A Little Context for the Greek Debt Crisis

If you’ve paid even the slightest bit of attention to international affairs, you’d know that Greece has been in economic trouble since the Great Recession, which resulted in the Greek Debt Crisis a year later. The subsequent handling of the crisis between Greece and its creditors is an issue that I’m looking forward to discussing in the future. However, I’d like to discuss a different aspect of Greece and the Eurozone. The Eurozone refers to countries within the European Union, whom, once they’ve met certain financial requirements, may ditch their local currency, and adopt the Euro. Having a common currency is attractive because it eliminates transaction costs i.e. costs from exchanging currencies in all sectors that involve foreign currency, and brings simplicity to intra-Eurozone/European Union commerce. Poorer countries, such as Ireland and Spain, have seen significant economic growth since they both joined. This brings me back to Greece. Greece shouldn’t have even been allowed in the Eurozone… but Greece lied… multiple times. There are three main requirements to join the Eurozone and they are as follows:

  1. Inflation less than 1.5% higher than the average of the lowest members
  2. Debt to GDP ratio of less than 60%
  3. Government deficit of less than 3% of GDP

Greece joined the Eurozone in 2001, and adopted the euro as its currency in 2002. In 2004, it was revealed that had falsified data regarding its deficit, which was higher than the maximum 3%. These findings suggested that Greece’s financial conditions weren’t as stable as it was led to believe, which caused its loan credibility to diminish, and therefore had to pay higher interest rates on loans.

This would suggest that Greece helped dig its own grave, to a certain extent. The financial sector, and business in general, relies on consistency, trust, and reputation. The uncertainty of Greece’s finances may have played a role in the current crisis. Potential investors would be wary of investing in a country that has reporting inconsistencies dating back before its inclusion in the Eurozone. Investors would charge higher interest rates, or not provide loans/invest at all, which is what happened. The Greek Ministry of Finance even acknowledged that one of the five major causes of the debt crisis was its statistical credibility, and that it needed to “restore credibility in financial statistics by making the National Statistics Service an independent legal entity…” The lack of accuracy in the statistics was made it more difficult to accurately determine GDP growth and the government deficit.

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