Greek Crisis Essay

Length: 7 pages Sources: 5 Subject: Economics Type: Essay Paper: #75228877 Related Topics: Greeks, Greek And Roman, Budget Cuts, Financial Crisis
Excerpt from Essay :

Greece Bailout


The Greek government has faced an ongoing fiscal crisis for the past several years. Recently, for the third time, its Eurozone partners have been compelled to offer a bailout to the country. This is done to stabilize Greece's finances and to impose further measures on the Greek government to remedy the nation's budget and to ensure that there are no similar issues in future. The first part of the paper is a brief overview of the situation. The second part will outline some of the key issues that lead both to favor the bailout and to oppose it, and finally there will be analysis and a conclusion about whether or not bailing out Greece is the right thing to do. It will be argued that it is not, at least in the current form.


There are several key issues at work with the Greek bailout. Greece was admitted to the European Union in 1981 and was a participant in the discussions about having a common currency for the European Union in the 1990s. The Maastricht Treaty set out the conditions for entry into the common currency, the euro, but Greece never met those conditions. Other nations in the Eurozone, however, had already set the precedent of overriding the Maastricht conditions, including Germany and France (Bloomberg, 2012). When Greece entered the Eurozone, despite it not meeting the Maastricht conditions, its bonds were only at a 51bp premium to German bonds, denoting modest risk. The economic crisis of 2007-2009, however, hit the Greek economy -- which was already weak -- hard. The new Greek government in 2009 revealed that previous estimates of government deficit were low, and its spending plans were only going to exacerbate the deficit. Bond rating agencies cut their rating on Greek sovereign debt, and the crisis began to spiral out of the control (Bloomberg, 2012).

There are several issues at play with Greece. The first is that the government has a revenue problem. While many view Greece as having a spending problem -- it does to some extent -- the real problem is rampant tax evasion that robs the government of the revenues needed to finance its social safety net and generous government wages (Surowiecki, 2011). The problem being persistent, and recession bringing no budget relief in sight for Greece, and with rates on Greek debt rising, the country moved towards default. Being in the Eurozone, it could not devalue its currency to spur economic growth -- assistance needed to come in other forms. These tended to be financial assistance from larger Eurozone nations, as Greek default would destabilize the entire currency union. This was predicted by many economists from the outside but for some reason the Europeans didn't envision that this would happen -- they were unprepared (Chu, 2012). The result has been that other Eurozone nations have negotiated a series of bailouts for the Greek government in exchange for an array of budget cuts -- but without addressing the revenue problem (Waterfield, 2014). The cuts have caused massive social unrest in Greece.


There are several advantages to the bailout. The Eurozone was borne of a grand idea of extending the EU's common market by bringing the continent under a single currency, removing another trade barrier. The Eurozone was set up with a central bank -- the European Central Bank -- to manage monetary policy but each member nation retained its own government to manage fiscal policy. This led to an inevitable imbalance between the fiscal policy approaches taken by each nation, and at times to a lack of cohesion between the policies of the ECB and its member nations. The Greek crisis has been a powerful example of that lack of cohesion -- Greece needing expansionary monetary policy and receiving austerity instead. The problem with this is that a default on Greek sovereign debt would destabilize the entire currency union. The Greek crisis is, therefore, a self-inflicted wound of the Eurozone's nations. They allowed Greece into the currency without having met the Maastricht conditions. They offered monetary policy misaligned with Greece's needs. And, they left constituent governments like that of Greece with no oversight in terms of fiscal policy. The pro-to the bailout therefore is...


They are also upholding the tacit agreement of Maastricht, wherein the European economy would benefit when stronger nations were able to prop up weaker ones. The only problem is that the politicians of the European nations didn't really think they were ever have to do that.

