Debt is defined as a process where one party pays the money or the agreed-upon value to another party. This consists of small to a large amount of money. The debt crisis in a state happens when the government loses the power to pay back the government’s debt. This is due to the increase in the state expenditures to an extent more than the value of its taxes. This has its huge impact on the state which might lead to disturbances in the economical situations. Debt crisis is a Nations fever that disrupts the entire system. This may spread the economic pain to several other countries and also cause tight financial conditions. There are several ways to solve a small debt crisis by keeping a balance on income and expenditures. The question arises, how to solve when a whole country is stuck in a debt crisis. Few alternatives must be set up for borrowing. The process of borrowing and lending must be balanced better. The small countries with low-income value must improve the tax collection but this is an impossible task as these countries consist of small factories and less qualified workers. They can also improve accountability status and manage in prior for any shocks or economic crisis
Eurozone was created on Jan 1, 1999. It is the common place for easing trade facilities and also to exchange currencies among the other countries. The eurozone consists of Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, the Netherlands, Portugal, Slovakia, Slovenia, and Spain. Over the years, the debt crisis started to arise in the eurozone and slowly all the states try to exit from this union. One of the most affected states is Greece. It was all over the world called the Greek sovereign debt crisis. This crisis is based both on the economical and political contexts. Greece was the first sovereign to be stuck in the middle of the confidence crisis. The Greek debt crisis is one of the dangerous amounts of debt in the European Union where they owed them between 2008 to 2018. They were not able to pay back the agreed value of money in the eurozone. Greece found itself at the center of a wave of criticism by the international press, international organizations, rating agencies, and the European Commission. The other states loaned their currencies to bring back Greece into the game of payback. Since 2010, various states and the Europe union loaned them a total of 320 billion euros. Since 2019, Greece only paid back 41.6 billion euros. Their debt payments were scheduled for 2060. They were in a very difficult situation and all their economic-financial conditions were disrupted. In return for the loan, the Europe union asked them to obtain Austerity measures in their government. The international financial markets and the strikes were crashing down. The business partners were pulling themselves out. The management system lost efficiency in tracking and assessing the spending and also accounting control. The low reform capacity was one of the main cause which made Greece vulnerable during the economic crisis. These measures can lower the indebtedness and can also restrict government spending. They also ensure the budget deficits. This is a harsh method as it increases unemployment as the increase in the credits leads to overall consumption but it is effective under the debt issues. This measure also excluded the pension system and also the early retirement policy. This austerity measure has its own pros and cons. These measures had social effects on people. It was reported that 20,000 people were homeless and were in severe conditions. 20 percent of shops in the center of the city of Athens were empty. The Implications of the crisis in Greece was profound. As one would have expected, the crisis led to a severe worsening of public finances. This was due to the operation of automatic stabilizers, the cost of bailing out the financial sector, and discretionary fiscal measures. Greece could have accepted the debt reliefs and bailout funds in exchange for better austerity. The austerity has damaged the economy, deflating wages and the jobs, the increase in taxes led to the difficulty in paying the existing high debts.
This crisis developed a fear among all the states on the expectation of a global financial crisis. The media printed negative articles throughout the international web and news, before and after the crisis. These negative impacts led to stereotyping and worsened the crisis itself. Years down the line, Greece’s market started to collapse and the financial conditions were unstable. Foreign borrowing reduced because of low credibility. Many states were asked to exchange currencies for less debt. As of 2017, Greece had a national debt of approximately EUR 329 billion. Its debt to GDP ratio is 179 percent. The European Union struggled to come up with a solution. Greece pleaded the EU for forgiving a few debts but they were not in a position to let the Greece scot-free. The biggest lenders to Greece were Germany and its bankers. They encouraged n the austerity measures as it would add to the advantage of Greece’s global market place. They would ensure the adjustment of public finances. It can also lead to lowering the taxes and trade barriers and may evolve in the exporting products through trade. The Greek economy shrank 25 percent. That reduced the tax revenues needed to repay the debt. The rate of unemployment reached 25 percent which involved the unemployment of the youth to 50 percent. The elections and the political system at that time were a mess and the people were blind folded and voted for those who pave a way out of the severe status. In return for the implementation of austerity measures, the EU and international monetary fund gave 240 billion euros in emergency return. The money was only used to pay the existing debts and to keep the banks capitalized. EU stood behind them in all situations as they don’t want to face the consequences if Greece left the union or get defaulted. EU and the other bond agencies were harsh on Greece as they don’t want it to use the money for paying off the old debts. Countries like Germany, Portugal, Spain, Ireland, etc followed the austerity measure and maintained their economies. They expected Greece to follow the same. The EU was ill-equipped to face such a crisis though they have dealt with many in their union. The speedy measures and instant responses were difficult to handle. The public finances and international markets remained persistent with problems throughout, since the entry of Greece’s crisis. The Greek GDP declined to a value where it leads to a depression dynamic situation.
When the financial crisis hit the international economy, Greece was still plagued by fiscal imbalances and low international competitiveness. Despite efforts to address the situation since the 1990s, public debt had been stabilized at a high level relative to GDP, and the fiscal situation remained as one of the most serious problems of the Greek economy. On July 20, 2015, Greece made its payment to the ECB with the help of the loan with 7 billion euros from the EU emergency fund. In November, Greece’s four biggest banks privately raised 14.4 euros billion as required by the ECB. The banks were slowly functional and the funds were used to cover the loans. The bailout loans were used in exchange for the loans of 86 billion euros. In March 2016, the bank of the state concluded that Greece would be back to normal by the summer. The EU’s European stability mechanism gave 7.5 billion euros to sustain the rest of the funds. The austerity measures were still functioning as per the legislation. With the euros, the pension and other tax systems were controlled. On Jan 15, 2018, they adapted new austerity measures for the next round of bailouts. The new measures were introduced which can restrict other states in paralyzing Greece. They opened up energy and pharmacy markets and also an implementation of new child benefits. It also lead to the closure of bad debts. On August 20, 2018, the bailout program ended. Most of the debts were owed to EU funding entities. Until the debt was repaid, the European supervisors monitored the existing austerity measures.
EU and Greece got into this mess in 2001 when Greece adopted the euro as its currency. It could not get into the eurozone as the budget deficit was too high as per its criteria. Later Greece announced that in order to become a member of the EU, they lied. But Greece did not pay for their actions as at that time the France and Germany were earning high and concerns were spread in order to maintain their austerity measures. Throwing Greece out will be disruptive to the union and other bond markets. Greece could have changed its euro to the drachma and continue its economic business with drachmas. This could have actually increased the employment and lower the tax sufferings. The austerity measures would not have been implemented. But if this situation arises, it may affect the foreign investors of Greece. The mode of payback would have been very difficult. Greece would have suffered in all the foreign products investment. If drachma was introduced then it could only partner with Russia and China which eventually will bring down Greece and fall into the debt trap. As borrowing costs and finance dries up, Greece was not able to cope with the mounting debt.
With unstable property rights and the judicial obstacles, Greece is still selling assets worth 50 billion euros. After the great fall in the country both economically and financially, the brightest and the people who were predicted to bring good to the state fled from the country. The banks are still afraid to provide loans and advances. None of the citizens want to experience another major fall. Few people are paying high taxes than the normal value to reduce government spending. People only have low wage jobs and the bond markets have not yet recuperated. This is a slow path to recovery.
About the author
Kiruba Kandaswamy is from Tamil Nadu, doing her BA.LLB(Hons) from Sastra University. She loves dancing and wishes of adopting dogs.