The Historic Downfall of an Economy: The Greek Debt-Crisis

The Beginning 

On January 1, 1981, Greece had joined the European Union with a debt-to-GDP ratio of 28% and a budget deficit of 3%, in other words as a somewhat perfect economy.  At this point, there were two main political parties, the NDP and the PASOK, both of which were founded in the year 1974. Both parties were alternating in power hence kept increasing spending on liberal welfare policies in an attempt to keep the Greek citizens happy. The increasing liberal welfare policies along with the increased expenditure led to the creation of an inefficient and protectionist economy.  

As both parties were fighting for power, the policies laid out by them while in power set Greece on a very unsustainable fiscal path. For instance, public-sector wages for workers automatically rose every year, completely disregarding factors such as their productivity, performance, and efficiency. Under the right circumstances, Greek women working in the public sector could retire as early as 50 with a pension. Similarly, a greek man could retire as early as 58 with a pension if he had worked for 35 years in the public service sector. Another such infamous policy that would lead to Greece’s downfall was the 14 months pay. Under this scheme, workers would be paid an additional month’s salary in December to meet their holiday expenses. They would also be paid an additional half months pay during Easter. On top of all this, workers would get an additional half months to pay when they decided to take a vacation. 

The Fatal mistakes that led to Greece’s Downfall

As the expenses of Greece kept rising, it had to find a way to cope with its expenses. Greece joined the Eurozone on 1 January 2001 to get foreign money with comparatively low effort. Joining the Eurozone came with benefits. It led to the GDP growth rate of the Greece economy to average at around 3.9% between the years 2001 and 2008, making it the second-fastest-growing economy in the European Union. But these benefits came with a steeper price, that would lead the Greece economy into shambles. 

The cost of this growth was a rising deficit and an increasing debt load. Even before Greece joined the Eurozone, in 2000, Greece had a debt-to-GDP ratio of 103% and a fiscal deficit of 3.7%, both well above the maximum limits set by the European Union’s Stability and Growth Pact of a debt-to-GDP ratio below 60% and a fiscal deficit below 3%.  

The financial crisis of 2008 delivered what was probably the final blow required to shatter the Greek economy and get it crumbling. Firstly, the risk of investing in PIIGS was exposed. Investors started demanding higher yields for their sovereign debts to compensate for the extremely high risks. Moreover, the 3.9% growth rate was no longer positive, the economy of Greece was contracting.  In the year 2011, the debt-to-GDP ratio of Greece topped at a staggering 180%. Its fiscal deficit was also at a record high- 12.7. The Greek and German bond yield spread jumped from just 0.65% to 33%. If all this alone were not enough, Greece was facing a liquidity crisis. 

With absolutely no other options in hand, Greece started looking for funding for a bailout. Several European creditors as well as the IMF was ready to give Greece the funds it was looking for. However, these funds had a condition. They stated that these funds would be provided to Greece only if it made some critical changes to reduce its spending and increase its tax revenues. Greece readily agreed and kept its end of the deal by implementing several austerity measures. 

The implementation of the austerity measures did not work well for the nation at all. It caused the unemployment rates to skyrocket, reaching 25.4% by August 2012. This led to a chain reaction of events that broke Greeces’ chance to get back on its feet. Since the number of jobs reduced, the tax revenue reduced drastically. The unemployment also led to a humanitarian crisis. House-eviction and suicide rates went through the ceiling, and public health declined. 

It was 2015, and Greece had defaulted on a debt of  €1.6 billion to the IMF, making Greece the first developed nation to have defaulted on a payment of this magnitude.