Introduction

The crisis that hit the United States mortgage markets in 2007 has since spread to the world financial system.  The global economic recession and crisis in the banking sector climaxed in September 2008 and spread to Europe. During this period, most economies experienced a downward trend, while other economic indicators such as employment, private consumption, investment and inflation became unbearable.  After 2010, the sovereign debt crisis in the euro area has revealed gaps in the monetary and fiscal policies in the European monetary union (Mavroudeas).  Greece is one of the European countries which have had adverse effects of increasing debt and hence enduring harsh economic times. Over the past few years, the real GDP and the unemployment rate in Greece have registered its lowest point. This paper will look at the underlying causes, effects and possible solutions to the problem.

Discussion

To start with, the Greece economy was doing relatively well before joining the European Union. For example, in 1974, the debt to GDP ratio was 18%.   After joining the European Union in 1981, the Greece economy turned to the worse.  By 1986, public indebtedness had reached the 58% of the country’s GDP.  High inflation rates, unemployment, and currency devaluations were also evident during this period (Lavdas, Litsas and Skiadas). By 1996, the financial problems persisted, and the ratio reached 113% of the GDP.  The increased misappropriation of funds could be as a result of greater access to European charitable funds, whose use could hardly be described as prudent. Increased government spending led to increasing state borrowing. The low-interest rates amongst the European Union members made it appealing for the country to borrow than it would be if Greece were not a member.  The accumulation of these debts for a long time resulted in the debt crisis that was apparent in 2010.

It is prudent to point out that the problems facing Greece are an example of a deep-rooted problem in fiscal and monetary policies in the euro zone. In fact, other European countries such as Portugal, Spain, and Ireland also had received financial assistance from the European Union. Spain and Ireland had more stable economies, while those of Greece and Portugal were marred by fiscal deficits and increased public debts. The difference between the two classes of countries lies in the difference between their borrowing habits as well as their spending. For example, most of the borrowing in Greece and Portugal was mainly done by the public sector (Mavroudeas). On the other hand, in Ireland and Spain, the private sector was involved in external borrowing. Nevertheless, the interruption of cross-border financial flows resulted in adjustment problem which had massive impacts on the European fiscal positions. It is, however, interesting to note that countries with massive fiscal deficits like Greece had no space to maneuver and consequently had more severe consequences.

Conclusion

In a nutshell, the Greece debt crisis is a larger picture of the fiscal crisis in the euro zone.  It is important to point out that the crises are the external rather than economic imbalances. Also, these imbalances affected most European countries and Greece only had severe consequences due to her unpreparedness. In essence, the causes of the European crisis were much wide than Greece and even absence of Greece from the union would not have saved the situation (Lavdas, Litsas and Skiadas). It is, therefore, important for Europe to reconsider the fiscal policies in the region to enable the recovery process.  Strict and proactive measures should be put in place to ensure the problem of fiscal deficits and state spending are aimed at enhancing the euro zone economy.

(Work cited)

Lavdas, Kōstas A, Spyridon N Litsas, and Dimitrios V Skiadas. Stateness And Sovereign Debt. 1st ed. Print.

Mavroudeas, Stavros. Greek Capitalism In Crisis. 1st ed. Hoboken: Taylor and Francis, 2014. Print.

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