Essay Example on Greece's Economic Crisis: Impact and Causes

Introduction

The financial crisis has been a critical aspect affecting many countries across the world. Greece is one of the European countries that have highly experienced a major impact due to the financial crisis. Usually, the Greek crisis started in 2009 after the government failed to effectively control its financial system, thus weakening the economy (Sands, 2015). As such, the country's economy severally experienced major shocks, thus affecting its ability to run numerous activities (Kapiki, 2012). The country also experienced challenges in the establishment of monetary policies, thus hindering activities such as tax collection (Notta & Vlachvei, 2014). Additionally, the financial crisis exposed prior government information about the debt level and deficits, which has not previously been reported (Ziabari & Milios, 2019). In the 2010 budget, the debt of the country had increased from 269.3 billion to $ 299.7 billion, which was about 11 percent higher than the prior-year (Notta & Vlachvei, 2014).

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Due to the crisis, a large number of economists lost confidence over the Greece economy. The issue was illustrated by a widening of bond yield spread as well as the rising cost of insurance cover (Sands, 2015). In comparison to other European nations, the insurance cover was too high, and this clearly indicated the ongoing danger of financial problems (Mitsakis, 2014). As such, the authority established 12 rounds of tax increase, minimizing the spending coast, and economic reformation (Notta & Vlachvei, 2014). These policies were negatively received, causing riots and national wide demonstrations. Due to massive resistance from the people, the government conducted a referendum that rejected further severity measures on controlling the condition (Ziabari & Milios, 2019). Despite various rules set to control the crisis, the country required more loans to finance various economic activities across the country.

From 2012 to 2015, the government pursued more financial assistance from the International Monetary Fund, Eurogroups, and European Central Bank. Due to aspects such as recapitalization, the country received 50 percent ‘haircut’ on the debt (Ziabari & Milios, 2019). In 2015, the country debt had reached up to €323 billion (Kapiki, 2012). In the same year, Greece becomes the first developed nation to fail to repay its loan within the stated time. In 2017, the debt-to-GDP ratio increased from 127 percent to 179 percent (Sands, 2015).

Causes of Greece Crisis

Great Recession

The rise of the Greek economic crisis has a major root in the Great Recession, which impacts the budget deficits in numerous European countries. Due to the Great Recession, Greece experienced a major budget deficit, which was 10.2 percent of GDP (Notta & Vlachvei, 2014). As such, the country experienced a high public debt to GDP ratio. Additionally, the country was not in a position to control the ratio and reached 127 percent of GDP in 2009 (Notta & Vlachvei, 2014). Despite being a member of the Eurozone, the nation had no independent monetary rules that could resist the issue of the Great Recession.

Controversial Statistics

The effect of controversies on Greek statistics was highly associated with the financial crisis. The drastic budget deficit was linked with an increase in the calculated value of the public debt by 10 percent (Kapiki, 2012). The approach triggered major arguments, and this caused the country to be punished by increasing the interest rate (Notta & Vlachvei, 2014). Due to an increase in interest rate, the country experiences a major challenge, especially when seeking financial support hindering other activities across the country.

GDP Growth Rate

In 2008, the GDP of the country was lower than expected (Notta & Vlachvei, 2014). As such, the government was forced to introduce policies to improve competitiveness, especially by minimizing salaries and bureaucracy (Mitsakis, 2014). Other non-growing sectors, such as the military, were forced to engage in economic activities with the aim of improving the economy (Notta & Vlachvei, 2014). Additionally, the global financial crisis had a major negative effect on the GDP rate of the country. In 2009, major economic activities such as tourism and shipping were badly impacted by the global financial crisis, causing a 15 percent revenue reduction (Kapiki, 2012).

Government Deficit

From 2004 to 2009, the country was linked with imbalance development (Notta & Vlachvei, 2014). As such, the government failed to effectively balance between output and input. The country experienced an expenditure increase by 87 percent against 31 tax increase (Notta & Vlachvei, 2014). As a way of controlling the condition, the government established several policies to cut the expenditure and implement a growth rate of 3.8 percent (Ziabari & Milios, 2019). The government also established high taxes to secure the revenue rate (Kapiki, 2012). Due to high spending, the country experienced an increase in debt. The structural economic reforms were not enough to cater for the large debt in the country (Notta & Vlachvei, 2014). Therefore, the debt increased to an unsustainable level subjecting the country to a major financial issue. In comparison with 1993, the debt-to-GDP ratio had increased by 29 percent in 2011, and if the condition was not controlled, it was expected to increase up to 198 percent (Notta & Vlachvei, 2014).

