Economy of Greece; Will It Survive?

Economy of Greece

by: Ahmad Faiz bin Ibrahim;

President of Students’ Representative Council,

MARA Junior Science College Taiping.

Greece adopted the euro (€) as its currency in January 2002. The adoption of the euro provided Greece (formerly a high inflation risk country under the drachma) with access to competitive loan rates and also to low rates of the Eurobond market. This led to a dramatic increase in Greece’s consumer spending, which helped Greece to a significant boost in their economy, around 4% which is twice than other Eurozone countries.

But then, the recession of Greece economy during the 2009 caused Greece into a debt binge, provoking an economic crisis that threatened both Europe’s recovery and the future of the euro. As a result, Greece has to rely on a package of €110 billion, or $152.6 billion, agreed to by its richer European neighbors in May 2010. This was supposed to restore the confidence of investors and to cut the deficit encountered by Greece.

Having debts meant that Greece must find a way to pay them. One of them is to cut the pay of its public workers by 10 percent but continued to miss deficit targets as its economy sank deeper into recession, shrinking by an estimated 5.5 percent in 2011. Unemployment is expected to continue to increase, reaching 11.8% in 2010, 14.6% in 2011, and 14.8% in 2012.

The plunge in Greece economy has also affected the value of euro (€), added to the value of euro (€) these days which has already decreases around 15% then its value during 2009. As comparison, the list below shows the difference of value of euro (€) between these following years:

Year	Value of euro (€) (in Ringgit Malaysia)	Increase in rate (%)
2001 (Before Greece changed their currency to euro (€) and 2 years after it was introduced as an accounting currency.)	3.623	-
2003 (After a year Greece changed their currency to euro (€).)	3.958	+9.25% (2003 to 2001)
2005 (Euro (€) highest exchange rate compared to Ringgit Malaysia.)	5.052	+27.64% (2005 to 2003)
2007 (Recession of world economy due to the fall in US economy.)	4.564	-9.66% (2007 to 2005)
2008 (A year after the recession of world economy.)	4.854	+6.35% (2008 to 2007)
2009 (The fall of Greece economy; this led to a debt binge.)	4.749	-2.17% (2009 to 2008)
2011 (Greece economy in the brink of bankruptcy.)	4.042	-14.89% (2011 to 2009) *the lowest value since it highest exchange rate compared to RM in 2005.

Greece has also increases the main sales tax from 19% to 21%. This will affect the prices of most of consumer goods and the cost of fuel. With these 3 major problems:

1.           High unemployment rate;

2.           The decreasing value of euro (€);

3.        Increase in tax; surely it will cause one big problem in Greece: LOW PURCHASING POWER;

                Purchasing power in Greece:

                2008       -              USD 340.1 billion

                2009       -              USD 333.2 billion

                2010       -              USD 318.1 billion              

As the prices of goods increase and the value money decreases, the Greeks will find that saving is much likely safer for them than spending.  Unfortunately, this will lessen or maybe stop the money circulation within the country. Hence, the Greece buying market and demand will become slower, lesser income will be received by the national treasury; and the government still needs to repay the debts. That is why deficit in Greece is now 13.6%, 4 times higher than the level allowed by European Union (EU) for Eurozone countries.

Greece has long lived beyond its means and spent much of the last two centuries defaulting on its debts. Joining the euro (€) was meant to put an end to all that. However, it merely seems to have exacerbated its problems. It was no surprise to any economist that the EU, at first, refused to allow the country to join the euro (€) when the new currency started in 1999. So, the questions today; will Greece economy survive another economy recession?