Greece Scrambles to Escape Deficit With Drastic Cutbacks

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Greece has a public-sector debt totaling 150% of its GDP. (Photo: Jonte Remus)
Greece has a public-sector debt totaling 150% of its GDP. (Photo: Jonte Remus)

ECONOMY

  • Greece spiraled into debt over a ten-year period
  • Government spending skyrocketed 87% between 2004 and 2010
  • Greek implements austerity measures to meet EU-IMF demands

Since the late 1990s, Greece has ventured into the furthermost realms of debt and watched its economy plummet. In 2009, just eight years after joining the Euro zone, Greece's national debt climbed to nearly 12.7% of GDP, leaving it no other option but to take a combined bailout of €80 billion from the EU - and another €30 billion from the US last year.

Greece’s joining the Euro zone afforded the country the ability to borrow at low interest rates. This, combined with lax EU implementation of rules to cap debt, allowed Greece’s external debt to soar.

State Spending Skyrockets

The origin of the debt is partly accounted for by the phenomenal jump in government spending which, between 2004 and 2010, skyrocketed 87% while revenues in contrast grew just 31%. Widespread and largely unpunished tax evasion and the country’s expensive health and pension provisions are also pointed to in explaining Greece’s deficit.

With the portion of its population aged over 64 years of age set to rise to almost a third within the next 40 years, relatively lavish healthcare and pensions could continue to leech public spending. The country’s heavy subscribed social security is equally costly, with unemployment reaching 12% last year.

On Thursday, June 30, the government put its latest austerity measures in place in a bid to adhere to EU demands and access a €12 billion installment of the €110 billion three-year bailout funds allotted to aid the country’s failing economy last year.

The austerity measures include job cuts, the sale of national assets, tax increases and budget cutbacks designed to save the country €78 billion (€28 billion through tax and €50 billion through privatizations). Greece has already cut public salaries by over 10% since last year, fuelling protest by its population, with 25% of its workforce employed in the public sector.

It also bumped up the retirement age by four years, making 65 the new minimum age to retire. The latest austerity measures sparked a 48-hour strike and incited angry protesters to set fire to the Finance Ministry on Wednesday 29 June.

On the other side of Greece’s extensive borrowing from international capital markets, investors are becoming increasingly anxious as to the country’s ability to pay back their debt with the possibility that bailouts may be merely delaying an inevitable default. Within Europe, France and Germany own the lion’s share of the country’s €340 billion debt, with French banks owning €15 billion and German banks owning almost €23 billion last year.

Greek Crisis Ricochet Effect

Being granted the latest installment of bailout funds means Greece is now teetering marginally further from the edge of default. However, little has been done to assuage fears of its parasitic effect on Europe with Greek debt still threatening to break its banks and flow into neighboring countries, and thus drag the European economy down. With a public sector debt totaling 150% of its GDP, Greece still has the potential to destabilize the Euro.

Economic turmoil in Greece begs the question: what good is a common currency without a common EU fiscal policy? If Greek debt is to be attributed in part to factors regarding adoption of the Euro, the issue of EU solidarity springs to the fore.

Faith in the EU currency is bound to be compromised by a survival of the fittest attitude among the 27 member states when one sinking ship has the potential to bring down the entire fleet. Europe is inexorably caught somewhere between damage control and a solid front facing economic instability.

Should Greek’s debt crisis spread to an EU-wide level, there would be an effect on the US due to a depreciation of the Euro relative to the US dollar, which would aggravate trade imbalances as the US would be likely import more and export less in the light of a less-competitive EU currency.

Global economic problems call, therefore, for far greater cooperation between nations resulting in a united, internationally coherent fiscal policy in order to establish worldwide economic stability.

Key Statistics – European Union Debt (source: Eurostat)

  • Last year both Greece and Italy saw their debt rise above 100% of their GDP.
  • Last year debt for all 27 member countries of the EU rose 5.6% from the previous year to 80% of GDP.
  • Public debt was over 60% of GDP in 14 EU member states last year.
  • At almost 143% government debt to GDP ratio, Greece has the highest debt in Europe with Italy coming second (119%), followed by Belgium (96.8%), Ireland (96.2%), Portugal (93%), Germany (83.2%), France (81.7%) Hungary (80.2%) and the UK (80%).
  • Estonia is at the bottom of the list for government debt to GDP ratio at 6.6%, with the second lowest rate 16.2% in Bulgaria and third lowest Luxembourg at 18.4%.

By Ellsy O'Neill for
Ellsy O'Neill is a Paris-based writer, proofreader and translator. She covers industry, culture and current affairs.

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