“The world is slipping into the Great Economic Depression- like situation”-This statement made by Raghuram Rajan is finally making some sense. The situation in Greece is even worse than the one experienced in 1929. The nation is veering towards bankruptcy after facing huge debt crisis. Greece has already endured 5 years of austerity-induced economic disaster and is finally out to protest against it and to pull the economy out of the catastrophe. All the other European countries like Portugal, Ireland and Spain have eventually recovered from the crisis but the situation in Greece is worsening day-by-day.
The series of the calamitous events began in 2009, when Greece announced the underestimation of National Public Deficit. It was wrongly valued at 6% instead of 12.7% which further rose to 15%. Fearing the consequences, many investors sold their risky Greek bonds and other holdings which led to soaring bond yields. A 10-year bond yield was above 8.5% which was the highest since the country began using Euro as their currency in 2001. This made it unsustainable for Greece to borrow from capital markets after its public debt rose to €350 billion ($435 billion) and so it appealed to European Union and International Monetary Fund for loans. Finally, came to their rescue, what is called, the troika, constituting International Monetary Fund, Europe Central Bank and European Commission which issued bailouts worth € 240 billion or $264 billion currently. However, it wasn’t easy for Greece to acquire this bailout. They had to sacrifice their overall development and a hope to revive the country. Harsh austerity measures were imposed on already-suffering Greece in exchange of the funds acquired. The terms of the austerity measures were- wage cuts, spiking taxes, removal of all trade barriers for smooth functioning of businesses – or quite simply reduction in government expenditure and increase in their revenues (mainly through taxes).
These reforms did no good to the economy. The rigid austerity conditions led to a complete halt in the economic development, investors lost trust in Greece, people began leaving the country and the situation worsened further. A major portion of the bailout money was used to pay off Greece’s international loans and interest payments to the creditors. In fact, Greece had to borrow more to pay off earlier loans and so Greece found itself engulfed into the situation of “Debt Trap”. The country reluctantly imposed stringent measures that sent debts surging to 180% of their GDP, doubled poverty, left around 25% of the workforce unemployed, raised instances of emigration, suicides and infant mortality rate. The country was void of basic health infrastructure and the economy was reduced by a quarter. Fearing the consequences, the native Greeks rushed to the banks and withdrew their money before the central bank’s stock of money completely extinguishes.
Who was benefiting from the situation? It was the fellow European countries itself who took this as an opportunity for their own country’s development. German and French banks profitably and recklessly lent to Greece. Berlin is profiting because of high-interest on loans to Greece. Germany also benefited from the export of consumer goods to peripheral regions especially Greece.
Many Economists question the European Union in taking no initiatives in helping one of its member countries. The European Central Bank, headquartered at Germany, favoured Germany over any other member nation. That is why Germany is booming while countries like Greece and Spain are in a situation of bankruptcy. Now the situation is such that even ECB could not do anything. Any step taken for the betterment of Greece would have an opposite effect on Germany. If it prints more currency, it might be fruitful for Greece but lead to tremendous inflation in Germany, disrupting their smooth functioning.
While some were of the view that Greece is responsible for its own plight. Germany has accused Greece of non-compliance of bailout conditions and so is the reason for its present state.
Finally, the Syriza party brought a ray of hope in 2015. They brought anti-austerity measures into perspective and pledged to drive the country out of a possible economic depression. The party led by Alexis Tsipras came to power and it immediately began its work to boost growth in the country.
In June 2015, Tsipras-led government rejected creditors’ demands for pension cuts and reformation in the labour market. After the refusal of the counter proposal put forward by Greece, the Greece Central Bank announced likely exit from the Eurozone which came out as breaking news worldwide. This was their first revolt against the Europe of austerity and corporate power. It was also a drive to bring about some sense of democracy in the socially progressive Europe. The creditors, on the other hand, offered a 5-month, €12 billion extension deal in order to avoid a possible default of the IMF loans. Tsipras then called for a referendum on creditors’ latest bailout proposal. If the referendum resulted in a ‘No’, then it would deepen rifts between Greece and the rest of Europe, marking a possibility of Greece abandoning the Eurozone. The public supported the government through their overwhelmingly No at the referendum and favoured changes in austerity reforms. But the question was still haunting whether grexit (a term coined indicating Greece’s exit from the Eurozone) is good for Greece and the world economy or not.
A round of debate took place across the globe. Some favoured the decision while others found it to be a major blunder on the part of Greece and in fact the Eurozone as a whole. Some were of the view that the effects of grexit would worse than the downfall of Lehman Brothers in 2008. Grexit would question Eurozone’s solidarity. Russia’s predictions of disintegration of the European Union would eventually come out to be true. After Greece’s exit from the Eurozone, a precedent would be set for the ejection of other member countries and finally leading to dissolution of Eurozone. Many would end up blaming Germany; one of the highest creditors to Greece, for the nation’s suffering. As the French economist, Thomas Picketty points out that “Germany is the best example of a country that throughout history has never repaid external debt.” And in a similar situation, Greece has been denied the much needed write-offs. Investors, who earlier withdrew from investing in Greece, now would hesitate investing in the Eurozone as a whole. Thus, Tsipras banked on a theory highlighting the fact that the departure of Greece from the Eurozone without a bailout would be detrimental for the entire Europe.
While others argued that Grexit would bring no harm to Europe. Europe has put up safeguards to prevent the financial contagion from spreading out to other European countries. In fact, Greece’s withdrawal from the Eurozone would be the best decision ,making the union better off as they have to no longer render the needs of a nation who constantly in need of help from its co-members.
While all this was going, Greece was crying for urgent help. Greek Banks remain shuttered with only €500 million left in cash reserves, nearly €45.5 for each citizen. With the economy facing a freefall, Greece needs to take action as soon as possible which might eventually force the country to print a parallel currency in the economy.
However, in the recent talks with the European Union, Tsipras proposed a three-year loan worth €53.5 billion from the European stability Mechanism Bailout Fund that would be used to meet Greece’s debt obligations and bring some sort of stability in the financial structure of the country. The blueprint of the reforms increased service tax from 10-23%; fall in salaries, raising the corporate tax from 26-28% and privatisation of various state-owned projects. Currently, Greece has been given a week’s time to come up with fresh reform proposals so as to convince lenders about the gravity of the situation and manage to avail fresh loans to avert bankruptcy.
While there is little hope for revival of the country, some measures can be taken which can bring some relief to the crumbling economy. Government needs to explore and generate new sources of revenue and not depend primarily on taxes for meeting its expenditure. With rising taxes and falling employment accompanied by incidents of migration, would ultimately lead to fall in the tax revenue which thereby resulting in rising Budget Deficit. The country needs to focus on debt sustainability and also come up with proposals wherein it can work on overall economic growth of the country.
Only solution for the country is to print more currency. This would lower interest rates, boost demand and increase the otherwise falling employment rate in the country. But as discussed earlier, ECB cannot take this measure as it would lead to inflationary pressures on other booming economies especially its favoured spot – Germany. So, ECB needs to sort out the differences and should also bring out more federalism in its structure. It can learn from the situation of the US which handles the financial structures of all the states centrally and yet, at the same time prevents the effects of financial crisis in one state from rippling on other states of the US. It also needs to work upon the provisions for departure, whether voluntarily or forced, from the Eurozone.
The Eurozone needs to improve upon its shortcomings. It needs to take up initiatives to help its fellow country revive from its current state and bring in prosperity and economic development. Only then would Greece manage to recover at a fast pace.
-By Mishika Jain