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Can the euro survive the Greek crisis?

Reuters/John Kolesidis

The eurozone is struggling to find an answer to financial problems which are putting a strain on relations between its members. How did Greek overspending land the European Union in the deepest financial crisis it has ever faced?

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Why are Greece and its debt crisis giving all eurozone member countries the shakes?

After Greece joined the eurozone in 2000, it was able to enjoy substantially lower interest rates. For a decade the government went on an unrestrained spending spree. Public-sector wages nearly doubled while the state continued to fund one of the most generous pension systems in the world. Employees usually received a pension equivalent to 92 per cent of their pre-retirement salary. In a country which has one of the fastest-ageing

Dossier: Eurozone in crisis

populations in Europe, the pension bill kept on increasing. As the government continued to spend, tax income diminished because of endemic tax evasion among rich and middle-class Greeks. Hosting the Olympic Games in 2004 only made a bad situation worse. The games cost double the original estimate of 4.5 billion euros.

How bad is Greece’s debt problem?

By the beginning of 2010, the debt had risen to 300 billion euros which is more than the entire value of its Gross Domestic Product (GDP). It is currently said to be in excess of 350 billion euros.

What is being done to help solve the debt crisis?

In May 2010, eurozone countries and the International Monetary fund (IMF) agreed a 110-billion-euro, three-year bail-out package to rescue the Greek economy. The EU was to provide 80 billion euros in funding and the rest was from the IMF. Athens received the vital first tranche of the loan on 18 May 2010. But European finance ministers are now hesitating over when to release more funds because Greece announced at the beginning of October it would not meet the budget deficit reduction targets set by the EU and the IMF.

Is the Greek economy on the road to recovery?

In return for the bailout money, Greek Prime Minister George Papandreou’s government vowed to introduce a series of cost-cutting measures. These included scrapping bonus payments for public-sector workers, banning increases in public-sector salaries and pensions for at least three years, increasing VAT from 21 to 23 per cent and raising taxes on fuel, alcohol and tobacco by 10 per cent. These unpopular measures caused mass protests on the streets and have clearly not had the desired effect on the economy. Athens now says the deficit will reach 8.5 per cent of GDP this year, instead of the 7.6 per cent set by the European Union and the IMF. In 2012, Greece expects a further reduction of the public deficit to 6.8 per cent of GDP not as much as the forecast 6.5 per cent.

What happens now?

Eurozone ministers will meet in mid-October to discuss releasing another eight billion euros in loans. They want Greece to slash government spending and agree additional measures with international auditors. These are likely to encounter stiff opposition from unions and other people who have joined recent protests. That in turn raises fears that Greece could not pay its bills, the country will default on its debt repayments and may even be forced to leave the eurozone.

What would happened if Greece left the euro?

No-one knows exactly. There are no exit clauses in the original treaty. If a country decided to leave the euro, it would go back to its former currency, in this case the drachma. The value of that currency, without protection from the euro's safety blanket, would fall sharply. The weaker currency would make exports more competitive but would add to the domestic value of the country's debts. Interest rates on that debt would rise, making it harder for the country to meet its obligations. The debt Greece owes to foreign banks and investors would also be changed into drachmas. If banks are forced to take this hit, a world economic crisis, similar to the one that followed 2008's collapse of Lehman Brothers, could be triggered. Greece's exit and default would probably have a contagion effect on other eurozone economies. If Greece is forced to quit the eurozone, investor confidence in the bloc would fall, pushing other weaker economies such as Ireland and Portugal towards default but also threatening Spain, seen by many as too big to fail.

Government consolidated gross debt as a percentage of GDP
RFI/Anthony Terrade

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