Greece Joining Euro Zone in 2001 Was A “Big Mistake”
Summary

There has been a long debate going on since ever on whether joining Euro Zone was a mistake on the part of Greece, and whether Greece should have been allowed to join the euro even when Greece wanted to. It was a mistake by Greece to join the euro single currency when it did because its economy was not ready to form a monetary union with others in the club. Trouble in the public sector, problems with taxes, structural challenges and downfall of tourism and shipping due to economic crisis made it next to impossible for Greece to settle down being a part of euro zone. Not only was Greece in a troublesome state, but even all the European leaders are dealing with growing debt problems that are rattling investors worldwide; as everything is globally connected.

Background

When it came to joining the euro in 2001, it should have been obvious that Greece did not meet the debt conditions. But, by spinning the numbers, Greece gained entry, not just to the single market but to debt markets that allowed it to borrow as though it was as dependable as Germany. Greece went on a spending spree on infrastructure, services and public sector wages. Meanwhile, the Greeks stopped paying taxes. To Athens’ delight, banks and the financial markets filled the gap by lending billions of euros. With the onslaught of the credit crunch, Greece’s vast debts were exposed - but so was the exposure of European banks.

Euro accession led to an economic boom in Greece and the fiscal policy was pro-cyclical * Adoption of the euro and loose global credit conditions in the 2000s allowed Greece easy access to foreign borrowing that financed a significant expansion of government spending. * Robust private credit growth following financial liberalization also served to boost household consumption. * Real GDP growth averaged 4 percent from 2000–07, higher than in all euro area countries save Ireland and Luxembourg * As a direct fiscal dividend, government interest expenditure dropped from 11½ percent of GDP in the mid-1990s to 5 percent of GDP in the mid-2000s. * However, these savings were more than swallowed up by increased spending on wages and pensions. * The economy turned down in the wake of the Lehman crisis and the general government deficit reached 15½ percent of GDP (after incorporating data revisions), up from 4 percent of GDP in 2001. * Public debt was 129 percent of GDP at end-2009, with 75 percent held by foreigners.

Other factors made Greece fall even harder; Trouble in the public sector and problems with the taxes * Greek current account deficit averaged 9.5% of GDP from 2001 through 2009.

* Most notorious was its public sector deficit. Having touched 3.1% of GDP in 1999, the deficit rose steadily past the Maastricht limit, from 3.7% of GDP in 2000 to 9.6% of GDP in 2008, before surging to 15.5% of GDP in 2009. * Most outsized component of government spending was employee compensation. Government employee compensation comprised of 32% of total economy wide compensation, far above the 22% average for the mostly advanced nations of the OECD. * Greeks retired at 58 years and received 96% of pre-retirement income, while OECD workers typically retired at the age of 63 years and received only 61% of pre-retirement income. * On the revenue side, the tax evasion continued. Tax evasions combined with politicians’ patronage spending to buy support, cost the Greek government a staggering 8% of GDP. This was mainly due to large presence of microenterprises and of the self-employed. * Structural challenges also affected the economy in a bad way, even the business climate was judged inhospitable and the FDI took a deep nosedive.

Impact was not only severe for the Greece, but also for the other nations in the Euro zone * Mounting unemployment among the young was reported to be around 20% in 2008. * Yields on two year Greek government bonds doubled from 2% in November to 4% in December; yields in 10-year bonds rose from 4.7% to 5.8%. * The overall impact of Greece recession was an alarming sign for the investors to invest in other countries. It was feared that Italy may not be able to protect its banks of there is a loss of confidence. Even French banks burdened with all manner of Italian debt could totter. Thus money might flee to saver countries. * Other countries had to intervene as they were holding a lot of Greek debt and its currency.

Conclusion: Greek entering the Euro zone has unembellished consequences especially on its own economy.
So if you put all these things together, you get the following: (a) excessive borrowing driven by a perception about sovereign risk and too much spending public sector and wages lead to inefficient use of resources(b) Greece would have had a far more solid country if it had not joined the euro leading to a larger industry, higher interest rates and its public debt would not have become so high (c) it was not only single monetary policy to be blamed, but inefficient government & public sector, also played a major role in leading to high inflation and debt crisis. The problem is centered mainly in the public sector of the economy, in 2009 public spending accounted for 54% of GDP whereas public revenues accounted for 38%. In short Greece’s problem is the public sector and a populist political environment, not its economy

SURGING BUDGET DEFICIT

INFLATION AND GROWTH RATES

SELF EMPLOYED

CURRENCY DEVALUATION