Greece has been all over the news for the past couple of years, mostly for the wrong reasons. Words like Grexit, troiko, and IMF and names such as Alexis Tsipras, Yanis Varoufakis, and Angela Merkel have become too familiar. What most of us know is that the country is in a mess. A lot of us may not know why. Well, here is a short (may be incomplete) guide (for the laymen, not economists!) to the troubles in Greece and its present state of affairs.
Greece is a member of the Eurozone, which means that (among many other things), Euro is its currency. This is the most important starting point of understanding Greece’s problems. In the recent decades (historically also?) the governments in Greece have not been quite successful in collecting tax properly; a lot of people (mostly the wealthy) have been evading taxes. Also, the country was quite generous about welfare (pensions etc.). This means that Greece was earning less (because tax is the main source of revenue for any country) and spending more. While this is true for most of the governments, Greece didn’t have any control over the difference in earnings and spending.
Here is where banks become crucial players. When governments run short of money, they generally approach banks. Because the Greek government was spending too much, banks were reluctant to lend money. Those who did charged high interest. Just like parents don’t give a lot of money to children who spend carelessly. This means that Greece had to approach the troika (a term used in Greece to collectively address the European Commission, the International Monetary Fund (IMF), and European Central Bank). These are some big guys in Europe who have considerable financial and political powers. The IMF said, “okay, we can give you loans but you will have to agree to some of our terms”. This is how IMF (and World Bank) operate(s), they most often have some strings attached to the financial help they provide. The lovely name of the set of terms and conditions is Structural Adjustment. Mostly, these include cut on welfare expenditure like pensions and more taxes.
Normally when countries face such financial crises, what they do is take some monetary measures, meaning, adjusting interest rates, printing more/less currency etc. But since Greece was (still is) a part of the Eurozone, it couldn’t do much of such stuff, as their currency, the Euro, was shared by a bunch of other European countries too. If someone has to authorize printing of the Euro, that would be the European Central Bank in Frankfurt, Germany.
Greece had to accept most of the terms and conditions of the international creditors, and the loans were granted. Not only the IMF but also financially strong countries like Germany lent money. But would Greeks like their pensions to be cut and taxes to be increased? Never. Protests and riots followed, even killings. Greece was in a real mess. Governments had to resign, unemployment climbed up, GDP growth fell to negative, all sorts of horrible things for an economy.
Time has come (June 30th, 2015) for Greece to repay a part of the loan it had taken from IMF. Obviously, it doesn’t have the money. So what’s going on now is a marathon series of negotiations on what can be done. The creditors, including Germany (their Chancellor, the all powerful Angela Merkel has proved to be a tough person to handle for the Greek Prime Minister Alexis Tsipras and the Finance Minister Yanis Varoufakis) are asking for more austerity measures in Greece (more welfare cuts) to which the present Left government cannot completely agree. If Greece fails to repay 1.6 billion Euros to IMF before June 30th, it may force Greece to exit the Eurozone (they call it Grexit). Now this may have a heck of a lot of bad consequences. The Greek government and most of its people don’t want this to happen. Even most of the European countries also don’t want Greece to go, as this may show that their great European unity project may be falling apart. But at the same time, they can’t let one small country borrow money from them and do whatever it wants. As the June 30th deadline is approaching, international observers are waiting to see what’s gonna happen with that small, beautiful country which, a few thousand years ago, had contributed a great deal of things to humanity.
I have read a few articles online on these matters, one of which is by The Guardian. For those who want to know more, Google something like “What’s happening with Greece” and you’ll get many many sources of credible information. Happy reading!