The financial crisis of 2008 affected the entire globe. One of the major outcomes of the crisis was the increase of public debt in many countries. Such potent economies as Germany, the UK, France, etc. had to face significant financial issues.
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At the same time such peripheral economies as Ireland, Greece, Spain, Portugal, etc. were in danger of complete collapse. Thus, in the period of 2007-2010 gross debt/GDP ratio “increased by 62.3% in Ireland, by 38.2% in Greece and by 36.3% in Spain” which is the largest increase (Kouretas & Vlamis, 2010, p. 392).
Admittedly, many countries face the same problem, i.e. increase of General Government Debt (see Fig. 1). However, it is clear that Greece had the most severe crisis (Young & Semmler, 2011).
Fig.1. Percentages of General Government Debt in Some Countries of Eurozone.
It is necessary to note that Greece has suffered a great economic turmoil. The government had to implement various austerity measures. However, some of these measures have proved to be ineffective.
It is possible to state that Greece should undergo a number of political, economic and social changes to overcome the aftermaths of the crisis and make sure that such a devastating crisis will never occur.
Interestingly, Greece was one of the fastest growing economies in the entire Eurozone in the early 2000s (Kouretas & Vlamis, 2010). However, mismanagement of financial flows led to the increase of private debt. The government tried to decrease private debt with the help of loans, which led to increased public debt.
Combined with severe global financial crisis increased public debt became one of the major reasons of the economic crisis in Greece. Thus, in the late 2009 analysts expressed concerns about a sovereign debt crisis which led to the crisis of confidence (De Santis, 2012).
In its turn, it affected other weak economies in the Eurozone. In 2010 the situation worsened and the International Monetary Fund provided €110 billion bailout to the country. In 2011 the IMF agreed to provide another bailout of €130 billion. However, the Greek government had to undertake certain measures.
There were lots of talks about the second bailout as Greeks were against austerity measures suggested by the Eurozone leaders. There were a lot of riots in the country.
The election which took place in June 2012 was regarded as decisive as the new government was to decide whether to use the plan offered by other European countries.
However, the election proved to be quite unsuccessful as the new government failed to form the necessary coalition to develop a plan to follow. Now there are increasing talks about the so-called ‘Grexit’.
It is possible to define several reasons for the failure of the measures undertaken. In the first place, Greek government’s activities were erroneous. Thus, increased public expenditures caused the crisis.
The Greek government should have reconsidered the amount of these expenditures. Thus, according to Eurostat (2012) while Eurozone leaders cut their public expenditures during the most difficult periods in 2008-2009, Greece steadily increased these expenditures (see Fig.2).
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Fig. 2. Public Expenditures of Some Eurozone Countries on Labor Market Policies (% of GDP).
Secondly, it took too much time for European countries to understand that the sovereign debt crisis in Greece was to be handled at once (Kouretas & Vlamis, 2010). However, the Eurozone leaders hesitated. A lot of discussions were held and countries of Eurozone failed to foresee possible outcomes of such a severe crisis in Greece.
Notably, Kouretas & Vlamis (2010) point out that it was quite difficult to estimate the real conditions of the Greek economy as Greek governments often provided wrong data.
Even when countries of Eurozone agreed that Greece needed help, they could not come to a single decision on what exactly could be done (Kouretas & Vlamis, 2010).
The researchers also note that even when the financial aid was provided, it could not be the necessary solution as European countries which had common currency (euro), had different monetary policies including tax policies, wage policies, budgetary policies, etc. (Kouretas & Vlamis, 2010).
It is also important to note that cultural peculiarities did play an important role in escalation of the financial crisis in the country. Thus, Young and Semmler (2011) state that when Eurozone countries faced the crisis, many of them chose severe austerity measures.
For instance, Germany cut public expenditures considerably (see Fig.2). However, the Greek government was not capable of implementing austerity measures. Greeks were also uneager to comply with austerity measures offered by the Eurozone leaders (Young & Semmler, 2011).
There were lots of riots. People protested against rising taxes, low wages, low pensions, etc. Interestingly, according to Eurostat (2012) the unemployment rate in Greece was not very high compared to other countries (even compared to the Eurozone leaders) (see Fig. 3). However, Greeks insist that austerity measures are far too severe.
Fig. 3. Unemployment Rate in Some Eurozone Countries.
The Greek government was in a very difficult position as the Eurozone leaders demanded implementation of austerity measures while Greeks demanded governmental support. Many people were waiting for the election which took place in June 2012 (Nadeau, 2012).
Democratic forces won, but the election has not led to any outcomes as the new forces failed to form a coalition. Therefore, the Greek government is not ready to choose a path.
Now many European analysts consider the so-called Grexit. Some claim that Greece should leave Eurozone as this will positively affect Eurozone as well as Greece (Buiter, 2012). Of course, there are people who think Grexit will negatively affect economies of other Eurozone countries.
Supporters of the Grexit claim that this is the only way out, and it is rather inevitable. Admittedly, Greeks have already obtained certain financial support from Eurozone countries.
However, Greeks are still reluctant to comply with the rules offered by the Eurozone leaders. This inability to follow the rules makes any other help meaningless or even harmful for economies of other countries.
