Greece Crisis: Civil Services Mentor Magazine - September - 2015

Greece Crisis

Greek crisis has its genesis in the year 1999 when euro currency was adopted. Adoption of Euro as common currency reduced trade costs among the Eurozone countries, increasing overall trade volume. In relative terms labour cost in countries such as Germany remained lesser as compared to Greece. This made Greece as less favoured destination for trade. This led to increse in Greece trade deficit from the levels of 1999.Both the Greek trade deficit and budget deficit rose from below 5% of GDP in 1999 to peak around 15% of GDP in the 2008–2009 periods.

Then after the global slowdown of 2008 trade volume declined. Greece cannot devalue its currency to make its trade competitive as it was controlled by the European central bank. In the year 2009 Greece announced that country has understated its fiscal burden earlier. After this announcements investors and foreign countries became skeptical about the prospects of Greece economy. This increased Greece’s debt to GDP ratio from 109 percent in 2008 to 146 percent in 2010. To make the matter worse countries bond ratings were also downgraded to junk status. This led to panic among the investors and they invested in safer investment options. In order to prevent the crisis from escalating to other parts of Europe, Troika of IMF, European commission, European Central Bank designed a bail out plan. There were two bail out plans:

  • First plan provided a loan of 110billion euro;
  • Second plan of 130 billion euro;

However troika imposed certain reform conditions on the Greece for the improvement of its financial situation. These reform conditions mainly include:

  • severe austerity measures to cut down government debt;
  • privatisation of government assets;
  • and structural reforms to improve the growth prospects;

But these severe austerity measures were highly unpopular in the Greece. After the Greek election 2014 new government refused the terms of the agreement between the troika and the earlier Greek government. This led to suspension of the remaining tranches of aid. After this Greece became the first developed country to default. A referendum was carried out across the nation to check whether people accept the earlier bailout terms or not. People rejected the bailout package given by the trioka. However the Greek PM reconsidered its original positions and given the willingness to negotiate the new terms given by the trioka. Some of the terms given in new bailout package for Greece are given below:

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