The Effects Of The Greek Financial Troubles On The Rest Of Europe

Running head: THE GREEK FINANCIAL TROUBLES 1

The Effects of the Greek Financial Troubles on the Rest of Europe

THE GREEK FINANCIAL TROUBLES 2

The Effects of the Greek Financial Troubles on the Rest of Europe

The Greek financial crisis has constituted one of the most dramatic economic events in

recent history. Greek’s recession followed the 2008 global financial crisis that started with the

collapse of the Lehman Brothers in the US, before spreading to the rest of the world. The win by

PASOK, Greek’s center-left political party in the October 2009 snap elections was the turning

point for the country (Munro & Se

mite

s, 2014). Admissions by both the country's Finance and

Prime ministers, that the previous government had underestimated the 2009 annual budget led to

a credit rating downgrade from A- to B++ (Munro & Se

mite

s, 2014). The move restricted the

country's ability to borrow money on the capital markets, pushing the cost of borrowing as

investors demanded higher returns on their loans to the government.

Due to the high financial and trade integration between European nations, the financial

turbulence of Greece negated economic development within the region. Karasavvoglou and

Polychronidou (2014) document that, the several European countries that had invested heavily in

Greece suffered massive financial losses. For example, banks in the more stable European

countries such as Germany and France owned lots of bonds and investments within the Greek

economy. Loss of such investments, coupled with the fact that many European banks had bad

loans as a result of the collapsing real estate markets, negatively affected interest rates, currency

strength, corporate profits and the balance of trade within the EU. Karasavvoglou and

Polychronidou (2014) estimates that, as a result of Greek’s bailout by the European Union,

Eurozone’s Gross Domestic Product (GDP) shrunk by 3.0 points between 2010 and 2012.

In 2011, Greece recorded its worst GDP decline at -6.9% while a record 111,000 Greek

companies filed for bankruptcy (Karasavvoglou and Polychronidou, 2014). With many European

companies operating in Greece, unemployment increased disproportionately across the continent

THE GREEK FINANCIAL TROUBLES 3

affecting the housing market, stock market, GDP and the Consumption Price Index (Munro &

mite

s, 2014). Key statistics also indicate a decline in Europe's GDP per capita, an increase in

the continent's public debt and an increase in public expenditure. The fact that Greece defaulted

on a $10 billion EU bailout further made the country's debt dynamics unsustainable leading to

the need for new financing which other European countries could not shoulder (Munro &

mite

s, 2014). To manage the Greek burden, most European countries had to apply a number of

indirect taxes on goods and services which further perpetuated depression since higher taxation

discouraged trade, encouraged tax evasion and encouraged some firms to relocate to other

regions (Munro & Se

mite

s, 2014).

The most apparent social effects of the Greek financial crisis included a decline in the

real gross earnings across Europe, income inequality, and poverty. According to Nelson,

Belking, and Mix (2011), the Greek crisis led to an unusually high number of job losses in

countries like Spain, Portugal, Belgium, and Italy. In addition to job losses, the gross and net

earnings declined in both the formal and informal sectors. The crisis also increased poverty

levels as indicated by the proportion of European's populations with a net equivalent income of

below 60% of the median in 2013 (Karasavvoglou and Polychronidou2014). The Greek crisis

also resulted in an unequal income distribution across continent inferring from the changes in the

composition of income deciles (Karasavvoglou and Polychronidou2014).

Having been a member of the EU since January 2001, Greek's failure affected EU

countries due to the economic interdependency among them. The crisis negated Eurozone's

economic progress adversely impacting corporate profits, interest rates, currency strengths and

the GDP across the continent. The crisis similarly increased unemployment rates, public debt,

public expenditure, and tax percentages. Socially, the job losses led to a decline in net earnings

THE GREEK FINANCIAL TROUBLES 4

and unequal income distribution which increased poverty levels within the continent. In

summary, it is more than evident that the Greek's crisis has had an adverse impact on a majority

of European countries' economies leaving them very vulnerable to future external economic and

financial shocks.

THE GREEK FINANCIAL TROUBLES 5

References

Karasavvoglou, A. G., & Polychronidou, P. (2014). Economic crisis in Europe and the Balkans:

Problems and prospects. New York: Springer.

Munro, E., & Se

mite

s, K. (2014). The European debt crisis: The Greek case. Manchester, UK:

Manchester University Press.

Nelson, R., Belking, P., and Mix, D. (2011). Greece’s Debt Crisis: Overview, Policy, Responses,

And Implications. Washington, DC: Congressional Research Service.

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