GREECE CRISIS

                                                   Members of the Eurozone had ample opportunity to preclude the Greek debt crisis from spiralling out of control.....

            Whistler, British Columbia - The Greek debt crisis has caused considerable grief for just about everyone involved. The country is broke, the future of the Euro is in question, banks around the world are overexposed to Greek debt and the French and Germans have no choice but to foot the bill. The future of the Eurozone hangs in the balance and one (more) poor decision could precipitate another global financial meltdown. However, while the situation is dire it was to be expected. Greece should never have been admitted to the Eurozone in the first place, and the Europeans have only themselves to blame for the current fiscal disaster.

First, What is the Eurozone?

            The Eurozone, not to be confused with the European Union, is an economic union of 17 countries in Europe that use the Euro as their currency of legal tender. It was formed in 1999 to promote a strong and unified continental economy with fewer trade barriers and centralized monetary governance, which is directed by the European Central Bank (ECB). The Euro would facilitate extensive economic integration, which, by default (no pun intended) would push countries to work closely together to protect and improve their collective financial arenas.

            In recognition of the diverse nature of European economies, countries are required to meet certain criteria before joining the Eurozone. The Maastricht Treaty, signed prior to convergence, set forth four tenets for admission: low inflation, a manageable government deficit, moderate exchange rate fluctuations and low long-term interest rates. The Maastricht Treaty sought to ensure that Eurozone members were fiscally similar so that the union could function with limited inhibition.

Greece in the Eurozone

            Greece was admitted to the Eurozone in January 2001. A relatively small economy, it added only minimal value to the union, but member states were eager to strengthen the fledgling currency through enlargement. In spite of its size, Greek integration into the Eurozone led to heavy investment into the country by a number of large regional financial institutions. Most notably, French banks hold US$93 billion and German ones hold over $40 billion of Greek debt. If Greece defaults on its debt, which it may, those banks will lose sums large enough to significantly reduce global credit liquidity. A number of analysts have referred to Greece as the Lehman Brothers of Europe. This is why the entire Eurozone is now in danger of collapse.

            The admission of Greece into the Eurozone was bad news from the beginning. In 2004, three years after it joined, it was discovered that the country falsified its economic reports to comply with the Maastricht criteria. While Eurozone countries were expected to have a budget deficit of less than three percent of their national Gross Domestic Product, Greece had actually been running a deficit of at least 3.38 percent since 1999. Further reports suggest that the country may not have, in fact, met any of the stipulated requirements.

            Greece’s economy has been mismanaged for years, but the 2004 Athens Olympics and the 2007-2008 global economic downturn plunged the nation to new financial lows. The reason for Greece’s current debt woes, of course, is because it went decades spending money that it didn’t have. The Summer Games, alone, cost the country over $11 billion and much of the infrastructure developed for the Olympics is unused today. In short, that money basically went to waste. And, four years later when most of the world fell into recession the situation in Greece only worsened.

Europe Should Have Stopped Greece While It Had the Chance

            As much as Greece is dragging down the Eurozone, much of this is also the fault of those European states. Recall that in 2004 Greece admitted to fudging its numbers in order to join the union: at 3.38%, its budget deficit as a percentage of GDP was nearly half a percent too high. However, the Eurozone didn’t even turn a blind eye; it simply announced its disappointment in Greece but said that it would not question the country’s membership. Unsurprisingly, by 2009 the deficit had ballooned to 15.4% of GDP.

            Why didn’t France and Germany suspend Greece from the Eurozone, or at least force it to clean up its fiscal house? Why did they let things get this bad? The answer, of course, is quite simple: they wanted to expand the Euro and didn’t anticipate that Greece could trigger a global economic crisis. The Eurozone member states were short-sighted, unrealistic at best and greedy at worst. Yes, Greece lied and is ultimately responsible for the ensuing crisis. Its government severely mismanaged the economy and the Greek citizens never cared to hold their leaders accountable for it. But the Eurozone had ample opportunity to take the necessary measures to preclude a disastrous outcome, which is what we now face.

Conclusion

            What the outcome of the Greek debt crisis will be remains to be seen. France, Germany and the International Monetary Fund can administer as many economic band-aids as they deem necessary, but the only sustainable solution lies within Greece, itself. The problem is not just the Greek government; it is the people who elect the government. The country’s society is permeated by corruption, which is widely regarded as one of the catalysts for the Euro crisis. For example, in 2009, alone, the average Greek person paid €1,335 in bribes and rampant tax evasion costs the government €20 billion annually. How can a country function if its people won’t support the government? Conversely, why should the people support a government that does so little for them? This vicious cycle needs to come to an end. Moreover, citizens of France and Germany should also hold their respective governments accountable for their lax handling and oversight of Greece’s membership in the Eurozone. While there is enough blame to go around, it is clear that Greece’s problems are far below skin-deep, and if they’re not solved it will cost the rest of Europe dearly.