Economic issues in Greece related to euro currency and financial crisis

Economic issues regarding Greece and the euro currency because of Greeces financial situation.

Economic issues regarding Greece and the euro currency because of Greece's financial situation

With a gross domestic product of $341 billion for 2009, Greece is the 34th largest economy of the globe. The model at the basis of the economy is a capitalism in which 40 per cent of the GDP is generated by the public sector and 15 per cent of the GDP is generated by tourism. Living standards -- given by the income per capita -- in Greece however remain lower in comparison to those in the developed countries of the European Union. Public debt, inflation and unemployment are however above the average in the euro zone.

Up until 2007, Greece had been following an ascendant trend due to increased access to credits, higher consumer spending and improvements in infrastructure. In 2008 however, the country's economic stability and funds decreased due to the internationalized crisis. By 2009, Greece was in economic recession and had accumulated a federal debt of 10.7 per cent of the GDP -- in a context in which the EU had imposed a 3 per cent cap on federal debt. The internal problems, such as decreasing federal funds, inadequate statistical reporting or inability to follow through the reforms set with the European Union, forced international credit rating agencies to downgrade the country's debt rating.

In this context of increasing financial instability, the government in Athens has implemented an austerity program by which it aims to reduce governmental spending and restructure the public sector. The measures have however generated intense populous turmoil and protest and even riots are possible in the country. In support of the country's economic revival, the governments in the euro zone and the International Monetary Fund have "pledged more than $160 billion in support of Greece over the next three years" (Central Intelligence Agency, 2010).

The financial recession in Greece is generally perceived as a powerful international phenomenon, with potential impacts on the near and far global communities. Despite the fact that Greece is a far away country and a small economy (generating only about 2 per cent of the European Union's output), its problems could easily represent the commencement of a greater global financial crisis. Greece represents the model of several modern countries which have increased their foreign borrowings, and despite its size, Greece could also represent the symptom of a greater crisis.

More explicitly, Greece has borrowed immense sums of money to cover its losses. Combined however with the emergent events and the unstable economic climate in the world, the sovereign risk in Greece has exponentially increased. It is in this order of ideas possible for the Greek officials to modify their fiscal policy in a means that decreases the value of all foreign credits. This will immediately decrease the funds of lending countries. And most importantly, this situation with the sovereign risk is not only characteristic to Greece, but to various other countries, including the United States. "More especially, the IMF is concerned that higher sovereign risk in countries like Greece can spill over to domestic banking systems and across borders, thereby triggering a second global economic crisis. It is also important to note that sovereign risk is not confined to Greece, but there are a number of other global more systemic important countries that fall into this category, including the world largest economy, the U.S.A." (All Africa, 2010).

In terms of the immediate impact, this would be most obvious within the neighboring Balkan countries. Greece is one of the largest investors in the Balkan region as well as one of the greatest donors. When its economic problems hit, the country's investments and donations would significantly decrease, to eventually impact the initial destination countries. Additionally, Greece is also the host country of millions of immigrants from neighboring states (Fotiadis, 2010). The respective states would no longer receive funds from neither the Greek government, nor from their own citizens employed in Greece.

Aside from the loss of a donor and an investor, the European countries would also be faced with the loss of a trade partner. At the level of the European Union, the member states have already weakened their financial strength in order to support Greece. Had they not done this, the weakening Greek economy could have led to the devaluation of the euro. This risk is still present nevertheless.