Reaction to the Crisis and Reasons Why Greek Debt Crisis Is of Crucial to the Eurozone

Reaction to the crisis and reasons why Greek debt crisis is of crucial to the Eurozone

Greece has some options in order to solve the crisis. First, Greece can reduce the deficit by decreasing expense which is expenditure for government. We can see that the expense keep increasing in the past few years before the crisis (Graph 4). However, Greece has suffered from negative GDP growth (Table 1). If Greece reduces the expenditure, the amount of currency in the market would decrease which would lead to deflation. Deflation would lead to negative GDP growth, and it would make the recession even worse. Also, for political issue, reducing expenditure means that government would reduce their pension and social benefits which they have promised. It is less likely that government would break the promise because it would lose the support from the citizens and the election. From the graph, we can discover that the government tried to decrease the expense after the crisis but was really fluctuated and even increased dramatically in2014. Compare the spending to GDP (Graph 5), we find out that the ratio just slightly decreased in 2011 then raise to almost 60% in 2014. We think it is because that GDP kept decreasing so the expenditure couldn’t be reduced efficiently due to the bad economy performance, therefore cause the ratio to increase. In conclusion, Greece is reluctant to reduce the expenditure in this situation.

Graph 4. Greece Government Spending (2001-2014)

Graph 5. Greece Government Spending to GDP (2002-2014)

Second, Greece can increase the revenue via raising the tax. Nevertheless, Greece was in recession. It’s not reasonable for the government to raise the tax when GDP is decreasing and in higher unemployment rate. We can see that after 2010 the crisis began, unemployment rate has rapidly increased from 10% to 20% which has doubled within 2 years (Graph 6). Therefore, Greece is also unwilling to raise the tax.

Graph 6. Greece Unemployment Rate (2001-2014)

Third, Greece could leave Eurozone and creates their own currency, new drachma. Greece can create their own central bank and print new drachma to buy the debt and pay back the debts with new drachma instead of euro. It is a feasible option but it would cause inflation to the country. The inflation would highly decrease the fortune of the citizens. Suppose Greece announces that 1 euro for 1 new drachma today, the next day new drachma would depreciate. And the depositors of the bank will know their fortune would decrease the next day. This would