The European Union and Britain have been on the news for a significant amount of time last year owing to Brexit. The most debated topic is the impact it will have on other European economies, especially those that are not super powers. Cyprus and Greece have been receiving some lime light on this regard. Greece has also only recently snapped out (theoretically) of the financial crisis it has been facing since 2008.
So what is the impact Brexit can have on Greece? Until the terms of Brexit are finalized and ratified, we cannot go into the details. Despite clarity, two impacts are very clear. First is the impact on Greece’s export market. Greece is an exporter of various food items such as grape wines, virgin olive oil etc. This is also the area of their economy that has a significant production value. Imposition of tariffs on these commodities, because of Brexit, would affect Greece more than any other European country. The second and more significant impact will be on the tourism industry. Tourism contributes fifteen billion Euros in revenue every year to the economy and Greece is a popular destination to the British, owing to its proximity and low costs. If the Pound strengthens as a result of Brexit, Greece could lose up to 200,000 visitors and 150 million in Euros. All this is not within the control of Greece’s economy, as it cannot devalue the Euro to reduce the impact on its own economy. This makes us wonder how bad an economy should be performing to be vulnerable to exogenous factors. This brings us to the Greek financial crisis itself.
The Greek financial crisis began in the year 2008, shortly after the subprime crisis. Introduction of the Euro reduced trade costs for all of Europe. However, the labour costs in countries such as Greece were more than that of core countries such as Germany. This led to deficits in payments caused by trade which was unfavourable to Greece. Soon, Greece started consuming more than it was producing and took loans from Germany. Once the effects of the Great Recession spread all over Europe, money inflow from Germany to Greece reduced drastically. Under normal circumstances, a country will devalue its currency to encourage investments and lending. But this could not be done as Greece was using Euro. Due to its fiscal mismanagement, Greece fell short of requirements of the European Union and submitted reports that had fudged Debt-GDP ratios. After revaluation by Eurostat method, the figure increased nearly to 10%. This resulted in the investors losing their confidence in Greece. This lead to widening of bond yield spreads, which is the difference in return over products with same maturity, which is a criteria for risk and rising cost of insurance on credit default swaps, which is a mechanism of covering losses of one party by another.
Having received criticism internationally and under pressure from the European Union, the country adopted strict measures for a conditional receipt of bailouts from the European Union. These measures had a combination of increase in taxes and reduction in government expenditure. There were close to twelve rounds of increase in taxes which lead to nation-wide protests and strikes. After several decades of not having spent much on taxes or personal expenses, the impact on the citizens was severe. The biggest area of concern was a massive cut down on pension offered to citizens. From being sufficient for a comfortable or even luxurious livelihood, the pension was brought down to zero, thus the dependence of the retired on their children increased. This only caused further frustration as close to one-fourth of the population also faced unemployment. The tension among citizens was so tangible that more than 60% of the population voted against the austerity measures. This created the possibility of Grexit. The Greek financial crisis shows how different countries have wanted to exit the European Union for vastly different reasons and it shows the effects of single market economy.
The final obstacle for the government was battling corruption and tax evasion. Data as of 2012 indicated that the Greek black economy or underground economy, from which little or no tax was collected, contributed to nearly 24.3% of GDP. If this money had been subject to government control, we may have not even needed one of the bailouts. A lot of this money was stored in Swiss banks, of which only one percent was declared in Greece as taxable. After multiple negotiations from 2011 to 2015, the countries finally agreed on a tax treaty to supply more information and reduce evasion with support from UK and Germany. Additionally, for domestic tax collection an overhaul of the system and use of debit and credit cards created a trail and allowed taxation as and when a transaction took place.
After all that was done, Greece still has to make payments till 2059 to fully discharge its liability, which is the scenario despite creditors accepting cuts as high as 50% in many cases. This shakes the foundation of fiscal management and economic planning in any country. To prevent further crisis, Greece should structure its economy to avoid weaknesses such as dependency on tourism, as it provides volatile returns. Secondly, countries should be regularly scrutinized to curb over spending in the name of welfare schemes for political purposes. The situation in Greece is quite contrary to that of Venezuela where the government did not spend enough under the pretext of a welfare motive. Finally, we should create more regulatory mechanisms to fully protect economies in a single market.
Picture Source: GreekReporter