Greece has been grasping at straws to end the current financial crisis which has crippled the country for over half a decade. In addition to the Troika (the trio of the European Commission, European Central Bank, and the IMF), Germany has also imposed its own austerity measures under their bailout packages, which have caused anger and dissent amongst the Greeks.
The Syriza Party, a coalition of traditional and radical left parties, won in a landslide victory in the January 2015 election, capturing 36% of the popular vote. Greek voters ushered in Syriza as they seemed willing to fight against austerity measures and stand up to the Troika. Party leader, and current PM, Alexis Tsipras has begun the process of negotiating Greece’s massive debt; however, he and his party have run into various road blocks, mainly resistance from Germany and German Finance Minister Wolfgang Schaeuble. In addition to the staunch German refusal to forgive portions of the Greek debt, the EU has been delaying its decision, to allow the Syriza party to get a handle on Greece’s financial situation. Just prior to a portion of Greece’s loan coming to maturity, a last minute deal was struck on February 27 to extend the bailout package by four months, giving Greece more time to organize its repayment schedule and go back to Brussels with a new debt reduction plan.
The Greek debt crisis has quickly become a multi-faceted issue, encompassing Greece, Germany and the fragile bonds which has kept the EU together for over two decades. If Greece defaults and leaves the Eurozone, fearfully dubbed the ‘Grexit’, it could spell disaster not only for Greece, but the entirety of the EU as other European nations in financial trouble including Spain, Portugal, Italy and Ireland, could be next. A break-up of the EU could be far more costly to the EU economy than current European indebtedness as investors drop the volatile Euro, and member countries incur the massive associated costs of dividing up Europe’s financial system. While larger EU members like Germany and France could weather the ensuing storm of EU dismantlement, other nations, like Greece, would likely face complete financial ruin.
In a late 2012 report by the IMF, the organization admitted that it did not foresee the impacts that forced austerity would have on Greece. They had planned for a 5.5% reduction in GDP, while real reduction in GDP was closer to 17%. While the IMF admitted that the current debt program with Greece was ineffective, little was done to reform austerity measures; instead, further bailouts were mandated to keep the Greek state afloat. The Greek economy has shrunk by 22% since 2008, and unemployment is over 25%; the entire state itself is on the verge of collapse as a result of internal financial issues, and crippling austerity measures. However, these figures are not a surprise to many who reject the notion of austerity measures. By its very nature, austerity cripples the debtor, while mainly benefiting the creditor.
Syriza has very little time to fix Greece’s financial future. In their four month window, PM Tsipras and Greek Finance Minister, Yanis Varoufakis, have a long road ahead and a very short period of time to help create reform policies that will be accepted by the EU and other private creditors. It has not helped that Minister Varoufakis has been seen as difficult to work with, often very critical of Greece’s creditors. During this window, Greece must work with its creditors to reform its financial policies, taking into account Greek policy priorities; namely, social spending to help its struggling economy. In a statement by EU representatives, they stressed bilateral policy making, stating that: “[T]he Greek authorities commit to refrain from any rollback of measures and unilateral changes to the policies and structural reforms that would negatively impact fiscal targets, economic recovery or financial stability, as assessed by the institutions.” The Troika, it seems, is acknowledging that an easement of austerity measures is necessary for the promotion of fiscal growth.
With the February 27 deal marking the first positive sign between the EU and Greece after the election, the road ahead is still fraught with issues. Current policy suggestions of tax reform, tackling corruption, and restructuring public expenditures will not go far enough to help pull Greece out of its GDP to debt gap. Direct investment by Greece and it creditors to begin rebuilding Greece’s economy is needed. Also, a structured payback plan which is tied to GDP growth is the only way the EU can insure the Grexit will not occur, while giving Greece the ability to pay back its debtors. Looking back, what is clear is that the forced austerity measures imposed on Greece by its creditors only helped to stifle its economy, and further the debt crisis.