Data Credibility

The first issue on data credibility arose in 1999 when Greece was applying for Euro membership (Ziabari & Milios, 2019). From 2005 to 2009, Eurostat noted some controversies about the Greek fiscal data (Sands, 2015). Due to the issue of data misreport, the country experiences a major challenge in GDP growth. At the end of each year up to 2014, the country figures were below the expectation (Ziabari & Milios, 2019). Due to data persistence, the country could not effectively resist the economic challenge (Kapiki, 2012). The approach forced the Eurostat to revise the financial magnitude, thus controlling further challenges (Mitsakis, 2014). It was highlighted that from 2000 to 2010, the government had exceeded the Eurozone stability feature (Notta & Vlachvei, 2014). After the revision, it was established that the government debt was 115. 1 percent of GDP (Notta & Vlachvei, 2014). As such, the country debt was significantly higher than the recommended state (Sands, 2015). It was reported that misreporting and lack of credibility on financial information has been a key challenge causing the fiscal issues (Li et al., 2013). In 2014, the European Parliament stated that the problematic condition facing Greece was due to statistical fraud in the prior years (Ziabari & Milios, 2019).

Government Spending

From 2000 to 2007, the country's economy was growing at a rate of 4.2 percent (Ziabari & Milios, 2019). However, the high capital inflow overlapped with a higher budget deficit. The government of Greece experienced a deficit of 3 percent from 1981 to 2013 (Kapiki, 2012). Due to improper management of funds, the country experienced a problem even in financing some essential departments such as the military. In 2008, the country was the largest importer of arms, and hence military force spend a lot of government money (Notta & Vlachvei, 2014). In 2013, Greece had the second defense spending after the United States (Ziabari & Milios, 2019). Maintaining these systems forced the government to use a lot of resources, thus subjecting the country to an economic crisis (Kapiki, 2012). Additionally, the country experienced a challenge in balancing payments, and this issue was stimulated due to capital flooding in the south (Notta & Vlachvei, 2014). Due to the issue of imbalance, the government was forces to seek financial assistance from foreign countries (Sands, 2015). When the inflow of money stopped due to a crisis, the government was forces to minimize the spending (Li et al., 2013). Due to a reduction in inflow, the country experienced currency devalue.

Tax Evasion and Corruption

In 2007, Greece was reported to be the most corrupt country in the European nations (Sands, 2015). The country lacked an effective approach to handle the issue. In 2017, the government established ant corruption strategy, which was meant to counter massive illegal actions in the country(Notta & Vlachvei, 2014). The high rate of corruption and tax evasion was perceived as a major barrier toward debt control (Mitsakis, 2014). In 2012, the tax receipts were below the required level, and this posed a major issue in repaying the debt (Notta & Vlachvei, 2014). In particular, the country tax was 24.3 percent of GDP (Sands, 2015). Most individuals who work in their businesses failed to repay their tax, thus reducing the country's income. Additionally, in 2012, a large number of people who had engaged in corrupt actions had invested in other countries such as Switzerland (Kapiki, 2012). More than 20 billion euros from tax invaders were stored in Swiss banks (Sands, 2015). A large number of people believe that penalties on tax evasions do not match the crime. As such, people continue to engage in black marketing, thus reducing government income. In 2017, it was reported that more than 95 billion euros are still uncollected (Sands, 2015). This was an increase from 76 billion euros in 2015 (Sands, 2015).

Impact of Greece Financial Crisis

The Greece financial crisis was a major blow across Europe and the world. The issue was associated with a lot of negative effects, thus reducing the growth rate of other countries (Notta & Vlachvei, 2014). Additionally, Eurozone’s structure weakened, affecting the European currency. It was reported that the Greece financial crisis is the worst recession in modern world history (Kapiki, 2012). As such, the financial crisis was associated with social, economic, and political impacts across Europe (Ziabari & Milios, 2019). However, the major impact was highly experienced by individuals and organizations within the country.

Unemployment

The financial crisis increased the rate of unemployment across the region. Many businesses, especially from Greece, were closed as they could not manage to overcome the economic pressure (Ziabari & Milios, 2019). Currently, there are more than 1.147 million individuals in the country who are not employed (Kapiki, 2012). Among those, half receive government support as they cannot manage to cater to their life (Kapiki, 2012). As such, the region experienced an increase in income inequality, disparity, and other social issues (Sands, 2015). When a region is associated with unequal societies, there are high chances that it may face major issues such as debt crisis (Notta & Vlachvei, 2014). Due to the issue, many European nations experienced a challenge in working with Greece. Most of them felt insecure, and this reduced their investment rate.

Additionally, the country experience labor market increase, particularly in the construction sector, as compared to other European Union members. Due to the condition, the country experiences a financial storm because the banks could not withstand the high debt rate (Notta & Vlachvei, 2014). The action highly affected property developers forcing them to slow their businesses (Ziabari & Milios, 2019). The country experienced a sharp fall in output since most sectors could not manage to pay maintenance costs (Sands, 2015).