Claire Suh Honors World Studies Period 1 Mrs. Hornstein June 2012 The Greek Debt Crisis
Suh 1 In recent times, the economies of multiple countries throughout the world have been suffering from excessive spending by both the government and businesses. In Europe especially, countries with weak economies spent more than they could afford. The European Union is in serious risk of a severe depression in Europe and a recession world wide due to countries within the Union, Greece specifically, that have accumulated massive debt over the past years. Greece especially has amassed a major amount of debt ever since joining the eurozone. The European Union’s plan to save Greece’s economy and the European Union is by keeping the financially depleted country in the eurozone and making them abide by a harsh program that cuts back on spending and revive the failing economy. The Trichet plan aims to unite Europe into the United States of Europe to save the euro, the EU, and Greece. However, it seems that the best option for saving Greece is what the many citizens of Greece are in favor of ; defaulting on the massive debt that has been accumulating Greece has her hands full with a financial crisis that if not solved properly could tip the precarious balance of the European economies and plunge Europe into depression and the rest of the world’s economies into recession (Eichler). Many factors led to the situation that is occurring in Greece today. When Greece joined both the European Union, a group of European countries that have created a barrier-free market for products and services and the eurozone, a group of European countries that collectively use the euro, in 2001 it wasn’t ready ("Eurozone";"European Union", Little). The European Union and the eurozone was established by the Maastricht Treaty in 1993 which stated that no country in the eurozone will have a budget deficit greater than 3% of its GDP (Little). When Greece joined, it met the criteria of the Maastricht Treaty, or so the statistics said. However, the statistics of the country were not valid because the companies and the governments of Greece had hidden their expenses, preventing them from appearing on the national budget balance sheet, and ultimately not affecting the deficit (Little). In addition to that mess, Greek wages shot up ridiculously high, the retirement age remained low compared to Western standards, and mass tax evasion plaqued the country. All of these
Suh 2 factors stagnated the steady stream of revenue that Greece got and unfortunately, their spending problems didn’t disappear like the statistics (Krieg). When the money ran out, Greece could now freely borrow massive amounts of money from other countries’ banks to relieve their building expenses because it was part of the European Union and the eurozone (“European Debt Crisis”). Banks all around the world wanted to buy pieces of Greek debt for profit, resulting in countries all over Europe and the world holding a piece of that debt that Greece can’t pay off (Krieg). All of the slip-ups that Greece had caused and overlooked has resulted in the problem occurring today. The countries who had loaned Greece the money and the countries who have bought the debt have entangled themselves in a huge web of debts and no one knows who owes who anymore, making them unsure if they will get their money back. This causes fear and it spreads, becoming a contagion (Stanners). Banks around the world lose trust in each other, making them call their debtors to pay them back immediately with higher interest rates and the economy freezes up (Roberts; Stanners). Greece is now in a bind because it is part of the euro, a single currency system, making it unable to stimulate its economy by devaluing its currency and it can’t cut interest rates because interest rates are controlled by the European Central Bank (Roberts). By October 2011, the debt accumulated by Greece is 166% of the GDP, the Gross Domestic Product, an indicator of the health of the country’s economy and the total value of the goods and services produced in a country (Marsh; "What is GDP and why is it important?"). In October of 2011, Greece owed French banks the euro equivalent of $54 billion, German banks $19 billion, and Portuguese banks $10 billion. These were the four most dire of their debts (Marsh). The immediate effect of the debt crisis is bearing down on the people of Greece very harshly. From 2008 to 2011, the unemployment rate in Greece rose 10%, from 7.7% to 17.7% ("Unemployment rate, 2000-2011"). By May of 2012, the overall unemployment rate of Greece is about 20% and youth unemployment is up to 50% (Elliot). Just walking down the street will give anyone the severity of the depression in Greece. A long line of normal middle-class people can be seen waiting for a soup kitchen to open. The shops
