When the euro was introduced in 1999, Greece was conspicuously absent from
the list of the EU member countries adopting the common currency. The country
was not ready. In a few short years, however, European leaders, probably
motivated by their political agenda, allowed Greece to join the euro club in 2001
although it was not entirely clear if the country satisfied the entry conditions. In
any case, joining the euro club allowed the Greek government, households, and
firms to gain easy access to plentiful funds at historically low interest rates,
ushering in a period of robust credit growth. For a while, Greeks enjoyed what
seemed to be the fruits of becoming a full-fledged member of Europe. In
December 2009, however, the new Greek government revealed that the
government budget deficit would be 12.7 percent for 2009, not 3.7 percent as
previously announced by the outgoing government, far exceeding the EU’s
convergence guideline of keeping the budget deficit below 3.0 percent of the GDP.
As the true picture of the government finance became known, the prices of
Greek government bonds began to fall sharply, prompting panic selling among
international investors, threatening the sovereign defaults. Several years into the
crisis, the Greek government debt stands at around 180 percent of GDP and
the jobless rate among youth is above 50 percent. The country’s GDP declined
by about 25 percent. Severe austerity measures, such as sharply raised taxes
and much reduced pension benefits, were imposed on Greece as conditions for
the bailouts arranged by the EU, IMF, and the European Central Bank. In addition,
people were allowed to have only restricted access to their bank deposits, to
prevent bank runs. Opinion polls indicate that the majority of people in
Germany, the main creditor nation for Greece, prefer the Greek exit from the
euro zone, popularly called Grexit, while some people in Greece are demanding
Grexit themselves and restoration of the national currency, the drachma.
Discussion points:
1.the root causes of the Greek predicaments;
2.the costs and benefits of staying in the euro zone for Greece;
3.the measures that need to be taken to keep Greece in the euro zone in the long
run if that is desirable
4.If you were a disinterested outside advisor for the Greek government, would
you advise Grexit or not? Why or why not?
