The Greek Debt Crisis: Causes, Impact And Resolution

3131 words - 13 pages

Introduction
Greece is a democratic, high income and developed country from the European continent with the 44th highest GDP and the 29nd highest HDI in the world. According to the International Monetary Fund, Greece’s GDP for fiscal year 2012 was USD 266 billion. The service sector accounts the largest chunk of it at 78% that includes the public and tourism sector. The industrial sector contributes to 18% of Greece’s GDP. Greece’s agricultural sector contributes a mere 4%, as shown in Figure below:

Source: The World Fact book, www.cia.gov.in – Greece (2012)

Source: The World Fact book, www.cia.gov.in – Greece (2012)
The workforce composition is also shown above. It must be pointed that the agricultural sector though corners a significant 20% of the entire workforce but accounts only for 4% of the Greek GDP implying vast income inequalities.
Greece has a history of financial trouble with high debt, endemic corruption and tax evasion. However, things took the turn for the worse in 2008 in the aftermath of the global financial crisis when the country faced a full-blown sovereign debt crisis.
Causes
The Greece economic crisis has been caused in varying parts and with varying significance by a number of factors. The key reasons for the Greek economic crisis can be identified as – Greece’s entry into the Eurozone in spite of its inherent inadequacies; insufficient tax base and reckless government spending coupled with corruption.
Greece officially adopted the Euro and became a part of the Eurozone in 2001. Becoming a member of the Eurozone required countries to meet specific criterion called the Maastricht convergence criteria. However at the time of its admission to the Eurozone, Greece was nowhere close to meeting the requirements. For instance, countries had to have a national debt to GDP ratio not exceeding 60%. Greece had a debt to GDP ratio as high as 126% at the time which was nearly double the criteria. This premature and mistimed entry came with its own set of complexities. The Eurozone is a single interest rate regime with a common exchange rate and a hard currency peg. Members are stripped of sovereign fiscal independence and significant economic policy tools like devaluation. This made Greece one of the weaker members of Eurozone more vulnerable to economic troubles. This magnified the impact of global recession on Greece. With the Euro regime in place, Greece could not adjust its fiscal policy to manage the economy during the time of global economic turbulence. The consequences of this inability were severe.
One of the most important sources of revenue for any government is tax receipts. However, Greece had huge problems here with its tax collections not commensurate with its spending. Greece’s tax take was a small 31.3% in 2008 which fared only better than Ireland among the other Eurozone members. The country grappled with the problems of tax evasion which took a toll on government revenues consequentially having a...

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