Economics: Greek Economic Crisis

The problem

Greek economic crisis is threatening the future of the euro and euro zone. If Greece defaults, the whole of Europe, and the world economy by extension, would be thrown into a recession. According to newspaper reports, the Greek government fiscal indiscipline after joining the euro is responsible for the problem. Austerity measures imposed on Greece as part of rescue package are unpopular in Greece, and this has created the current political turmoil.

Greek economic crisis as presented in the news

According to an article by the journal Turkish Weekly (turkishweekly.net/news, 7 July 2012, n.d.), corruption is to blame for the crushing debt burden that is sinking the Greek economy. Corruption is not only widely practiced but also unofficially tolerated by the political leaders.

Greeks pay bribes to get jobs in the public sector and also to get services. This sleaze is responsible to the largely bloated government workforce because politicians corruptly employ more needless workers so that they can win elections. Quoting a source from an anti-corruption agency, the paper says that in 2011, Greeks spent 1.62 billion Euros in bribes (Klein, 2012).

Another problem cited that has increased the 367 billion Euros debt is tax evasion. It costs the country around 60 billion Euros (Greek crisis: Economic Times, n.d.). Politicians and wealthy people commit crimes related to money with impunity. With the current problems facing the country, however, a former minister has been prosecuted for money laundering and corruption. Economic hardships have made people more corrupt thereby aggravating the problem that indirectly help create the current crisis in the first place.

Washington Post also reports that tax evasion is responsible for the big budget deficit that was first noticed in 2009. In that year, the amount in evaded taxes could have covered half of the deficit. To come up with the estimate of the amount in evaded taxes, economists used bank data to determine people’s real incomes.

Most people in Greece underreport their true income when filing returns to the government tax agencies by half for purposes of evading tax (Ignatius, 2012). According to the paper, the reason that has made the Greek government unable to curb tax evasion is that the worst tax evaders, such as professionals, are well represented in Greek parliament and defeat all efforts to fight tax evasion.

The economic crisis in Greece is so bad that Greek Jews are migrating to Israel. Other immigrants are going back to their home countries (HRW – chicagotribune.com, n.d.). They are also going home due to attacks by xenophobic and racist vigilante groups targeting them (National Post, n.d.).

In some of the leafy suburbs of Athens, trendy hotels and shopping malls are being shut down during weekdays, opening only on weekends. Banks are running out of cash. An article by Oregon Live says the problem originated from borrowing spree that occurred immediately and after the country joined euro in 2002. Greece also spent billions of Euros in hosting the 2004 Olympics. The infrastructure built for the games was not used for anything productive after the events.

Oregon Live reckons that Greeks want to retain the euro, but are not willing to institute reforms pushed the European Union (Greek financial crisis takes its toll, n.d.). Although exiting the euro would help the country deal with its debt problem, many people fear their county would slide back into deep poverty common in the 1970s. Austerity measures pushed on the country are deeply unpopular and are responsible for the political crisis (Hanson, 2012).

The Daily Reporter reports that Greece has entered its fifth straight year in recession. Industrial zones supported by government and the EU subsidies are crumbling. Industrial output has fallen by around 2.2% this year. In northern Greece, industrial output has fallen by almost a half since the crisis began (TIME.com, n.d.).

Greek economic crisis in historical context

The financial crisis that started in the USA in 2007 is partially responsible for the current economic crisis in Greece (The New York Times, n.d.). What worsened the problem for Greece than elsewhere; however, was the presence of structural problems in the economy. Over the years, the country’s competitiveness has slowly been eroded compared to other countries in the European Union (The Economist, n.d.). This is evidenced by increasing budget deficit and rising public debt.

Corruption and inefficiency led to loss of public resources, and this further increased the debt problem that continued to increase over the years. Lack of good tax policy starved the state of the much needed resources. These structural problems made the economy vulnerable. At the time of Greek ascension to the EU, its economy was not internationalized (Walt, 2012).

Low extroversion is responsible for the weak production and low competitiveness, which also contributes to the problem o f rising public debt. Increase in interest rates raises the cost of servicing debt making the debt problem even more problematic.

