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8Debt crisis in Greece

Debt Crisis in Greece

Debt Crisis in Greece


Follow mg the financial crisis of 2008 which imp0loded the wall street, Greece became the focus of the debt crisis in Europe. While global financial markets were still reeling, the government of Greece announced in 2009 that its treasury had been underestimating its deficit figures. This led to a scrutiny in the determination of the soundness of the finances of the country. By the end of 2010, Greece was excluded from borrowing in financial markets and this threatened the possibility of bankruptcy in the country and the eruption of a new financial crisis (Arghyrou & Tsoukalas 2011, p. 180). The European Union through the International Monetary Fund (IMF) and the European Central Bank (ECB) provided about 240 billion euros as the first two international bailouts for Greece. These institutions provided bailouts with conditions that resulted in deep budget cuts and an increase in taxation among other business conditions. Despite the bailouts, Greece is still experiencing a financial crisis (Mourlon-Druol 2012, p. 1). This paper will evaluate whether the EU should continue bailing out Greece from its current financial crisis. In addition, the paper will also assess whether Greece should change it current domestic economic policies in response to the demands of the EU.

The role of the EU in bailing out Greece form its current financial crisis

One of the prevailing discussions in European politics today is the economic challenges that the Eurozone faces. Despite the strength of the euro, Greece has requested for multiple bailouts from the European Union considering the sluggish economic growth that the country has been experiencing since the 2008 global financial crisis (Arghyrou & Tsoukalas 2011, p. 182). The European Union has a moral, economic, and political responsibility to continue bailing out Greece for its current economic crisis. This is because at the beginning the EU was created as a political project targeting the promotion of economic growth, unity of member states within Europe and the existence of peace and democratic institutions among the member states. While ensuring economic growth among member states, part of the role of the European Union is to protect the euro in the fluctuating market and ensure it is strong enough to guarantee progress among the member states (Arghyrou & Tsoukalas 2011, p. 182). Prior to the financial crisis in Greece, the EU considered the euro as a symbol of success. However, failure by the EU to secure counties in the peripherals such as Greece form the possibility of bankruptcy revealed the weakness of the EU in ensuring economic development among member states (Hix & Høyland 2011, p. 253). The Greece debt crisis presents a challenge and an opportunity for the EU to prove its relevance as unifying body in Europe. This is because failure to help Greece through bailouts would be an indication of the inability of the EU to promote cohesion, democracy, and economic growth among member states (Mourlon-Druol 2012, p. 1).

The rest of the European member states have a responsibility of continuing the bailout program for Greece. This is to be done with the objective of preventing contagion and the prevention of moral hazards through austerity measures. Such bailouts would protect the interest and investments of the creditors and the debtors of the European Union Member states (Caporaso 2012, p. 24). Being the debtor, Greece is disadvantaged economically and this explains why Germany through its austerity measures offered to help bailout Greece (Manolopoulos 2011, p. 154). These bailouts were however channelled through the domestic and political constraints affecting the country. The objective of these measures was to prevent the possibility of the occurrence of a moral hazard by insisting on budget reductions and the restructuring of Greece fiscal policies (Pagano 2013, p. 2). For countries such as France the decision to grant bailouts to Greece was based on the desire of minimizing contagion of the crisis into other European countries and minimizing losses to its investors operating in Greece. A unified move by the rest of the EU member states would guarantee the government in Greece of financial support, which would also lead to the development of, polices aimed at streamlining the fiscal state of the country and safeguarding the interest of other investors within Europe (Pidd 2011, p. 1).

It is noticeable that the Greek debt is relatively high for the government to be able to refund its investors. This is based on the consideration that the country operates on low economic productivity and weak administrative capacity to ensure effective collection of taxes (Caporaso 2012, p. 25). Collaborative efforts and bailouts by the rest of the EU member-states it make it easier for the EU, through the European Central Bank, to implement its plan of conducting long-term refinancing operations (LTROs) which would act as a guarantee that all the European banks will experience full liquidity in a period of three years at a nominal interests of 1%. The involvement of all the other EU member states in solving Greek’s financial crisis through bailouts would act as a sign of the unity among the member states in executing the mandate of The EU towards its member states (Pidd 2011, p. 1).

Should Greece change its domestic economic policies in response to demands from the EU?

There is need for Greece to change its domestic economic policies in response to the demands by the EU. This is because the country does not have a stable local currency and therefore it relies on the strength of the euro to finance its operations. It is therefore necessary for the government in Greece to engage in the implementation of measures that will make the economy more competitive and highly conducive for business (Caporaso 2012, p. 28). Such measures would make it easier for the economy to attract more investors into the market. Such an attraction of more investors would improve the level of productivity of the underperforming Greek economy hence beginning the initial steps of solving the debt crisis (Schulte, M. 2011, p. 3).

The change of domestic economic policies will be in agreement with the laws governing the use of the euro among the EU member states. This is because through stringent domestic polies focusing on austerity measure, it will be easier for the government of Greece together with the European Union to develop ways of integrating the economy of the country together with those of other EU member states (Risse-Kappen 2014, p. 23). The domestic economic policies that would guarantee Greece solution towards the debt crisis would be decrease in expenditures on wages and social welfare activities. These would ensure an increase in the competitive nature of the country’s economy within Europe (Elliot 2011, p. 13). A continuation of the crisis and any failure by Greece to integrate itself in a rapid manner would necessity permission by the economy to default or exit the EU. Furthermore, it is important for Greece to ensure a change in its domestic economic policies because failure to act on its misguided economic policies would mean a reduction or total refrain from bailouts by the EU, the IMF and other counties within the Eurozone (Schulte, M. 2011, p. 3).

The current crisis in Greece means that the country does not have the power to renegotiate the austerity measures as presented by the EU. The EU is representative of a regional political and economic block with the objective of strengthening and improving economies of its member states (Wolff 2015, p. 14). This is an indication that to be able to solve its international debt crisis, Greece must be aligned with the requirements of the EU. This is because the institutions that form the regional body were designed to prevent member states from engaging in radically revision of economic policies. Like any economy in the EU, Greece is less sovereign in terms of control over its economy and this requires some form of alignment between its operations and those of the ECB (Risse-Kappen 2014, p. 26). The ECB operates on the understanding that political and economic systems represent dense players whose adaptation to initial changes often generate a network dynamics and effects of interactions that could result in radical change for the concerned parties. For Greece economy to demonstrate its desire and ability to solve its debt crisis, it is important for the lawmakers to demonstrate their desire by embracing domestic economic policies targeting economic growth and competitiveness (Pisani-Ferry et al 2014, p. 1).

The main aim of altering the domestic police in Greece is to restructure the debts structure in the country. The debt crisis as it is experienced in Greece is not viable and the stringent austerity measures aimed at the generation of large surpluses in the future may stile economic growth and increases the unemployment rates (Wolff 2015, p. 20). However, from a broader perspective changes to the domestic economic policies in Greece would help the country in amassing wider support from countries within the region. This will call for a European conference on the EU public debt that will attempt to convince countries into bailing out Greece form its debt (Risse-Kappen 2014, p. 27).


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