Following the Greek financial crisis, the government instituted numerous social benefit programs in the hopes of increasing the labor force once again and alleviating the stagnating unemployment rate. Contradictory to these expectations, however, Greece’s residents have grown to rely on these benefits, and, as a result, Greece’s unemployment rate has stayed relatively unchanged and less tax revenue is being collected. Since government spending is increasing and tax payments and government revenue are decreasing, Greece must turn to other countries for loans. The escalation of Greece’s debt crisis, however, was caused by their manipulation of GDP reports to the European Union in order to meet the GDP requirements set to remain a member of the EU. When the misleading reports were uncovered, many countries and banks offered to loan Greece money to allow them to recover their economy and avoid a Grexit.
The International Monetary Fund and Germany are the two current major lenders to Greece, and the question of paying back these massive loans arises since Greece’s unreliability has been expressed through the misleading GDP reports and the very late surfacing of the massive debt. The Greek government has been gradually deepening its debt and giving fake GDP reports to cover up its ineligibility to stay in the EU instead of requesting financial aid from the union when the debt was still relatively under control.
The International Monetary Fund lends money to countries in need under the condition that said country implements IMF-approved austerity measures. Greece has been given thirteen austerity measures for loans from the IMF. The first measure called for economic reform and was implemented in May 2010, pushing the Greek government to create companies and jobs and to increase taxes. Such austerity measures were designed to help Greece’s economy recover and make it a more reliable debtor. The Greek government will receive more loans from the fund if the economic plan ensues as their spending will be guided by the plan put in place. After the implementation of the austerity measures, the fund carefully examined Greece’s debt ratio and argued that delaying the repayment of the loans until 2040 to allow them to use the money to recover their economy rather than use it to repay other loans; postponing the repayment will prevent the debt rate from rising more than 200 percent. Greece’s debt to GDP ratio was predominantly affected by the fund’s social reforms and allows lenders to assess the government’s ability to pay back loans, which impacts the loans they are willing to give and the conditions and interest rates that accompany them.
One of the most controversial concepts of the fund’s plan for Greece is their intention to provide debt relief until 2040 in order to give the Greek economy a chance to relaunch before paying back the loans, which would require European nations involved in Greece to reimburse the European Stability Mechanism (ESM) for the money Greece is not yet able to pay. The debt relief was intended to provide Greece more time to recuperate before imposing the payments on them, thus allowing Greece to focus on implementing austerity measures set by the fund and improving its social and economic state, instead of worrying about paying back loans with money they do not have. The debt relief is economically effective but would have many negative impacts on the Greece. Implementing austerity measures requires the cooperation of civilians and the government, which Greece lacks. There have been many violent protests against the implementation of the measures and an increase in corporate corruption to maintain a level of profit and minimize government influence on the economy. If Greece were to take the relief, it would most likely trigger a Grexit, which would invalidate Germany’s interest in providing aid to Greece.
The inclusion of Greece in the EU was effectuated by Germany; thus, Germany was responsible for helping Greece’s economy to allow them to remain in the union. Greece must meet the union’s GDP requirements in order to prevent a Grexit; they must pay back their debt in a timely fashion rather than accept the fund’s debt relief. If Greece decides to take debt relief and is removed from the union, many small and struggling economies within the EU will exit as well, and the EU will therefore start to dissolve and lose power, since it would have power in fewer and fewer European countries. Since Germany strongly advocated for Greece’s inclusion into the union, it takes the responsibility of keeping Greece in the union, while the IMF is mostly interested in providing financial aid to Greece and is less concerned with the sovereignty of the EU.
Keren Blaunstein is a weekly columnist for The Daily Campus. She can be reached via email at email@example.com.