Greece Crisis and its impact on World Economy

Greece became the epicenter of Europe’s’ debt crisis after Wall Street imploded in 2008. The present day crisis actually started in 2009 when Greece was unable to pay its debt and restructure its economy.

Created On: Aug 20, 2015 10:08 ISTModified On: Sep 23, 2015 18:56 IST

Genesis

Greece was admitted to European Union (EU) in 1981 and it became eurozone member on 1 January 2001. Though Greece was not welcomed in the EU but it was the strategic concerns to ensure democracy and stability in Southern Europe at the height of cold war that led to group comprising of wealthy Western European Powers to admit Greece.

Causes of Crisis

Greece became the epicenter of Europe’s’ debt crisis after Wall Street imploded in 2008. The present day crisis actually started in 2009 when Greece was unable to pay its debt and restructure its economy. There were various inter-linked factors:

Inefficient pension system: Greece spent 17.5 percent of economy on pension payment, which was the highest in EU according to recent estimates.

Benefits: Government employers had some of the best worker benefits in Greece, for example some workers got bonuses for turning up for work on time.

Early retirement: According to government data, an average Greek man retires at 63 and woman at 59. But in some military and police senior retirement was as early as 40 or 45. Also there were benefits to female employees to retire at 43.

High unemployment and work culture issues: Unemployment rate in Greece stands around 25.6 percent.

Tax evasion: Greece has struggled to collect taxes especially from wealthy citizens and in creating more equitable tax system.

All these factors led to high government debt in Greece and the deficit was as high as 177 percent in 2014.

Impact on India

  • India’s largest trading partner is EU and it exports nearly $40 billion to EU.
  • World financial markets are closely linked. Investors will pull out money from the Indian market thus affecting the Indian economy
  • When world bond markets get into a problem, Indian government would find difficult to borrow money and it would affect domestic investment and growth. It will also push down currency and cause inflation.

Conclusion

Greece owns nearly 315 billion Euros worth of debt. Of this 60 percent is owed to the European financial system. Greece exit or its default on payments will hit investor’s confidence leading to retrieval of money by the investors. This in turn will cause cascading effect the fallout of which will hit the global markets.

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