The Greek financial crisis

In the history of Europe Greece has always claimed a vital role. World famous destination for tourism, a country with perfect climate and rich cultural heritage, Greece faces another kind of challenge.

The national economy that had grown strongly for the last 15 years entered into recession in 2009. Its budget deficit hit 15.4 percent of GDP and later a series of revisions by the government revealed the economy was in far worse shape than it was previously admitted.

Since the major European economies are linked through the euro zone, Greek problems became the problem of the European Union. A debt crisis in Europe's single currency zone has entered a critical phase with fears Greece could default and spark a global financial catastrophe.

Therefore the Greek crisis does have two sides, the first within Greek society, while the other reflects a crisis within the European Union, where several political, economic and cultural factors are intertwined.

Greek government bears huge responsibility for the crisis, especially the Central Bank and the Ministry of Finance, which were supposed to monitor the financial positions and conditions of their affiliated institutions and the tax system, the cornerstone for financing all government budgets. The second parties to be blamed are European banks, especially German and French, which gave loans of tens of billions of Euros without sufficient guarantees. The numbers indicate that French banks gave €40 billion while German banks gave around €25 billion.

Corruption and tax evasion issues
Chronic Greek problems include rampant tax evasion, some estimates show that a quarter of the economy pays absolutely nothing. Due to negligence and corruption only 5,000 people disclosed their ownership of assets worth more than €100,000. Obvious attempt to evade paying taxes somehow went unnoticed by everyone.

The figure is shockingly low for a European country with a population of more than 10 million people. Thus, the Greek government was not able to collect at least €13.4 billion of taxes. Greece has a sovereign debt pile of 350 billion Euros, more than 30,000 Euros for each of its 11.3 million people.

The 110 billion euro bailout accepted by Greece from the European Union and the International Monetary Fund has proved insufficient. The second package worth about the same is being prepared. About 70 percent of Greece's debt is held abroad and the remainder at home. Greece is paying an average 4.2 percent interest rate on EU/IMF bailout loans.

European Union future at balance
The longer the crisis drags on, the greater the risk that contagion will spread to other troubled euro zone economies like Ireland and Portugal, which have also been bailed out before. Spain is often referred as a last stand, because it is much bigger and a bailout could prove too expensive to rescue.

Austerity plans have caused big street protests in Athens. Frequent violent strikes and protests mostly revolve on issues concerning widespread early retirement, tax rises and cuts in benefits and wages. Bank and utility workers, public sector contractors and even doctors have taken to the streets in massive strikes. Private sector workers blame the public sector and likewise, the public sector blames tax cheats of the private sector. They all blame the corrupt politicians for the country's problems.

In reality, the Greek people bear some responsibility because of their negligence and carelessness about the issues of work, employment and productivity. The current unrest of angry citizens will not contribute to the solution of the problem. It will probably complicate it further. A default by Greece would hammer the banks that hold its debt. It could also prompt credit markets to freeze up, thus making banks virtually stop lending to each other. With European future at balance, we eagerly await further developments.

Written by:
Bojan Baretic, MA in Economics

Table of contents
1) The Greek financial crisis summary
Print button image Print | Suggest to a friend