Greek Financial Crisis. This essay will begin by identifying the financial problems and analyze its causes, followed by a discussion of the fiscal and monetary policies that can be applied especially in the eurozone context,

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After Iceland and Ireland, Greece becomes the third country to face bankruptcy with huge budget deficit and public debt in the recent economic downturn. This struck the market by surprise and prompts three major rating agencies to downgrade Greece’s credit rating (Reuters 2010). Greece’s fraud on deficit management leads the financial markets to believe that the country will default on its debts. This undermines the credibility of the euro, and there has been a debate of whether to provide financial backing to Greece among other EU members. This essay will begin by identifying the financial problems and analyze its causes, followed by a discussion of the fiscal and monetary policies that can be applied especially in the eurozone context, an examination of its impact, and finally draws the conclusion.  

Greek financial crisis remains unknown until October in 2009, when the new government disclosed that the 2009’s budget deficit and public debt accounted for 12.7% and 113.4% of its own GDP, which are far beyond the EU standards of 3% and 60% (EurActiv 2006, Reuters 2010). After the announcement, Fitch Ratings cut the nation’s credit rating—the assessment of the ability to repay debts—from A- to BBB+ (Reuters 2010). Loss of credibility makes the situation worse as interest rates on existing debts rise, and Greece needs to borrow €50 billion this year to repay its bills (The Times 2010). Consequently, the European monetary union is put at risk, and the euro is likely to depreciate against other currencies.  

Greece’s financial problems are structural and they had a long period of incubation. Years of excessive government spending and failure to reform the economy have driven Greece into the hardest situation ever since the birth of the eurozone. Firstly, the government’s institutions are quite weak, eroded by serious corruption and tax evasion (McArdle 2010). Greece is supposed to be the most corrupt EU country unveiled in an annual corruption ranking report (Pop 2010). In addition, the Prime Minister claims that more than 10% of its GDP, which is 31 billion euros, has been dodged by Greek workers and companies through tax (Sills and Weeks 2010). Apart from corruption and tax evasion, Greece’s adoption of the euro is also partially responsible for the crisis. With the help of dubious accounting offered by Goldman Sachs, Greece was able to borrow at low interest rates and join the EU while its budget deficit had in reality exceeded the EU limit (Machnowski and Wagner 2010). Finally, tourism and agriculture, two main sectors of the Greek economy, are vulnerable to sudden shocks especially in this global financial crisis (McArdle 2010).

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 Confronted with such severe financial problems, the government and the central bank generally will carry out proper fiscal and monetary policies to cope with them. According to Sloman (2000), budget deficit is defined as the excess of government spending over its tax revenue, while national debt means the total accumulation of government borrowing to finance its budget deficit. Running a budget deficit will crowd out private borrowers who are trying to finance investment, which can be illustrated in Figure 1:      

Figure 1. The effect of government budget deficit (Mankiw 2007)

This figure demonstrates that when ...

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