Investigating buildup to the Greece fiscal crisis and implications for the Eurozone

Abstract

As Rahm Emanuel, U.S. President Barack Obama’s chief of staff, said during the 2008 credit crunch, “You never want a serious crisis to go to waste. It’s an opportunity to do things that you could not do before.” The last couple of years have seen considerable turmoil in the world economy. It all started as the housing bubble in the United States went bust and resulted in the downfall of some of world’s biggest financial institutions, which were, to some extent, responsible for their own demise. The crisis soon spread throughout the world resulting in a deep economic recession in several nations. The Greece sovereign debt crisis emerged in late 2009 (October), when the world finally seemed to be coming out of the US-originated recession of 2008. It was soon followed by another US-like but much less significant crisis in Dubai in Nov 2009, involving real-estate bubble burst. Thus the recent past has witnessed three unprecedented crises in three different continents. Although some similarities and connections exist between them, they were by and large unrelated. The blame in these cases has mostly been related to weak regulations and loose fiscal policies on the part of involved governments and regulatory bodies. As the Greece debt crisis and the subsequent decision of the European Commission (EC) to bail Greece out have taken place at a crucial point in world economy, it could have significant short and long-term implications, not just for the euro area (EA-16) but for the entire world economy. This crisis has come as a rude shock to the financial markets because of two reasons. First, it involves the Euro area comprising mostly of developed economies which were performing well until at least the recession of 2008 and were backed by a strong currency. Secondly, its nature as a sovereign debt crisis might have an effect on investor confidence in the entire region due to the nature of the Eurozone, which functions as an economic union. This could be compounded by the fact that some other Euro zone countries (abbreviated as PIGS economies) are also in a situation similar to Greece with significant financial stress. Also, the manner in which the Greece crisis has been tackled (through financial bailout) is quite similar in some ways to the response to the US recession of 2008, in which case some big financial institutions (like AIG) facing trouble were given government bailout to protect the overall financial system. Both cases involved huge oppositions from taxpayers (US) and other Eurozone economies (Greece) before the bailouts were approved. Also in both cases these bailouts have been accompanied by demands for stricter regulations, and several restrictions have been imposed on the respective parties. Thus, now that the matters in Greece seem to be stabilized with the financial support, at least temporarily, and the Euro seems to be back on track in the Foreign-Exchange market, the time is right to analyze the various causes behind the crisis and take lessons from it to avoid similar occurrences in future. This is what the study has aimed to do.