For most of the s, the interest rates that Greece faced were similar to those faced by Germany. These lower interest rates allowed Greece to borrow at a much cheaper rate than before , fueling an increase in spending.
While indeed spurring economic growth for a number of years, the country still had not dealt with its deep-seated fiscal problems which, contrary to what some might think, were not primarily the result of excessive spending. In , Greece was below the EU average of Much of this lack of revenue was the result of systematic tax evasion. Generally, self-employed , wealthier workers tended to under-report income while over-reporting debt payments.
The prevalence of this behavior reveals that rather than being a behind-the-scenes problem, it was actually more of a social norm that was not remedied in time. Eurozone membership helped the Greek government to borrow cheaply and to finance its operations in the absence of sufficient tax revenues.
Compared to Germany, Greece had a much lower rate of productivity , making Greek goods and services far less competitive. The adoption of the euro only highlighted the competitiveness gap as it made German goods and services relatively cheaper than those in Greece.
Having given up independent monetary policy Greece could no longer devalue its currency relative to that of Germany. While the German economy benefited from increased exports to Greece, banks, including German banks, benefited from Greek borrowing to finance cheap imported German goods and services. As long as borrowing costs remained relatively cheap and the Greek economy was still growing, such issues continued to be ignored. In , U. As capital began to dry up, Greece faced a liquidity crisis , forcing the government to seek bailout funding, which they eventually received with staunch conditions.
Bailouts from the International Monetary Fund and other European creditors were conditional on Greek budget reforms, specifically, spending cuts and higher tax revenues. These austerity measures created a vicious cycle of recession with unemployment reaching These measures, applied amidst the worst financial crisis since the Great Depression , proved to be one of the largest factors attributing to Greece's economic implosion. Some contracts governed by Greek law would be converted into a new currency, while other foreign law contracts would remain in euros.
Many contracts could end up in legal disputes over whether they should be converted or not. Greek companies who still owe big debts in euros to foreign lenders, but whose main sources of income are converted to a devalued non-euro currency, would be unable to repay their debts.
Many businesses would be left insolvent - their debts worth more than the value of everything they own - and would be facing bankruptcy. Foreign lenders and business partners of Greek companies would be looking at big losses.
In the wider eurozone, businesses, afraid for the euro's future, may cut investment. Faced with a barrage of bad news in the press, ordinary people may cut back their own spending. All of this could push the eurozone into recession. The euro could lose value in the currency markets, providing some relief for the eurozone by making its exports more competitive in international trade.
But the flipside is that imports from the rest of the world would become more expensive - especially the US, UK and Japan. If Greece leaves, it undermines the idea that the euro project is irreversible and could give a boost to anti-euro and anti-European Union political forces in other countries.
In Spain, the left-wing anti-austerity party Podemos is already gaining ground, ahead of elections later this year. In Portugal, there is growing fatigue with austerity, and it also goes to the polls this year.
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Email Address There was an error, please provide a valid email address. To learn more or opt-out, read our Cookie Policy. Greece is falling apart. The unemployment rate is 25 percent — down from a peak of 28 — and four in 10 children live in poverty. In the wintertime, Athens is overcome with smog as residents too poor to afford electricity burn everything and anything they can to stay warm.
The income of the country's rich, once inflation and taxes are taken into account, is back where it was in The poor are back where they were in And this weekend, things hit a new low, as fear of a total financial meltdown grew so widespread that Greeks emptied more than a third of the country's ATMs on Saturday in a desperate attempt to pull out as much money as possible before the banks collapse.
The crisis is at a pivotal moment now, but it has been brewing for years. Despite what you may have heard, it's not happening because the Greek government spent beyond its means and now is suffering the consequences. It's happening because Europe isn't sure whether it wants to be one country or many, and has in the meantime adopted policies that have created a humanitarian catastrophe for the Greek people. The financial crisis blew a hole in Greece's budget, which was already not in great shape.
The Greek government took billions of euros in bailout money in from the European Union and International Monetary Fund. The lenders required Greece to implement crushing spending cuts and tax increases, which contributed to skyrocketing unemployment and plummeting living standards.
Since then, Greece has faced a choice: Either stick with the bailouts and endure the pain of austerity, or reject the terms of the bailout — likely leading to default and, possibly, leaving the eurozone entirely. Greeks elected a new government in January that tried for a third option: renegotiating the terms of the bailout to require less severe austerity measures.
But this failed, partly because Greek leaders have no leverage and partly because European politicians feared that granting Greece's demands would encourage other countries that have accepted bailout money — like Spain, Portugal, and Ireland — to rise up as well.
This new Greek government has punted the decision to voters: On July 5, Greece will hold a national referendum on whether to accept lenders' latest proposal and keep going with austerity or reject the proposal and, in all likelihood, abandon the euro. When Greece joined the euro in , confidence in the Greek economy grew, and a big economic boom followed. But after the financial crisis, everything changed. Every country in Europe entered a recession, but because Greece was one of the poorest and most indebted countries, it suffered the most.
If Greece didn't use the euro, it could have boosted its economy by printing more of its currency, the drachma. This would have lowered the value of the drachma in international markets, making Greek exports more competitive.
It would also lower domestic interest rates, encouraging domestic investment and making it easier for Greek debtors to service their debts. But Greece shares its monetary policy with the rest of Europe.
And the German-dominated European Central Bank has given Europe a monetary policy that's about right for Germany, but so tight that it has thrust Greece into a depression. So Greece is squeezed between a crushing debt burden — percent of GDP, about twice the level in the United States — and a deep depression that makes it difficult to raise the money it needs to make its debt payments.
Any tax hikes or spending cuts enacted to help pay back the debt would just worsen the depression. For the past five years, Greece has been negotiating with the European Commission, the European Central Bank, and the International Monetary Fund "the Troika" for financial assistance with its debt burden. Since , the Troika has been providing Greece with loans on the condition that the country raise taxes and cut spending. Those policies have contributed to crisis-level unemployment and poverty, causing massive resentment among ordinary Greeks.
They've also hurt the country's economy so much that Greece can't raise money to pay off its debts on its own, and will keep needing bailout money. Without the euro, Greece could handle all this without external help. But the euro means it can't use monetary policy to help itself out, locking the country into this horrible cycle.
It's mostly Europe's fault, but Greece isn't blameless. The financial crisis revealed that its government had been, for years, borrowing more than it reported publicly, meaning the country was running bigger deficits and racking up more debt than previously thought. But Greece enlisted banks like Goldman Sachs and JPMorgan Chase to evade those rules and borrow money under the radar to enable more spending.
The discrepancy was massive. On November 5, , the newly elected socialist prime minister, George Papandreou, admitted that the year's budget deficit would be The country's finances were in much, much, rougher shape than anyone — especially anyone financing the Greek government by buying its bonds — had realized.
At the same time, tax evasion by Greek citizens and businesses was, and remains, a huge problem. A study comparing Greek bank account data with government tax data found that the true income of the average Greek person is about 92 percent higher than the income reported to the government.
Tax evasion accounted for half of Greece's deficit and a third of its deficit.
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