There was a lot of enthusiasm when the euro was introduced to the world. The adoption of such a currency was intended to encourage the free flow of goods, services and commerce internally in Europe. It seemed ideal at the time, as having one currency enables easier transactions and facilitates trading of stocks/bonds at a common price all over Europe. But for once country it has all gone horribly wrong – Greece.
The euro ushered in an era of strong financial growth for some of its member countries. It seemed like nothing could go wrong and the European Central Bank (ECB), which manages the euro, kept a stringent check on inflation and did not seem susceptible to political pressures.
However, the pitfalls of this boom soon started showing. When the financial crisis hit, it resulted in large trade and budget deficits for Greece, and the country has become a major target for speculators who believe that it could default on its debt obligations.
So what went wrong for Greece in particular? For one, the ECB’s hard-line euro policy has meant that Greece was left with no room to maneuver as it tried to deal with the crisis. The low labor mobility due to language and cultural barriers saw Greece not getting many of the predicted advantages of a common currency.
Poor governance and a relaxed attitude towards productivity has meant that the country has fallen way behind other Euro zone members like Germany and France when it comes to managing its fiscal situation.
The government funds pensions and healthcare for an ageing population and early retirements are common, which lead to a huge expenditure. Any sign of reform in these matters is met with widespread resistance and is therefore eventually scrapped. The state is not efficient enough in its tax collection, and figures show that better taxation alone will bring in a substantial amount to get Greece out of its crisis.
Possible solutions either look too risky or they are met with resistance from the public. People will have to make sacrifices in the form of reduced pension and healthcare, scrapping early retirement, reduced wages, higher taxation etc, and all these things would lead to a lot of pain in the short term.
The other alternative, which is unthinkable for many, is dropping out of the Eurozone. But this would mean another serious crisis in the financial system and huge costs that are associated with a currency transition. Either way, the path ahead is a tough one for the Greeks.