The Financial Crisis Of Greece

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Introduction Since the 1990s, the Greek economy has been suffering from a deficit in its accounts due to years of funds mismanagement and poor fiscal policies. However, the task of dealing with the issue was passed on from one executive to the next, hence exacerbating the problem. When Greece saw the possibility of joining the European Union in 1981, lack of transparency and misreported figures in its bookkeeping system allowed the country to meet the criteria and become a new member of the Eurozone. As investors were confident on the stability of the Euro, Greece was able to borrow cheaply from the European financial markets and sustain an expansionary policy between 2001 and 2007. Nonetheless, the outburst of global financial crisis…show more content…
From 2001, low-interest borrowings allowed the Hellenic country to increase government spending and investments. Therefore, as economy expanded so did GDP. Fig.1 shows how the real GDP, which consider only changes in output but not in prices, went from €45millions in 2001 to €65millions in 2008. Yet, this period of growth was short lived: failure in collecting tax revenues gradually widen the Greek budget deficit and intensified the effects of the 2008/9 financial crisis. (Source: Trading economics | National Statistical Service of Greece, 2015) Fig.1 As a result of the global financial distress, the GDP growth rate dropped to -4.3% and caused the recession in Greece, and similarly in the whole Eurozone. Although other European countries succeeded in limiting the economic damages, Greece’s austerity policies and debit crisis protracted the economic downturn wherein the GDP growth rate bottomed at -9% in 2011 (Fig.2). (Source: The World Bank, 2016) Fig.2 While the rest of the Eurozone registered a negative output gap that remained relatively low at around -3%, Greece’s GDP gap has been particularly wide and showed an actual output well below potential. As seen in Fig. 3, having an inflationary output gap until 2009 and then large recessionary gap suggest a leftward shift in the aggregate demand curve. (Source: Organization for Economic Co-operation and Development, 2015)
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