In World Economy News 09/04/2015
Following the global financial crisis in 2008, long term economic misfortune struck several countries around the world, including several European Union members. Despite numerous bailouts and policy reforms, the Greek economy and eurozone are still dealing with the effect of the crisis. Greece has hovered near economic collapse over the past six years, and its recession isn’t an overnight phenomenon but the result of years of financial mismanagement. While bailout efforts continue, the effects of the Greek financial crisis can be detrimental to the U.S. (For more, see: European Union Breakup: Greek Euro Exit.)
Causes
Following Greece’s 2001 entry in the European Union, a series of misguided decisions led the country to its present economic turmoil. As a member state of the EU, Greece adopted the euro as its currency and enjoyed lower interest rates, which helped the country borrow exorbitant amounts of money. Meanwhile, public debt ballooned as Greece increased wages and doled out generous pensions instead of funding necessary sectors. Mass tax evasion also occurred on individual and business levels, preventing government tax revenues from balancing rapidly outgoing pension funds. As a result, Greece’s debt eclipsed 113 percent of GDP in 2009 and currently is estimated around 175 percent.
Despite Greece’s economic mismanagement, trouble only arose when international rating agencies cut the country’s credit rating to junk status. A credit rating downgrade forces a country to pay a substantial premium in order to source investment, and it decreases investor confidence. Since Greece was unable to reconcile or reduce its ballooning public debt, investors feared the nation would default on its debt. (For more, see: Alexis Tsipras Profile: Can He Impact The Euro Economy?)
Fallout
As events began to spiral out of control, many macroeconomic indicators plummeted as well. The government deficit grew to -15.7 percent, far beyond the EU threshold of 3 percent, and the debt to GDP ratio swelled to 175 percent—employment, household wages and deflation also reached alarming levels. Whereas U.S. unemployment was around 7.5 percent in 2013, Greece witnessed a record high of 28 percent unemployment that same year. Household income fell more than 30 percent, with investment and consumption opportunities nearing zero. Furthermore, the nation continues to face a real deflation threat due to falling wages and prices. Since political and economic policy reform failed to revive the Greek economy, the International Monetary Fund (IMF) and European Central Bank (ECB) provided bailouts of $147 billion and $173 billion in 2010 and 2012, respectively, to Greece. (For more, see: The History Of Greek Sovereign Debt Defaults.)
Effects on U.S. Economy
While most believe the Greek crisis is limited to the EU and its member states, the U.S. cannot ignore a Greek collapse or exit from the EU. The U.S. economic relationship with the EU constitutes the largest in the world, resulting in $276 billion in exports to the region. Further Greek turmoil could cause a relative appreciation to the already strong U.S. dollar, which, combined with soaring interest rates in Europe, could make U.S. exports more expensive and unattainable to EU member states. Additionally, a Greece default would disrupt financial market stability and have a negative impact on the American cash pouring into the European stock market. Likewise, Greece’s action could cause fellow small EU economies to follow suit. As the U.S. economy continues to recover, an appreciating dollar can perpetuate decreasing exports, undermine corporate earnings and run the threat of a currency war.
The Bottom Line
The Greek financial crisis is widely considered as the worst fallout of the Great Recession. Despite multiple bailouts by the IMF and ECB, Greece continues to experience economic turmoil. The ongoing issues have caused some to believe a Greek default or exit from the European Union is likely. Under both circumstances, there would likely be global ramifications that would significantly impact U.S. financial markets and exports. In order to sustain its continued growth, the U.S. must not ignore the situation in Greece.
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