Factors Leading Up to the Greek Financial Crisis

Last week on the blog we saw an overview of the history of Greek currency leading up to today. Now, in the midst of the Greek financial crisis, also known as the Greek debt crisis, we are going to take a look at the many factors that were involved in the eventual onset of the Greek financial crisis, which began in late 2009.

Euro zone standards

Greece became a part of the Eurozone in2001. Upon entering the Euro zone, as is the case with every country, Greece needed to meet the standards set by the Maastricht convergence criteria. This criteria is laid out in the Maasricht Treaty, which was drafted in part to help create economic unity with a common exchange rate and single interest rate within the European Union. EU requirements lay out that a government must maintain a budget deficit of at most 3% of GDP and a debt-to-GDP ratio of at most 60%. Greece at the time of admission, however, had a debt-to-GDP ratio of 126.4%, making Greece a weaker member of the Euro Zone and therefore more vulnerable to economic troubles. This caused the Global Financial Crisis to hit Greece especially hard.

Mass tax evasion

During the years leading up to the crisis, Greece also saw especially high levels of tax evasion, with many Greek citizens failing to pay their taxes. This, of course, did not bode well for a government that relies primarily on incoming taxes for revenue, especially at a time when the government saw increased spending levels. This lack of income required Greece to turn more and more to external financing for the growing budget.

Insufficient bureaucracy

Insufficient bureaucracy surely didn’t help the situation, either. There was relatively little coordination and organization within the budget, and the amount of overlapping control mechanisms made it difficult to track the effectiveness of spending.

Public spending

The decade leading up to the financial crisis saw a great deal of government spending for raising public sector wages and benefits, making public administration expenditures a major part of the government budget. This could have been due in part to the fact that some government officials see provision of public sector jobs and benefits as a means for gaining favor. Yet, during this time the country saw little improvement in government services.

Check back to the blog next week for a current overview of the Greek financial crisis.