To say that this past year has been an eventful one for Greece would be an understatement. The country has faced intense political and financial instability. Throughout the year Greece has been facing a showdown of sorts with its creditors, those being the other nations that use the euro, the European Central Bank and the International Monetary Fund (IMF). However the recently re-elected Prime Minister Alexis Tsipras has finally given in and accepted a new package of budget cuts, tax increases and other economic policy changes. This is in return for an additional 86 billion euro, an aid that will undoubtedly prove necessary to reopen Greece’s banks and restore its economy to functional operation.
How did Greece get to this point of economic instability? Since Wall Street imploded in 2008, leading to a global fall out and one of the biggest recessions we have seen in recent economic history, Greece has been at the centre of this crisis. However, unlike Ireland whose economy is slowly but surely improving, Greece has been moving rapidly in the other direction. Greece made the announcement in 2009 that for years it had been understating its deficit figures. This raised alarms across Europe about the country’s financial stability. Suddenly Greece was seen as a liability and no longer able to borrow in the financial markets and by 2010 the country found itself on the edge of bankruptcy.
In an effort to avoid chaos the Troika (consisting of the International Monetary Fund, the European Central Bank and the European Commission) issued the first of two international bailouts for Greece. The lenders imposed harsh austerity terms, requiring deep budget cuts and steep tax increases. This combined with the fact that most of the bailout money went to paying off Greece’s international debts meant that in the long term the bailout did little to aid Greece’s fragile economy. Greece’s economic problems are far from solved as the economy has shrunk by a quarter in the past five years, and unemployment is currently at 25 per cent. This is the highest unemployment rate in Europe.
Greece’s relations with Europe are resting on unstable foundations at the moment. For a time it looked as if an agreement between Greece and the European Union could not be reached and that Greece may leave the Eurozone. This however would have been a short term solution to a long term problem. While it would allow the Greek government to hire new workers and decrease the high unemployment rate, it would have been the other European governments that would be left footing the bill. This could have lead to many banks going bankrupt, and it is also felt by other countries such as Slovakia and Lithuania.
Leaving the Eurozone would also have severe long term effects for Greece. It could possibly trigger hyperinflation within the country as the price of imports skyrocket. Greece imports 40 per cent of its food and pharmaceuticals and 80 per cent of its energy. But many countries would be apprehensive to export these items to a country that is unable to cover the cost. The country would find themselves having a hard time attracting new foreign investment in such an unstable situation. Eventually Greece would have found itself returned to its current position, burdened with a debt they have no chance of repaying.
On the 23rd of July this year, the Greek parliament passed the second round of austerity measures needed to receive the loan from the European Union. The first round was passed on July 15th after a referendum on the 6th in which voters said no to austerity. However, despite the fact that it was against popular opinion, parliament members realised that there really was little choice in the matter. The July agreement was concluded under duress as bankruptcy, isolation and pressure were reigning down from the rest of Europe. But it finally came together after tense months of negotiations with creditors led to the imposition of strict capital controls to prevent a bank ruin by worried depositors.
Fortunately, things do seem to be taking a positive turn. The newly re-elected Prime Minister Alex Tsipras recently told his first cabinet meeting that he believes Greece can be out of crisis by 2019. He stated: “This is an absolutely achievable target, provided we dare carry out major reforms and changes… We must work to re-establish, as soon as possible, financial stability, and restore normality to the banking system.” He has further pledged to honour Greece’s commitments for further spending cuts, and to implement the tax hikes and reforms that were decided upon in the July agreement. In return Greece’s European creditors will take another look at Greece’s debt if the country passes its first review, at which time Tsipras will no doubt be hoping to get relief in the form of longer repayment periods and cuts in the interest rates on the loans. Hopefully from this point, Greece’s economy will slowly but surely start to improve.