Eurozone Crisis

The ongoing Eurozone Debt Crisis started in Greece in May 2010. Greece became the first developed country to default on the IMF as it failed to transfer 1.55 bilion pounds? For a country of the EU to enter the Eurozone, it must meet the criterion of the 1992 Maastricht Treaty. In Greece, the primary drivers of the initial impressive growth rates were easy,credit-fuelled government spending. Unfortunately, a significant portion of the credit-fuelled government spending was for non-productive purposes such as the 2004 Athens Olympics and military needs, notably on German ships and tanks, which was about 3 per cent of the GDP in the period — the highest in Europe. Then came the Great Recession in the United States, which lasted from January 2007 to June 2009. Further, in June 2007, the ongoing Global Financial Crisis hit the U.S. When Lehman collapsed in September 2008, both the financial crisis and Great Recession became global. Under these conditions, the private capital flow surge that started in 2002 from the centre to the periphery suddenly reversed in 2008. Both these events adversely affected not only the Greek economy, but also its ability to roll over its debts. Unlike non-eurozone peripheral countries with their own domestic currencies, Greece was unable to devalue its currency and raise the interest rates to weather the storm. Soon, Greece found itself in trouble. Greece has gone through two “bailout” programmes. Greece has been in depression since the beginning of 2009. Currently, youth unemployment is above 60 per cent, and the Greek debt to GDP ratio is about 180 per cent. In return for these programmes, the Troika demanded a variety of austerity measures including cuts in social benefits. Some ardent believers of the neoclassical economic orthodoxy argue that despite that the government and households spending less, the economy can pick up the slack, because production may become more profitable under austerity and labour market flexibility — that is, there will be an obedient work force. Since, under the euro, Greece lacks a central bank that can provide liquidity to its banks independently of the ECB, Greece’s banks are in the hands of the Troika.