Suh 3 empty of customers and cabs empty of passengers indicates the 20% contraction of the economy of Greece and the consumer spending down by a sixth. Children faint of hunger in school and 20,000 Athenians scrounge through trash for food. Political extremists such as fascists and anarchists roam the streets at night, threatening immigrants and the Golden Dawn party, devotees of Adolf Hitler, roar on motorcycles at night. One woman reportedly whispered, “It’s like the Weimar Republic (Elliot). This chain of causes and effects will lead to a dead end for both Greece and the entire European Union of years and years of hardship if the issue isn’t handled appropriately. Economists and politicians throughout Europe and the US have struggled to come up with a solution to both the Greek and European debt crisis. Many different options have been formed by various groups with various interests, not all with the welfare of Greece as a priority in mind. The European Union has decided to try to save Greece and the rest of the European Union with their austerity measures and stimulate the economy with large amounts of money (“Eurozone crisis explained”; Forelle). The EU planned to bailout Greece but on the condition that they take on harsh austerity measures to stabilize their economy. These harsh austerity measures include drastic spending cuts, tax rises, labour market, and pension reforms. In 2010, a bailout of 110 billion euros was agreed upon for Greece. A second bailout of 130 billion euros was agreed upon later ("Eurozone crisis explained"). The aim of this plan is to save Greece by keeping it in the eurozone so as not to cause major chaos if it defaults. In time, if the austerity measures hold up, by 2020, Greece’s debt will be reduced to a level of which it can pay off its debt ("Pros And Cons:"). Greece will also be kept in the eurozone, avoiding the dire consequences of possible business bankruptcies, more severe depression, collapse of banks, and no more bailout loans to help pay off their debts ("What could happen"). However, there are major problems with this plan. Riots have plagued Greece and the angry citizens are enraged at the way austerity measures have affected them. Their wages have dropped marginally, and all of their pension and benefits have been cut. The quality of life has dropped dramatically and
Suh 4 ordinary middle class people have taken to the streets because of joblessness and other things brought about by the austerity measures (Thomas and Varvitosi). The EU’s plan to revitalize the economy is also becoming too costly. The 1.3 trillion euros that was infused into banks dropped interest rates to one percent, but the interest rates are rising once again and investors and the people of Europe are questioning the ability of the EU to bring Europe out of recession (Forelle). The reality is that the probability that the people of Greece are going to comply to the austerity measures and that the massive amounts of money thrusted into the banks of Europe are actually going to benefit the economy in the long run is nearly impossible and the austerity measures are nearly certain to fail. An alternative to the austerity measures is another plan that was proposed by the ex- European Central Bank Chief, Jean Trichet, called the Trichet plan (Reuters). The plan is to unite Europe into a united nation called the United States of Europe, very much like the United States of America. The nation states of Europe would give the whole United Nations of Europe a huge chunk of power over their economies and would strengthen the already existent monetary union between the European nations. Countries like Greece who run huge deficits and are having major financial difficulties would be put under the control of the United States of Europe and would have their problems smoothed out by the higher law. Countries would oversee each other and put fines on countries that step out of line (Reuters). This plan will obviously unite the countries of Europe into a strong union that could salvage the euro by declaring one of its states bankrupt and taking it over. It would address the weakness of the euro, which has caused strains on the high deficit countries because it was run before any political and fiscal policies were established in the European Union (Reuters). This plan has also proven itself unsatisfactory. This plan prioritizes saving the euro, not Greece. Many people argue that the solution is basically to take over a country when it is failing and force upon it the not-likely-to-succeed policy of balancing its budget, and the country’s people would have no say in how they want their country to be saved. In other words, this plan is quite authoritarian sounding and tramples upon the democracy of the
Suh 5 country (Black). This plan is also highly unlikely to succeed because of the plethora of historical and political issues that separate the countries of Europe (Reuters). The best plan to save Greece from this vicious cycle of debt and pain is to default on all of its debt, leave the eurozone, and reinstate the drachma. Greece is stuck in harsh austerity, lack of competitiveness, and deepening depression in the midst of the austerity plan (Roubini). The austerity plan is barely sustaining Greece in the short term, but will ultimately fail in the long run. The Trichet plan doesn’t have the best interests in mind and will kill the democracy of Greece. The default may be painful now, but in the long run, it will benefit Greece far better than alternative of decades of depression if it sticks to the eurozone (Roubini). Countries in the past, such as Argentina, that have defaulted in an orderly fashion have prospered in the long run, unlike countries who haven’t (Roubini; Stanners). A managed exit from the eurozone will result in increased competition and growth, and stabilize its ability to pay off its debt in the future for Greece (Roubini). The Greek debt crisis is a problem that needs to be solved jointly by the Greek government and the European Union. Choosing to default on the debt and leaving the eurozone will prove to successfully solve the growing economic and political hardships of the debt crisis. Greece should do what is best for its people, and once it does that, the issue will be solved and the future will be auspicious for the generations of the Greeks now and the generations to come.
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