The other major pro-to the bailout is that it is better than the alternative. Moral obligations aside, the pragmatic view is that Europe's economies are, for the most part, struggling. Other Eurozone economies are weak, and a crisis of confidence in the Euro resulting from Greek default would likely prove the tipping point to a cascading set of defaults as risk premiums across the Eurozone would rise. If Greek defaults, either it gets kicked out of the Eurozone or it brings the Eurozone down with it. Either outcome is bad business for Germany et al. The bailout, as costly and politically unsavory as it is, is still the better option. It costs less than default, allows for movement in a positive direction instead of negative, and even if the outcomes are not entirely positive they are still better outcomes than would occur without the bailout.

The third benefit to bailing out Greece is that it gives the Eurozone partners the opportunity to remedy at least some of the fiscal issues the country faces -- the bailout process is a way to implement oversight on Greece, albeit retroactively. Even though revenue is the biggest problem and that will be more difficult to tackle, there is little doubt that Greece never could meet the Maastricht conditions, because its fiscal situation was always suspect. A country with generous pay/benefits for its government workers in particular, Greece was always living a lifestyle it could not afford. The financial crisis simply brought the crisis to a head, but the crisis was always there. With each of the three bailouts, strict conditions have been imposed on Greece in an attempt to get the Greek government to put its fiscal house in order. Not only is this oversight critical for Greece, but it sets an example for other Eurozone nations as well -- implement your own oversight or we will do it for you (Morris, 2012).

There are downsides to the bailouts, however. The first is that is creates a precedent by which Eurozone member nations can avoid their fiscal duties, knowing that the Eurozone partners will have to bail them out. The politicians who created Greece's budget problems, for the most part, were voted out years ago, leaving other politicians and the Greek people to bear the brunt of the austerity measures. The links between behavior and incentive in this situation are misaligned, which means that the bailout merely acts an incentive for poor policy, with the politicians knowing that they probably will not be around when their bad policies come home to roost.

Another downside to the bailout is the heavy social cost. There has been unrest in Greece for years as the result of this cycle of bailouts and austerity. The Eurozone member can only influence certain things in the Greek budget, and those have tended to be on the expenditure side. Pensions have been slashed, as have other public benefits, and the public payroll. The suffering caused by these cuts, therefore, is felt by ordinary Greeks, not the people who actually caused the problems. Again, this is a misalignment of incentives. The bailouts inflict a terrible social toll on the country, not to mention the economic toll. Since the measures have gone into place, Greece has experienced a significant brain drain, as its talented youth have moved to other parts of Europe, all but crippling the Greek economy for generations to come (Greeley, 2012). The brain drain might have occurred anyway -- default would not exactly have bolstered the Greek economy, but it is still a negative effect of the bailouts/austerity conditions. The other social costs are much more directly the result of bailouts -- had Greece left the euro and restored the drachma the effects on seniors and government workers would arguably have been less harsh and the country would have had more incentive to deal with the revenue side of the problem.


Bailing out Greece is a complicated situation, for all of the stakeholders. Among the issues being weighed are the historical issues that led to the crisis -- Germany and the other Eurozone members bear some responsibility for the mess by allowing Greece into the Euro in the first place -- the current costs of the bailouts, and the economic incentives that bailouts cause. The moral lens that one wishes to use to analyze the issue is also relevant -- a Kantian approach likely…

Sources Used in Documents:


BBC. (2013). IMF admits mistakes on Greece bailout. BBC. Retrieved April 17, 2014 from

Bloomberg. (2012). Greek crisis timeline from Maastricht Treaty to ECB bond buying. Bloomberg. Retrieved April 17, 2014 from

Chu, B. (2012). Interview with economist Paul Krugman: Greece will leave Eurozone within 12 months. The Independent. Retrieved April 17, 2014 from

Esparza, A. (2013). Chinese investment in Greek port the biggest FDI after the crisis. Marketpulse. Retrieved April 17, 2014 from

Cite this Document:

"Greek Crisis" (2014, April 17) Retrieved May 6, 2021, from

"Greek Crisis" 17 April 2014. Web.6 May. 2021. <>

"Greek Crisis", 17 April 2014, Accessed.6 May. 2021,

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