The fundamental problem with the economy of Greece is that their expenditure and borrowing magnificently exceeds the money the government has saved. This has been partly caused by the fact that the Greek authorities find it virtually impossible to clamp down on tax dodgers.
In 2010, the population of Greece staged a mass protest regarding the massive cuts on the public sector. At this stage, their debt was just over $340 billion. The countries in the EU realised that a bailout was required to make sure the Greek economy does not go bankrupt. The higher powers of the EU feared this because they realised that if Greece goes bankrupt, the money they loaned to Greece would never be returned. It was agreed that a bailout of $145 billion was required in order to replenish the Greek economy.
However, many economists have said that this aid was not spent to its best use. Even with the help of this large amount of money, the Greek government imposed heavier cuts and higher taxation. Instead of focusing on the growth of the economy, the Greeks focused on minimising the shrinking of the economy. The majority of the aid should have been spent on public services and goods, by imposing the Keynesian theory, which was the reason why the USA was the only country that managed to become richer after the Second World War. The Greek government must apply this theory in order to escape this crisis.
Although, this is not a very easy thing to do as since Greece is part of the Euro, they have no control over its monetary policy. All European countries have a single set interest rate which is set by the European Central bank (ECB). The size of Germany’s economy is a third of the whole of Europe’s, therefore they have more influence on the interest rates. A high interest rate creates problems for Greece, because it means people will have less to spend because their debts and mortgages are now more expensive. Interest rates should be low, so the Greek population could spend more, consequently boosting their economic growth.
If the financial crisis does not heal and Greece develops into a bankrupt state, it will impact Britain negatively. The fundamental reason why the UK is not in the same situation as Greece, Ireland and Spain, is because during the 2008 recession, the value of the pound fell dramatically against the Euro. This caused foreign countries and firms to find our exports very cheap compared to before 2008, where the pound was of very high value. Consequently, exports increased, which caused Britain’s economy to come out of recession after two quarters. If Greece crumbles, then the value of the Euro will drop against the pound, which would decrease our exports as EU countries will find British products expensive.
In order for the European economy not to experience a double-dip recession, the Greek economy requires another bailout, and a change in fiscal policy, where government expenditure should increase and taxation should be reduced, to give the Greek population an incentive to spend.
Contributed by Sahand Fousadiasl