Euro Crisis in Terms of the Greek Debt Issue - Case Study Example

Euro Crisis in terms of the Greek debt issue Euro Crisis in terms of the Greek debt issue Introduction Greece had experienced a rapid growth in its economy in the year 2000. The economic growth of Greece during this time was regarded to be the fastest growing in Europe (James, 2001). This caused the government miscalculated its budget and planned to introduce defensive strategies since Greece and Turkey were experiencing some political and economical differences. The investment of the government of Greece took a wrong turn since between mid 2000s and 2010 the economy begun to depreciate worldwide. This aspect caught the government of Greece unawares because the expenditure that had been made on the defense equipments was so high meaning that the rest of the country’s economy had been under budgeted. The major economic sources that comprised of tourism and the shipping industry were adversely affected by the economic deterioration that had hit all parts of the world. Lack of monetary fund to plan and budget for the governmental and non-governments needs arose in 2010. This caused the government of Greece to request for a loan in late April in the year 2010 from the European Union and International Monetary Fund (IMF) so that it could be able to cater for its needs and the needs of its citizens. Researchers announced few days after the issuing of the loan that the Greek government could not be able to repay the loan thus the investors that have invested in the Greek government and companies risked losing almost half of their investments. This announcement caused fear among the investors, existing and willing investors, and they withdrew from their original plans to avoid further losses. Effects of the crisis of Greece The Greek government had to introduce drastic measures that led to the infliction of high economic standards to the citizens of Greece in May that year. The high cost of living and low-income rates due to high taxes and other governmental requirements made the Greek citizens to have a series of peaceful protests, which later turned into social instability and riots in Greece. The International Monetary Fund in conjunction with European Union intervened and added an additional loan to the Greek government in 2011 on condition that it could regulate the flow of money and economy (James, 2001). In addition, Greece was supposed to come up with a structure of repaying the loan. This structure was to be produced by the Greek government and agreed upon by the International Monetary Fund, European Union and the Greek government. The European Union gave pressure to the prime minister of Greece due to the improper management and governance during his regime and threatened to withdrawal part of the loan that they were supposed to process for the Greek government. This led to George Papandreou step down to give room for an election of a new and focused regime to cover for the damages caused and give room for more external and internal donations and loans. The resigning of the prime minister caused or led to the release of the percent of the loan that had remained and the appointment of an interim prime minister to take control of the debt repayment and proper use of allocated funds. Scholars and economic analysts has been following up the case of the Greek economic break down and that of the European Union and are suggesting a possible break through for the European nations. The economic analysts are suggesting that the Greek government should stop using Euros and bring back its former currency, drachma, as its currency until it stabilizes. However, this would result in a political and economical instability and deterioration (Drazen, 2011). Some scholars argue that the reintroduction of the drachma would result to a more than 50% fall in its value if Greece chose to drop the use of Euro. This would mean that that the Greek government would suffer from high rates of inflation and there are possibilities of riots, military coups and war. In order to avoid this outcome, the European Union together with the International Monetary Fund decided to add an additional loan to the Greek government in 2012. This was agreed upon the realization that there would be an initiation of riots and war (Drazen, 2011). The agreement made by IMF and EU with the Greek government is regarded as the biggest debt to be restructured. Greece was given bonds that had low interest rates and a longer repayment period. The investment of the government of Greece took a wrong turn since between mid 2000s and 2010 the economy begun to depreciate worldwide. This aspect caught the government of Greece unawares because the expenditure that had been made on the defense equipments was so high meaning that the rest of the country’s economy had been under budgeted. Scholars and economic analysts has been following up the case of the Greek economic break down and that of the European Union and are suggesting a possible break through for the European nations. Economic analysts and researchers that Greek government should drop the use of euro and bring back its former currency, drachma, as its currency until it stabilizes, have suggested it (Bernanke, 2000). European Debt Crisis The European debt crisis is a monetary constraint that has affected