After the Financial Crisis of 2008, the world has experienced numerous economic threats. Greece’s Default is one such threat. In a capitalist economy, people can use money that does not exist and, in turn, cause prices to rise. In order to raise the price level, countries need to manage their economy to minimize damage. However, in the case of Greece, they failed to avert the danger. Greece was actually aware of the debt problem from 2009. So why weren’t they able to address it in time? There are many reasons behind the Greek default, but this article will address three main causes: joining the Eurozone, the corruption of Greece grandees, and welfare.
The Eurozone, officially called the Euro area, is a monetary union that has adopted the euro (€) as their common currency and sole legal tender. Of the 28 European Union (EU) members, 19 (including Greece) use the euro. While the members’ purpose of joining the Eurozone was pure and noble, this was never deemed an absolute solution. As a result of the union, the financial differences between the members of the Eurozone have diminished. While the financial situation of some members has improved, others have met with financial crisis. Unfortunately, Greece is one of the victims. Because of the Eurozone, Greece was unable to implement their own unique economic policies to cope with different financial situations. As their economic fluency eroded, it became tough for them to respond quickly to the debts crisis.
While the Eurozone is the external cause, the corruption of high-ranking officials can be seen as the internal cause. As the economic recession continues, corruption is prevalent throughout Greece. With limited access to money, people would go to extreme lengths to avoid the impact of the financial crisis. Even the grandees of Greece joined in. Moreover, tax evasion occurred frequently. The evasion of swimming pool tax is a good example. In Greece, if you own a swimming pool, you are required to pay a tax. Satellite pictures show that although 16,974 houses have swimming pools, only 324 reported pool ownership to the taxing authority. Numerous other taxes are not being collected either. It is estimated that 20 billion euros, which represents 8% of the country’s gross domestic product (GDP) is lost annually.
The final potential cause of the Greek default addressed in this article is welfare. It is highly debatable whether welfare played a role in the default. In Greece, 17.5% of GDP is spent on pensions. While this figure is similar to that in other common European countries that provide welfare benefits, some argue that pensions are not fairly distributed. Greece provides citizens free education and medical treatment, but the quality of these services is low, forcing people to pay out of pocket for private education and medical services. As a result, when in a financial crisis, only people with sufficient discretionary income can afford high-quality services, thus widening the rich–poor gap.
There are other opinions that the welfare is not the cause of the default. They mean that the welfare is not the direct cause of the default. According to their opinions, despite the existence of the defect of the welfare, their impacts are at very minimum level and pension plan is quite reasonable compared to other countries.
While the direct cause of the default is debatable, progress is being made to restore the Greek economy. At the beginning of the crisis, Greek citizens were in a state of confusion. People were unable to withdraw their money from banks and inflation kept growing. Prices were rising, and people were unable to buy necessities. Eventually, the pubic staged an armed protest for their survival. Their anger led to even more confusion. On July 20, Greek banks reopened, but the tax rate was still high and only small withdrawals were permitted. The problems in Greece have not yet been solved and people have been trying to minimize the damage on their own. Some have left Greece and found employment in other countries. Many companies that were located in Greece managed to move out to avoid the threat. Others who chose to stay in Greece returned to the old system. They chose self-sufficiency, which would not be influenced by the present economic threat facing Greece. While citizens and companies found their own ways of survival, the Greek government struggled to get out of the default.
On July 23, as the Greek parliament passed the second economic -reformation bill, they started preparing for negotiations of the third bail-out program. The program’s ultimate goal is to get the support for a bailout of 86 billion euros. The Greek government is pursuing this in another attempt to fix the ailing economy. Unfortunately, they are facing challenges as a result of the astronomical costs and the uncertainty associated with their ability to satisfy obligations. The program is still being negotiated and suggestions have been made regarding a more realistic plan to solve the problem at hand. The parliament has suggested initially giving 24 billion euros to address the problems of Greek banks. This will help provide the banks with capital as well as assist them with debts payments. While these economic activities are currently being discussed in Greece, some experts have come up with another solution—Grexit.
Grexit is a combination of the words “Greek” and “exit.” This plan involves withdrawal from the Eurozone. Once the plan is initiated, Greece will be free from the Eurozone’s monetary system, which means they can issue original Greek money, the drachma (₯). Their economic system will be separate from the Eurozone. This solution may seem groundbreaking in the establishment of their own monetary system, but it has both pros and cons.
Most of Greece’s income is derived from the tourist industry. Proponents of the Grexit believe that the value of Greek money will go down and this will revitalize the tourist industry. With the return of the tourist industry, Greece will begin to see a surplus in their trade balance and growth in employment. Eventually, the economic state of Greece will be re-stabilized.
On the other hand, those opposed to the Grexit feel that it can intensify inflation, and this is a serious problem. Economic revitalization will not happen immediately and this can lead to financial instability, impacting financial resources. Inflation will also increase the gap between rich and poor. This can cause unrest among Greek citizens and bring about social conflict between the citizens and government. As a result, opponents fear that the Grexit will further compound Greece’s problems.
The probability of the Grexit being implemented is very low. Germany is the leading power within the Eurozone and withdrawal for Greece will not be easy. In addition, Greece’s prime minister is from Syriza, an area that holds a conservative attitude toward the Eurozone. Therefore, the prime minister is unlikely to seriously consider the Grexit.
Following the Greek default, some experts are suggesting that the world will soon experience a massive economic crisis and every system will collapse. While every society has problems such as capitalism, the important lesson to learn from the Greek crisis is one of preparation. Countries should learn from Greece and put the necessary steps in place to become prepared for and be able to prevent a similar economic crisis.
The Republic of Korea has not been affected much by the default, but they have learnt that they are no longer economically safe. Some people claim that Korea should follow the welfare system of certain European countries, but it would be dangerous to not consider the consequences. Such extreme change can be very risky. Having said that, sticking to existing policy is not the answer. The best solution would be to keep watching the global economic situation and adopt policies that fit well with the current circumstance.