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Which nation helped most to bail out Greece’s failing economy?
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What Is the Story Behind Greece’s Downfall?
In 2015, Greece defaulted on its debt. While some said Greece simply fell into “arrears,” its missed payment of €1.6 billion to the International Monetary Fund (IMF) was the first time in history a developed nation has missed such a payment. Greece joined the Eurozone in 2001, and some consider that the Eurozone partly to blame for Greece’s downfall. However, the Greek economy was suffering structural problems prior to adopting the single currency, and the economy was left to collapse—although not without its reasons.
Greece’s Competitiveness Gap
Eurozone membership helped the Greek government to borrow cheaply and to finance its operations in the absence of sufficient tax revenues. However, the use of a single currency highlighted a structural difference between Greece and other member countries, notably Germany, and exacerbated the government’s fiscal problems. Compared to Germany, Greece had a much lower rate of productivity, making Greek goods and services far less competitive.
The adoption of the euro only highlighted the competitiveness gap as it made German goods and services relatively cheaper than those in Greece. Having given up independent monetary policy Greece could no longer devalue its currency relative to that of Germany. This served to worsen Greece’s trade balance, increasing its current account deficit.
While the German economy benefited from increased exports to Greece, banks, including German banks, benefited from Greek borrowing to finance cheap imported German goods and services. As long as borrowing costs remained relatively cheap and the Greek economy was still growing, such issues continued to be ignored.