Greece and the Crisis in the Eurozone


By Dharana Rijal, News Writer, MPP ‘13

Before entering the eurozone in 1999, member countries had to satisfy the Maastricht criteria, which required that their inflation could be no more than 1.5 percent a year, their budget deficit could be no more than 3 percent of the GDP, and that their debt-to-GDP ratio could be no more than 60 percent.

However, not all member countries were diligent in ensuring that their budgets were truly line with the stringent criteria. Moreover, many continued to depart from the criteria after joining the monetary union.

After years of flawed accounting and unbridled spending and consumption, Greece today faces a debt and deficit crisis such that its gross government debt is expected to be about 166 percent of GDP in 2011. Its deficit is expected to be about 8 percent of GDP in 2011. (Source: IMF- Fiscal Monitor).

Given their exposure to Greek bonds, international financial institutions and countries follow the Greek government balance closely. In May 2010, Greece received a rescue package of 750 billion euros through the European Financial Stability Facility (EFSF). This required that Greece implement strict measures to reduce its government balance. However, Greece has continued to struggle to implement these measures.

Since it is part of the monetary union, Greece cannot use exchange rates in order to get competitive in the international market. It seems doomed to default on its debt unless further financial assistance is provided.

However, following the annual meetings of the IMF and the World Bank last weekend, a new European rescue package seems to be emerging. The plan, if implemented, would increasue the size of EFSF to 2 trillion euros, which would help to write down half of Greece’s public debt.

 

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