Greece is Sinking: Will They Drown the EU?

Topics: European Union, Eurozone, Inflation Pages: 5 (1402 words) Published: March 26, 2014
1. Intro
a. “In this paper I will discuss…”
2. Body
a. The Rise of the Greece’s Economy
i. Economy suffering in the 80s
ii. Revive economy in the 90’s
iii. Join the European Union
b. The Fall of the Greek Economy
i. How debt crisis started
ii. The Bailouts
c. The Flaws of the European Union
i. The euro
ii. Policy constraints
iii. Integration
3. Conclusion
a. My viewpoint
i. The cracks must be fixed

Greece is Sinking: Will They Drown the EU?
Over the past few years, it seems that one cannot turn on the news without seeing something about Greece and its collapsing economy. It may have a high standard of living, but it has never had a top-tier economy and this was brought to the attention of the entire world in recent years. After experiencing drastic improvement and growth from 1994 to 2007, it seemed that the Greek economy was no longer destined to be at the bottom; however, everything changed with the start of the recession in 2008. Since then, Greece’s debt has increased enormously, precipitating a hugely negative impact on the economies of all the countries in the European Union. In this paper, I will discuss the Greek economic crisis and its effect on the European Union. The Rise of Greece’s Economy

During the 80s, the Greek economy suffered drastically due to expansionary fiscal policies, high inflation rates and an increasing budget deficit. Their economy was far from meeting the convergence criteria to Membership in the euro system of the European Union was a distant hope for the Greeks as their economy didn’t measure up to the strict convergence criteria, and improvements didn’t appear to be in the near future. The EU criteria consisted of requirements such as having a budget deficit of less than three percent of GDP, a debt-to-GDP ratio of less than sixty percent and low inflation rates (1). However, in the 1990s, the Greek government reduced the number of state-owned businesses to push for privatization, and encouraged FDI in their infrastructure (2). They also made cuts to the budget deficit and strengthened their monetary policy. These actions were enough to improve the economy and meet the criteria to join the single-currency unit of the euro. Thus, Greece was voted into the euro system in 2001 as the twelfth EU country (1). After being accepted into the euro system, Greece was allowed to borrow money at extremely low interest rates. Just as when a store lowers its prices, people rush to buy more merchandise, when low interest rates were offered, Greece borrowed more and more money. So even though Greece had a GDP growth rate two times higher than the EU average from 1997 to 2007, their economy was not as healthy as it appeared on the surface (5). The budget deficit and inflation rates continued to be high, which lead them to rely heavily on loans from other countries. With a large sovereign debt built up, it was only a matter of time before the ticking bomb of Greece’s economy blew up. The financial crisis of 2009 was the last straw that broke the back of the Grecian economy. The Fall of the Greek Economy

Once the financial crisis began, the true colors of Greece’s economy were unveiled. Instead of having a deficit-to-GDP ratio less than four percent, theirs was just under sixteen percent. Their debt-to-GDP ratio was 160 percent, not 125 percent (5). When credit-tracking agencies saw these statistics, they red-flagged Greece as a high risk investment. This activity caused many investors to raise the interest rate on Greece’s debt, and it soon became difficult for Greece to pay their bills. In 2010, Greece had finally hit an all-time low, and only two options existed: the EU could either let the Greek economy sink, or give them a bailout and keep them afloat. The more influential European countries, like France and Germany, knew that if the Greek economy collapsed, it would result in huge amounts of money being lost and could...

Cited: . "Greece 's Membership in the Single Currency." Europa: Summaries of EU Legislation. N.p., 25 Aug. 2005. Web. 30 Oct. 2013. .
2. "Greece- Overview of the Economy." Encyclopedia of the Nations. N.p., n.d. Web. 30 Oct. 2013. .
3. Lapavitsas, Costas. "Eurozone Crisis: How Greece 's Actions Will Impact Europe for Years." Alternet. Le Monde Diplomatique, 7 June 2012. Web. 1 Nov. 2013.
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