Causes of Financial Crisis in Greece

The financial crisis of Greece continues to occupy headlines in the global news almost a decade after its recognition. The Greek financial crisis is an outcome of the series of the debt crisis that began in 1981. The debt crisis originated from the mismanagement of the Greek economy and government finances in the 1980s. But, what kept the crisis brewing for so long? What caused it in the first place? Let’s find out.

What Caused The Financial Crisis In Greece?

The debt crisis originated due to the wasteful and excessive expenditure of the Greek government. Initially, the economy and finances of Greece were in good shape when it became the 10th member of the European Community on January 1, 1981. However, the situation deteriorated drastically over the next 30 years.

The path to debt

In October 1981, Andreas Papandreou founded a political party in 1974. This party quickly gained immense popularity all around Greece. In an attempt to keep the voters happy, the party spent lavishly on their electorates thereby, creating an inefficient and bloated economy.

Salaries of workers increased automatically every year without any performance or productivity checks. There were no limitations for pensions. Workers were even entitled to an extra month’s payment in December to support their holiday expenses. They were also paid one-half month’s pay at Easter and another half for vacations. Result? Low productivity, rampant tax evasion and eroding competitiveness. It sowed the seeds of crisis that the country faces even today.

Greece’s membership in the Eurozone

Naturally, the government had to rely on massive debt binge to keep the political party going. In January 2001, when Greece became a part of the Eurozone, the interest rates and bond yields declined sharply. By that time, they already had a budget deficit in excess of 3% of GDP and an excess of 100% of GDP in government debt.

The Eurozone membership created a way of hiding the problems under the carpet. It only degraded their financial situation. Also, public debt increased as Greece continued paying higher wages and doled out generous pensions. Mass tax evasion also took place. Thus, the debt of Greece eclipsed almost 113% of GDP in 2009 and 175% in 2015.

Unsustainable growth

Greece continued to borrow money despite being under heavy debts after joining the Eurozone membership. The final nail in the coffin of Greece's economy was the global financial breakdown in 2008. The Eurozone faced an economic crisis and Greece had to face the consequences in the form of a burgeoning debt load and rising deficits.

By that time, Greece had already exceeded the Eurozone’s maximum permitted level of debt by almost 50%. Greece’s debt to GDP ratio was 103% where Eurozone allow only 60% of the debt. The debt markets started reeling after 2008 and Greece’s unlimited debt piles became too tentative.

In 2009, Greek debt was downgraded and it was prevented from borrowing from the financial markets. The international credit rating of Greece was also cut down to junk status and investors were not ready to help them pay the substantial premium amount. Hence, by the year 2010, Greece veered towards bankruptcy which could set off a new financial crisis in the Eurozone.

To avert the calamity, the European Commission, International Monetary Fund and the European Central Bank issue two bailouts for Greece. The bailouts cost more than €240 billion.

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Despite The Bailouts in Billions, Why Was Greece Still In A Crisis?

Owing to the lavish expenditure and high debts, the bailouts for Greece came with strict terms and conditions. For instance,

Lenders imposed harsh austerity terms
Deep budget cuts
A steep increase in taxes
Streamlining Greece government
End of tax evasion

All the conditions were laid out to make Greece a stable and easy place to do business. Although financial stability was achieved, Greece was not free from its economic problems. Reports suggest that its economy got shrunk by a quarter in five years and 25% of unemployment still prevails.

The bailout money was primarily used to pay off Greece’s international loans. The government still has a staggering debt to pay. So the bailout money was never used for the country’s economic development.

Can The Economic Crisis In Greece Be Solved In The Future?

After all these years, the pertinent question remains answered: Can the financial crisis in Greek be solved? Despite all the doom and gloom, this issue can still be solved. If the underlying structural and economic deficiencies can be fixed, then the country can track its course back to prosperity.

The underlying deficiencies that prevent Greece from fixing the financial crisis are:

Investment and business scale disincentives
Large and inefficient public sector
Labor market inefficiency
Inadequate legal and judicial system
Widespread informality

Besides the Greek government’s inability to repay the debts, these are the other aspects that affect the Greece economy adversely. If these aspects can be taken care of, then the productivity and business growth in Greece can be enhanced to a great extent.

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