PER 2015
The European Union pledged to limit their deficit spending and debt levels by signing ‘The Maastricht Treaty’. However, in the first quarter of 2005, some EU member states failed to stay within the confines of theMaastricht Treaty criteria. These member states weren’t following traditional practices to reduce their debt levels and deficits. This allowed them to mask their deficit and debt levels by means, such as, inconsistent accounting and off-balance sheets transactions 64 . Greece masked their economic statistics in order to gain entry into the EMU 65 . Greece’s Eurozone application was endorsed on the basis of those statistics. Greece’s reputation was already ruined on entry to the EU, so this may amplify the claims that Greece was part of the cause of the crisis. To enter the Eurozone the government were required to maintain a budget deficit equal to less than 3% of GDP and a debt-to- GDP ratio of 60%. However, Greece had a ratio of 126.4% which was more than double the value that was required. This put Greece in a vulnerable place in the EU and making the country more susceptible to economic trouble. One of main benefits of the euro was to make it easy for capital to flow from one country to another within the EU. From countries with a lot of capital and to countries with less capital, allowing poorer countries to catch up to the richer countries using capital invested into them from the richer countries. From entering the EU, the rate of borrowing had skyrocketed for countries with a low rate of borrowing before entering, due to access to credit in the EU. Countries, such as, Greece, Italy and Portugal had increased their deficit spending because they could borrowing more. They promised their people, higher wages and more generous pension schemes because of the access to this new rate of borrowing. This borrowing was fueled by the access to credit, however, after the housing bubble burst in the US, credit became less available and borrowing grinded to a halt. Greece, Italy and Portugal used borrowed money to pay off debts and now found it harder to repay them. From 2007 to 2011, Greece’s government gross debt as a percentage of GDP went from 107.4% to 170.3%. This increase in government gross debt was caused by the soar in public spending, increasing the deficit in the country. There was also the decrease in the Greek government’s tax income, which was affected by the increase in mass tax evasion. Greece’s deficit spending 66 was increasing. As the recession came about, Greece was therefore not equipped to recover. On May 2010, the Troika launched a €110 billion bail-out loan to help Greece. This was done alongside Greece agreeing to implement austerity measures, structural reform leading to wage reductions and privatisation of government assets. But, austerity measures rely on the consumer’s ability to consume because tax revenue comes from the consumption of goods and due to high unemployment levels and low incomes, people weren’t spending as much and therefore Greece’s ability to repay debt is reduced. Greece delayed these agreed implementations and in the midst of a worsening recession Greece needed more help from the Troika. The Troika offered Greece a second bailout loan of €130 billion in October 2011, with the same condition as before. These bail-outs, combined, cost the EU €240 billion. The Troika even agreed to cut Greece’s long-term debt burden. However, between 2011 and 2012 with the launch of the second bail-out loan, Greece’s government gross debt went from 170.3% of GDP to 156.9% of GDP. In 2013 it rose to 175.1% of GDP.
64 Large capital spending is kept off a countries balance sheets through various masking techniques 65 European Economic and Monetary Union. 66 The amount at which spending exceeds revenue.
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