European Debt Crisis

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On May 1998, Belgium, Germany, Spain, France, Ireland, Italy, Luxembourg, the Netherlands, Austria, Portugal and Finland established the eurozone by fulfilling the necessary conditions for the adoption of the euro as their single currency. During the same period, the members of the Executive Board of the ECB were appointed. Our story begins two years later, when Greece becomes accepted as the 12th member of the eurozone countries. In the recent past, a number of EU members, including Greece, Ireland, Portugal, Spain and Belgium, shook the global financial markets with their sovereign debt crisis. In this paper, we will primarily focus on financial crisis in Greece, discussing the current situation and exploring the root causes of the crisis. Moving along, we will discuss how a solitary monetary policy could potentially worsen Greece’s current situation by imposing constraints on solution options. Furthermore, we will discuss two sets of implications of the crisis evaluation regarding debt. The first set of implications deals with what will happen if Greece defaults on their debt, while the second set of implications deals with the actions that must be taken in order to prevent the occurrence of default. In the end, we will summarize our research and analysis about the topic. CRISIS EXPLAINED

The “Greek financial crisis” revolves around the fact that the nation has a high level of debt and accompanied by a high probability of default. The story of the Greek financial crisis obviously coincides with the current global economic crisis; however, the events in Greece are unlike the financial events that have plagued the rest of the world. The story is twofold in that the Greek government is to blame for fraud and their poor financial practices, as well as the ECB for enabling such practices by making the cost of borrowing so low due to Germany and other more stable Eurozone nations. While the rest of the world can point the finger of blame at financial institutions and banks, the people of Greece can point their fingers at their government. The global crisis can be largely blamed on the willingness of financial institutions to invest in U.S. mortgage backed bonds, but in Greece, the only mistake the banks made was lending the government €30 billion. Currently attempting to work their way out of a $1.2 trillion debt, which equates to approximately a quarter of a million dollars per working adult, the country mainly has its government to blame. (Lewis).

The overwhelming corruption of the Greek government can be traced back to the late 1990’s, when the country had a strong desire to enter the Euro Zone. With the goal of becoming a European financial power, Greece agreed to meet the Euro Zone standards in order to join the euro. Some of these standards include a budget deficit below 3% of gross domestic product and maintaining extremely low inflation, neither of which Greece was even close to obtaining let alone maintaining. To meet the standards, Greece used fraudulent methods and quite a bit of “creativity” (including “cooking the books”, decreasing certain tax rates, and changing the consumer price index). Their fraudulent accounting methods seemed to carry on without much consequence until the fall of 2009. Eventually, it became known that the Greek government had exchanged over 70 valuable government properties for a worthless lake belonging to the Vatopaidi monastery. As the current government at the time began to crumble, new leadership took over (Lewis). Led by Prime Minister Papandreou and Finance Minister Papaconstantinou, the new government settled in, while the looming debt of the country grew daily. Without a congressional budget office, the new leadership had no way of knowing the severity of the situation until they dug through the numbers. Something new was found daily, from a $1 billion per year pension expense to phony job creation programs that were both left off the books. With all...
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