Effects of the Greek Financial Troubles on the Rest of Europe (Essay Sample)

The Effects of the Greek Financial Troubles on the Rest of Europe
The Effects of the Greek Financial Troubles on the Rest of Europe
The Greek financial crisis has constituted one of the most dramatic economic events in recent history. Greek’s recession followed the 2008 global financial crisis that started with the collapse of the Lehman Brothers in the US, before spreading to the rest of the world. The win by PASOK, Greek’s center-left political party in the October 2009 snap elections was the turning point for the country (Munro & SeÌ„miteÌ„s, 2014). Admissions by both the country's Finance and Prime ministers, that the previous government had underestimated the 2009 annual budget led to a credit rating downgrade from A- to B++ (Munro & SeÌ„miteÌ„s, 2014). The move restricted the country's ability to borrow money on the capital markets, pushing the cost of borrowing as investors demanded higher returns on their loans to the government.
Due to the high financial and trade integration between European nations, the financial turbulence of Greece negated economic development within the region. Karasavvoglou and Polychronidou (2014) document that, the several European countries that had invested heavily in Greece suffered massive financial losses. For example, banks in the more stable European countries such as Germany and France owned lots of bonds and investments within the Greek economy. Loss of such investments, coupled with the fact that many European banks had bad loans as a result of the collapsing real estate markets, negatively affected interest rates, currency strength, corporate profits and the balance of trade within the EU. Karasavvoglou and Polychronidou (2014) estimates that, as a result of Greek’s bailout by the European Union, Eurozone’s Gross Domestic Product (GDP) shrunk by 3.0 points between 2010 and 2012.
In 2011, Greece recorded its worst GDP decline at -6.9% while a record 111,000 Greek companies filed for bankruptcy (Karasavvoglou and Polychronidou, 2014). With many European companies operating in Greece, unemployment increased disproportionately across the continent affecting the housing market, stock market, GDP and the Consumption Price Index (Munro & Sēmitēs, 2014). Key statistics also indicate a decline in Europe's GDP per capita, an increase in the continent's public debt and an increase in public expenditure. The fact that Greece defaulted on a $10 billion EU bailout further made the country's debt dynamics unsustainable leading to the need for new financing which other European countries could not shoulder (Munro & Sēmitēs, 2014). To manage the Greek burden, most European countries had to apply a number of indirect taxes on goods and services which further perpetuated depression since higher taxation discouraged trade, encouraged tax evasion and encouraged some firms to relocate to other regions (Munro & Sēmitēs, 2014).
The most apparent social effects of the Greek financial crisis included a decline in the real gross earnings across Europe, income inequality, and poverty. According to Nelson, Belking, and Mix (2011), the Greek crisis led to an unusually high number of job losses in countries like Spain, Portugal, Belgium, and Italy. In addition to job losses, the gross and net earnings declined in both the formal and informal sectors. The crisis also increased poverty levels as indicated by the proportion of European's populations with a net equivalent income of below 60% of the median in 2013 (Karasavvoglou and Polychronidou2014). The Greek crisis also resulted in an unequal income distribution across continent ...