It is clear that the IMF or European Bank cannot afford allocating funds in such a thoughtless way. The Eurozone leaders should understand that Greece will follow the plan which can help the country overcome the crisis. Basically, the Eurozone leaders want Greece to follow their own ways, which have been quite successful.
For instance, austerity measures have saved Germany from severe financial constraints and made the country one of the Eurozone leaders. Nonetheless, as has been mentioned above, Greece is too different.
Greeks are eager to remain in Eurozone. They want to receive financial help. However, they are not ready for the austerity measures offered. They are still protesting and expressing their discontent with these measures.
It is necessary to note that recent elections have confirmed that Greeks will not comply with the rules set by Eurozone leaders. Democratic forces have won. More so, the present leaders claim they are ready to lead the country using Eurozone leaders’ paths.
Therefore, Antonis Samaras, Greek Prime Minister, states that Greece should accept the rules offered as this will help the country overcome the crisis (Nadeau, 2012). However, the Prime Minister has failed to form a coalition so far. This can only mean that the country’s political forces cannot come to a single solution.
Of course, it is possible to try to form coalition, but now Greece has the only way out. The country needs one more election. However, this time it is essential to make people reconsider their future in the Eurozone. Political forces should have particular programs to follow.
Greeks should understand that their exit from the Eurozone is inevitable. As has been mentioned above, the single European currency is not backed up by a single monetary policy (wage policy, tax policy, etc.).
Euro has proved to be inappropriate for Greece. The country should return to drachma which can positively affect the development of the country’s economy.
First, it will enable Greeks to work out their own way out. They will not need to comply with the plan which is unacceptable for them due to various political, social and cultural peculiarities.
Thus, Greek economy will be separated, so-to-speak. This separation will enable the economy to become a somewhat closed system. Greeks should not rely on other countries’ assistance any more. However, it is important to note that Greece should not leave the EU.
Greece should remain a part of various European organizations and incentives. Though, there should be a particular distinction between cooperation and complete reliance on external assistance.
Basically, Greece should start from scratch. The first step is to hold another election. People as well as politicians should understand that it is time to cooperate. It is time to forget about any ambitions or personal goals.
The country is to be led by a strong political force. The government should not be afraid of launching austerity measures. Of course, these measures should be appropriate. It is also necessary to reintroduce drachma. This Greek currency will help the country become competitive on the global scale.
Though, some claim it can be associated with certain risks, the reintroduction of the national currency is inevitable. Of course, this process should be controlled by the government. Reintroduction of drachma should be implemented in several stages. Greek economy should be prepared for the change.
In fact, it is necessary to note that all the countries of the EU should turn back to their national currencies as this will lead to financial balance. As has been mentioned above, the countries have different financial policies. It is but natural currencies should also be different.
Perhaps, in future the EU countries will manage to work out a common policy (wage, taxes, budgeting policies). This will enable the countries to introduce a common currency. In fact, common currency should be one of the final stages of integration.
In case of the Eurozone, introduction of euro was quite a hasty decision. However, there are also positive outcomes as now it is clear that the EU is not ready for a common currency.
As far as Greece is concerned, the country should also pay special attention to private debt. The Greek government should not try to decrease private debt at the expense of public debt as it will inevitably lead to another sovereign debt crisis. It is important to note that private debt in Greece can be handled without loans.
Fig. 4. Private Debt in % of GDP.
Thus, according to Eurostat (2012) other Eurozone countries (even Eurozone leaders) have higher rates of private debt (see Fig. 4). Kouretas and Vlamis (2010) note that private debt was increasing in the period of the economic boom. Therefore, this process is inevitable and it should be handled accordingly.
On balance, it is possible to note that the recent European sovereign debt crisis in Greece was caused by a number of reasons. On the one hand, the country failed to cope with the increase of private debt. The government tried to solve the problem with the help of loans from other Eurozone countries.
On the other hand, Eurozone countries failed to address the urgent issues which contributed to escalation of the crisis in Greece. Finally, even financial support of the IMF and European bank did not work for the country as Greece was unable to accept the plan offered by Eurozone leaders.
Of course, there are specific measures which can be undertaken to help the country overcome the crisis. Firstly, the country should have another election. Secondly, the country should reintroduce drachma.
Finally, Greece should not try to handle increase of private debt at the expense of public debt. It is also important to note that the two latter measures can help other Eurozone countries overcome the aftermaths of the financial crisis.
Buiter, W., (2012). Race to save euro will follow ‘Grexit’. Financial Times. Web.
De Santis, R. A., (2012). The euro area sovereign debt crisis: Safe haven, credit rating agencies and the spread of the fever from Greece, Ireland and Portugal. Working Papers Series. Web.
Eurostat, (2012). Statistics. Web.
Kouretas, G. P. & Vlamis, P., (2010). The Greek crisis: Causes and implications. Panoeconomicus, 4(1), 391-404.
Nadeau, B. L., (2012). No ‘Grexit’ after Antonis Samaras and new democracy win Greek Election. The Daily Beast. Web.
Young, B. & Semmler, W., (2011). The European sovereign debt crisis: Is Germany to blame? German Politics and Society, 97 (29), 1-24.