The biggest problem with the Greek economy was the decline of its competitiveness. This is a process that started well before the current economic crisis began. The gradual decline in competitiveness led to the gradual increase in trade and current account deficit, which turn led to increase in public debt. Even if the current Greek debts were cancelled today, the country would face the same debt problem in 2025 if low competitiveness is not resolved (Sklias & Galatsidas, 2010).

Despite the structural problems that laid the foundation for the current crisis, the government made the wrong decision of increasing consumption spending through borrowing at the expense of investment spending. In summary, the crushing debt burden facing Greece is due to the following:

  • Declining production base
  • Extroversion
  • Low competitiveness
  • Effects of economic policies followed in the 70s and 80s

After 1970s, the Greek government departed from a prudent fiscal policy that only allowed deficit in public investment expenses only. This led to increase in public debt from the 1980 figure of 20% of GDP to 100% of GDP in 2000 (Sklias & Galatsidas, 2010). In line with the increasing debt, the country did not adopt an efficient tax system to generate more income.

Expenses related to public employment consume almost 60% of GNP as at 2010 compared to the euro zone 37% average (Sklias & Galatsidas, 2010). All these, coupled with wasteful management of public resources, have created the current mess.

The current political crisis in Greece can be explained by the fact that people are unable to accept austerity measures where they are accustomed to state largesse. As reported by the papers, the richer states in the European Union blame Greek government profligacy for the crisis, but the problem is much deeper as already explained. The four principal problems discussed above created conditions that led to increase to current unsustainable public debt.

Austerity measures imposed on Greece have created social problems and further reduced industrial output. In the long run, dealing with the four principal problems that are the source of Greek’s economy structural weakness, is what will help make the economy sustainable. In my view, current efforts to curb on spending, institute labor market and tax reforms are not sufficient.

What is required is adoption of a new economic development model. The Greeks should also not take all the blame for all the economic problems they are facing: the 2007 financial crisis is partially responsible.

References

As Greek crisis gets worse, EU borders are quietly tighening | News | National Post. (n.d.). National Post | Canadian News, Financial News and Opinion.

Greek crisis: An odyssey seen through ancient myth – Economic Times. (n.d.). Featured Articles From The Economic Times.

Greek economic crisis isn’t slowing corruption, 7 July 2012 Saturday 9:11. (n.d.). Journal Of Turkish Weekly.

Greek police ignore rising attacks on migrants: HRW – chicagotribune.com. (n.d.). Chicago Tribune: Chicago breaking news, sports, business, entertainment, weather and traffic – chicagotribune.com.

Greek politicians are fiddling while Athens burns – Pittsburgh Post-Gazette. (n.d.). Pittsburgh Post-Gazette.

Greece News – Breaking World Greece News – The New York Times. (n.d.). Times Topics – The New York Times.

Hanson, V. D. (n.d.). Greek financial crisis leaves the country alone and broke — again |OregonLive.com. Oregon Local News, Breaking News, Sports & Weather – OregonLive.com.

Ignatius, D. (n.d.). Greek financial crisis causes suffering for the nation and its people |OregonLive.com. Oregon Local News, Breaking News, Sports & Weather – OregonLive.com.

Indebted Greeks Question the Cost of the 2004 Olympics | Olympics | TIME.com. (n.d.). Olympics | News, Photos and Videos from the London 2012 Summer Games | TIME.com.

Klein, E. (n.d.). How Greek tax evasion helped sink the global economy. Washington Post: Breaking News, World, US, DC News & Analysis.

Once thriving industrial zone turns to wasteland as Greek financial crisis takes its toll. (n.d.). Greenfield Daily Reporter – Your Hancock County Info Source!

Sklias, P., & Galatsidas, G. (2010). The Political Economy of the Greek Crisis: Roots, Causes and Perspectives for Sustainable Development. Middle Eastern Finance and Economics, 21(7), 166-177.

The causes: A very short history of the crisis | The Economist. (n.d.). The Economist – World News, Politics, Economics, Business & Finance.

Walt, S. (n.d.). The Greek Crisis and the Future of the EU | Stephen M. Walt. Stephen M. Walt | FOREIGN POLICY.