can keep a tight check on their earnings and administer their growth. When so many economies are inter linked with each other through a single currency it is important that they are bound by some terms and conditions and there must be a separate institutes that looks after whether these regulations are being followed or not and in case of defaults, such institute must have the power to take corrective actions against such defaulting members.


When economies get inter linked through channel of trade it becomes very important to maintain a certain level of transparency. It was only in 2008, when global recession hit, that everybody realised that Greece presented cooked up reports about is financial performance. This was due to the fact that Greece always maintained opacity about its working. Had it not been the case, Greece would have not been in crisis today. The very crux of the story began with a lie and its end is still unsure.


A lot of amount that was wasted could have been saved had Greece had curbed its public expenditure. The easy borrowings at cheaper rate of interest, sent Greece on a spending spree. Most of these expenditure did not generated revenue. As a result there was an excess of supply of money in the economy.  It spent the money hugely on public policies like subsidies and pension. They failed to generate additional sources for revenue through which they could have met their expenditure without borrowing from external sources.