In this paper I will be discussing some causes of the problems with Greece’s economy that has lead it to where it is today. I will also be discussing some austerities being put in place to try to resolve these issues and why they are necessary to help Greece become prosperous again.
Greece is currently at a cross roads, their economic practices over the last quarter of a century have brought the country on the brink of being bankrupt. There are many who feel their economy can be turned around by putting various austerities and reforms in to place. The problem has been coming to a general agreement on which path to follow and why. Some are against the austerities that Greece has agreed upon, they feel they are misguided and that they come at a cost of loss of sovereignty. Some feel that this is the price that has to be paid in order to avoid going bankrupt, so they support the austerities. Then, as in all things, you have a large portion of the public who are in the middle. They are unsure if any of these paths will lead them out of crisis.
There has been a lot of talk and questions focused around the short-run solutions to the crisis faced by Greece. Can Greece possible repay their massive debt? Will they have to go through a restructure of the bonds it issued to the private sector? Should Greece exit the euro zone and go back to the drachma? Will the European Central Bank and the European Union offer any more financial help to Greece in the form of bailouts? Are any of these questions even worth consideration if Greece does not implement the proposed solutions to help turn their economy around?
Before going further I feel it’s important to understand the difference between debt and deficit. A deficit is when the amounts of money a government takes in (revenue) is less than the amount the government spends each year (expenditure). When there is a deficit the government has to borrow money to pay their bills, this is a flow variable. This borrowed money then adds to the total debt which is a stock of money owed.
For a 10 year period from 1960-1970 Greece was basically breaking even, operating with almost no deficit or surplus. In the 1980’s Greece’s deficit jumped up significantly. The government’s expenditures exceeded their revenue by approximately eight percent of GDP. The deficit remained at high levels over the next twenty years. Running a high deficit for so many years, lead to a substantial increase in Greece’s debt. It jumped to twenty-six percent of GDP in 1980, then to seventy-one percent of GDP in 1990. This increased debt just added on top of the problem causing more issues with the deficit due to the increasing interest payments.
During these years of increased debt there seems to be a correlation with an increase in consumption and a decrease in investment. Greece spent more on consumption and less on investment into things like infrastructure such as roads and facilities. The government spent the majority of the money it...