Greece Joined the European Union in 1981

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4.2 How Greece became so indebted

Greece was living beyond its means even before it joined the euro. After it adopted the single currency, public spending soared. Public sector wages, for example, rose 50% between 1999 and 2007 - far faster than in most other Eurozone countries. The government also ran up big debts paying for the 2004 Athens Olympics (BBC, 2012). And while money flowed out of the government's coffers, its income was hit by widespread tax evasion. So, after years of overspending, its budget deficit - the difference between spending and income - spiraled out of control. Moreover, much of the borrowing was concealed, as successive Greek governments sought to meet the 3%-of-GDP cap on borrowing that is required of members of the euro. When the global financial downturn hit - and Greece's hidden borrowings came to light - the country was ill-prepared to cope. Debt levels are reached the point where the country was no longer able to repay its loans, and was forced to ask for help from its European partners and the IMF in the form of massive loans. In the short term, however, the conditions attached to these loans have compounded Greece's woes.

Like many countries, the Greek government relies on borrowed money to balance its books. The recession has made this harder to achieve, because tax revenues are falling just as welfare payments start to rise. It doesn't help that, in Greece, tax evasion is commonplace and pension rights are unusually generous – but, to be fair, using public spending to even out the bumps of the global downturn is what most large developed economies are trying to do right now.

Unfortunately, investors have lost confidence in the Greek government's ability to walk this tightrope – so they have been demanding ever higher rates of interest to compensate for the risk that they might not get their money back. The higher it’s borrowing costs, the harder it is for the Greek economy to grow itself out of trouble.

5. What will be the economic implication for the country if it decided to leave the European Union?

If Greece leaves the eurozone the European assistance support Greece’s banks is pulled away. It is hard to say exactly what the risk of a Greek banking collapse is to the rest of Europe. Firstly, The euro would be effectively abandoned, and Greece would return to the drachma, its previous currency. The drachma would likely tumble in value against the euro as soon as it was issued, and how much the government could print quickly would be a big issue. Secondly, it expects that this sudden economic collapse would “aggravate social unrest”, and notes that historically similar moves have caused a 45-85% devaluation of the currency. Capital Economics suggests that the drop could be milder, closer to 20%, and Oxford Economics says 30% (Barclays, 2015). Moreover, Greece’s central bank would probably start doing its own QE programmer, and the government would likely return to running deficits, no longer restrained by bailout rules. In addition, Inflation would spike immediately, but both Capital Economics and Oxford Economics say that should be temporary. It might look a bit like Russia this year — with the new currency in freefall until it finds its level against the euro, prices inside Greece would rise at dramatic speed. The inflation might be temporary, however, because with unemployment above 20%(Mike,2015), Greece has plenty of spare labour slack to produce more.

6. What will be the economic implication for the European Union if Greece leaves?

There are differing views regarding the long-run impact of Greece’s withdrawal from the Euro currency system. With Germany assuming the position of the patriarch of a fractious family, the withdrawal of a persistent trouble-maker like Greece could in fact help the Troika to operate efficiently in the future albeit the initial hiccup caused by Grexit as their 27-member polity would then comprise purely of co-operating elements who could work together for the greater good of the region. This would in fact enable the EU to implement the policy changes occurring in tandem with the renewed round of US-styled Quantitative Easing announced in mid-January by Mario Draghi, the head of the ECB. The only possible caveat could be the possibility of the political and economic chaos multiplying manifold as a result of the withdrawal of other countries from the EU in quick succession, with the threat of withdrawal from Spain, France and Portugal being the most imminent ones. Thus, a wildfire of sorts could result in mammoth capital losses for Germany losing € 1.5 to 2 trillion in a period extending till 2020 (Paris, 2011). On the flipside, if we consider the losses Greece could potentially incur as a result of a Grexit, then the burgeoning loss of brand equity associated with an exit from the EU system would certainly figure as the most prominent one.

7. Conclusion:

Summing up the above information we gathered via different ways we can have the following conclusions.

First of all introduce the current turmoil in Greece. It suffered financial crisis since 2008.

Second is that the introduction of the historical reasons for Greece joined the European Union.

Thirdly, we discuss how Greece became so indebted by overspending.

In additional, there were both economic implication for European and Greece if Greece decided to leave the European Union.

Reference:

BBC News, (27/11/2012) Eurozone crisis explained

Buiter, Willem, and Ebrahim Rahbari. 35/06/2012"The European Central Bank as lender of last resort for sovereigns in the eurozone." JCMS: Journal of Common Market Studies 50.s2.

Liz Alderman, April 8,2015. Explaining the Greek Debt Crisis. http://www.nytimes.com/2015/04/09/business/international/explaining-the-greek-debt-crisis.html?_r=0

Mike Bird, 17/02/2015. here what happens if Greece is forced out of the euro. http://www.businessinsider.com.au/grexit-if-greece-leaves-the-euro-2015-2

Paris, (2011) Anastasia, Sotirios Dedes, and Nikolaos Lampridis. "Greek financial crisis." Global Business and Management Research 3.3 : 319-341

Finance,04/03/2015. the turmoil in Greece: to stay or not to stay. http://www.mbaskool.com/business-articles/finance/12482

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