some of the governments in Europe that use euro as their medium of exchange and thus resulting to the intervention of other countries or organization to enhance the stability of these governments. There are several countries that have been hit by the economical crisis in Europe but the mostly affected is Greece. The effect of the debt crisis hit the European countries in 2009 and caused ripples to the investors who had already invested in companies and institutions in the affected counties. The upcoming investors had to withdraw from investing their resources in the affected countries because the feared losing their investments (Boone & van den Noord, 2011). The debt crisis has risen and appeared in few countries in Europe but its effect has been felt all over Europe since the investors and other business and economic partners have a negative attitude towards the European countries (Cerra & Saxena, 2008). There is a notion that the debt crisis can spread to the other European regions thus instillation of fear in the investors. Three countries are mostly affected by the debt crisis. These countries are Greece, Portugal and Ireland. Causes of the Debt Crisis Various factors and aspects lead to the debt crisis in the European countries. Various research practitioners have conducted research on the causes of the financial crisis and have had to base their research from earlier days before the crisis even occurred. This is effective in ensuring and indicating the different types and factors that contributed to the problem. According to the conclusion drawn by the different research practitioners, the social, economical and political aspects influence the causes of the financial crisis. These factors can be listed as, Globalization of finance- the finance of different countries and nations are limited and compressed to use a centralized form. This means that the different currencies are changed to a uniform currency. High rates of lending and borrowing between 2002 and 2008- This contributed immensely since the rate at which loans were finalized and received were high thus causing higher borrowing and lending rates. Lack of balanced international trade- This was caused by the development of other alternative goods and services from other competitors. In 2008, the economic growth and development was sluggish and thus the income and revenue realized could not balance with the level of output and labor produced in the production of the goods and services. The effects of the debt crisis came into being when the investment of the government of Greece took a wrong turn since between mid 2000s and 2010 the economy begun to depreciate worldwide. This aspect caught the government of Greece unawares because the expenditure that had been made on the defense equipments was so high meaning that the rest of the country’s economy had been under budgeted. The Greek government had to introduce drastic measures that led to the infliction of high economic standards to the citizens of Greece in May that year. The high cost of living and low-income rates due to high taxes and other governmental requirements made the Greek citizens to have a series of peaceful protests, which later turned into social instability and riots in Greece. The release of the percent of the loan that had remained and the appointment of an interim prime minister to take control of the debt repayment and proper use of allocated funds avoided immense repercussions by the Greece citizens on the Greek governance. Scholars and economic analysts has been following up the case of the Greek economic break down and that of the European Union and are suggesting a possible break through for the European nations. There is a notion that the debt crisis can spread to the other European regions thus instillation of fear in the investors. Three countries are mostly affected by the debt crisis. These countries are Greece, Portugal and Ireland. The debt crisis has risen and appeared in few countries in Europe but its effect has been felt all over Europe since the investors and other business and economic partners have a negative attitude towards the European countries. Conclusion There are very alarming factors are been considered regarding the sustainability, prevention and spread of the financial crisis in Europe. The European countries have to work together and ensure that the financial crisis ceases instead of developing to other countries (Bosworth & Flaaen, 2009). The International Monetary Fund in conjunction with European Union has to intervene and add an additional loan to the affected countries to avoid further financial crisis and high costs of living. References Bernanke, B. (2000). Essays on the Great Depression. Princeton. Princeton: University Press. Drazen, A. (2011). Political economy in macroeconomics. Princeton: Princeton University Press. Boone, L. & van den Noord, P. (2011). Wealth effects on money demand in the euro area, Empirical Economics 34, 525-536. Bosworth, B. & Flaaen A. (2009). Americas financial crisis: the end of an era. The Brookings Institution. Cerra, V. & S.C. Saxena. (2008). Growth dynamics: the myth of economic recovery. American Economic Review. 98, 439-457. James, H. (2001). The End of Globalization. Lessons from the Great Depression. Cambridge, Massachusetts: Harvard University press. Read More