Months of negotiations on extending Greece's cash-for-reforms deal with the eurozone have collapsed, so the Greek bailout ran out on 30 June and Alexis Tsipras's government failed to make a key debt repayment to the IMF. The European Central Bank (ECB) has said it won't extend emergency funding for the banks and there is a growing risk of Greece leaving the single currency. How in the world did it come to this?
Late in 2013 Greece’s public debt was estimated at 171.8 percent of gross domestic product (GDP) (ANSA, 2014), accentuating the Greek debt crisis that has been growing since before the economic crisis of 2008. The fear is that this debt crisis could ultimately have a domino effect throughout the European Union (EU), with similarly high debt to GDP ratios in Italy (132.9 percent), Portugal (128.7 percent), and Ireland (124.8 percent) (ANSA, 2014). The Greek debt crisis, and the international economic response led by Germany, has had an impact on the euro, the Eurozone, the European Union, and other economies in Europe. This paper will evaluate the causes and effects of the debt crisis, and alternatives for the solution to the debt crisis and its after-effects on the Eurozone and the European Union.
Greece’s Commitments to the European Union
Greece was admitted to the European Union in 1981 (European Union, 2014) following ratification of the 1979 Treaty of Accession of the Hellenic Republic (Greece) (1979), and adopted the euro as its currency in 2001 (European Union, 2014). Like every other EU member, the treaty of accession obligates Greece to adhere to the requirements of the EU established by the Treaty of Rome (Treaty establishing the European Economic Community, 1957). However, once a country becomes a member of the EU, there is no enforcement mechanism if a member country fails to adhere to its commitments (Andersen, 2011, March ). The Maastricht Treaty of 1991 attempted to obligate EU member countries to a series of convergence criteria (Carbaugh, 2011):
• Price stability with inflation capped at 1.5 percent of the three countries with the lowest inflation rates.
• Low long-term interest rates at 2 percent above the average interest rate.
• Stable exchange rates kept within the target bands of the EU.
• Sound public finances with the member country’s budget deficit limited to three percent of GDP and outstanding government debt no more than 60 percent of GDP.
The Treaty of Lisbon (European Union, 2010), which consolidated the Treaty of Rome and the Maastricht Treaty, attempted to make the EU’s Charter of Fundamental Rights (European Union, 2000) legally binding. As will be seen below, “Greece’s budget deficit and external debt level are well above those permitted by the rules governing the EU…which calls for budget deficit ceilings of 3% of GDP and external debt ceilings of 60% of GDP” (Rady, 2012).
Background of the Debt Crisis
Starting in 2004, the Greek debt to gross domestic product (GDP) ratio has been...