Economics Paper on Austerity Measures in Greece

Austerity Measures in Greece

Greece underwent an economic crisis between the year 2005 and 2010. According to Lynn (2011), the crisis resulted from low production, poor income distribution and high consumption both in the public and in the private sector. The fact that Greece was in the economic bloc of the European union and had to match standards of the region made it over borrow to maintain its spending. This continued from 2006 and the year 2008 and 2009 saw Greece’s national debt grow above the size of their economy. Economists refer to this scenario as an economic suicide when national debt exceeds the gross domestic product. To survive the crisis ten top lenders waived their debts and the world bank advanced bail-outs. Greece had to sign an economic agreement and impose stringent fiscal policies that would impose higher taxes and reduce the level of government spending which was the main reason behind the high inflation.

The country has a high gross domestic product of $200 billion. It has the 50th largest purchasing power parity of $300 billion (Beeson & Slesinger, 2015). Its per capita income of $27,000 is among the highest in the world. The services sector comprises 84%, the industrial sector is 13% while the agricultural sector is 3%. The most profitable economic sector is tourism and the shipping industry. The more than 20 million tourists have brought enough foreign exchange necessary for international trade. Greece dominates in foreign direct investments among the Balkans. It is classified as a high-income economy that enjoys high living standards evident from the high human development index of 0.896. The year 2002 saw the economy grow by 6% and in 2007 the growth increased to 8%. It was until the great recession crisis of 2008 that growth rates dropped to 0.2%, -4.5% in 2009. The decline continued until the year 2013. It was in this year that the government declared the condition as the worst economic crisis in Greece history.

Matsaganis & Leventi (2011) reveal that the government had to renegotiate a public debt recovery program with the private sector to recover. Moreover, it had to stop honoring treasury debts for a period of time till the economy stabilizes. At this time the public debt was 1.80 times the gross domestic product. This helped the economy recover from recession although growth levels have not surpassed the previous ones. They remain positives rates but do not exceed 3%. Unemployment has been solved from 29.5% in 2013 to 8% in the year 2015. The government is now able to honor debts it owns the private sector and still maintains growth. The poverty rate which had increased to 14.5% has seen a decline to 8%. The economic reforms are seeing a positive impact which will continue in the long run.

Beeson & Slesinger (2015) define the gross domestic product as the measure of the total monetary value of finished goods and services that are produced within a country in a period of time. Gross national product is the monetary value of goods and services produced by the nationals of a country. This could be within their country or in foreign countries where they have undertaken foreign direct investments. GDP takes into account public and private consumption, investments, total exports, government investments and outlays fewer imports. Real GDP only takes into measure the actual prices of goods and do not adjust the prices against the inflation rates in the market. Nominal GDP takes into account changes in prices brought about by inflationary pressures.

According to Lynn (2011), the four economic problems every nation intends to solve include; control of inflation, job creation and reduction in the level of unemployment, ensuring economic growth and ensuring a favorable balance of payment while engaging in the international trade. An increase in the cost of production definitely leads to cost push inflation, an oversupply of money and the problem can only be solved through fiscal and monetary policies interventions. National Income measures the value of goods and services available in a country. There is a positive relationship between a country’s national income and the per capita income. This means that a country with a higher per capita income enjoys high living standards. The citizens have a high development index. When national income is low, the per capita income is also low meaning that the country has a lower per capita income.

Government budget has two main elements which are revenues and expenses. Beeson & Slesinger (2015) note that the main source of government revenues is the tax. The government expenses include the purchase of goods and services, infrastructure, research investment and transfer payments that are made to retirees and the unemployed. The government is the greatest spender of all economic players. The government budget is a document that proposes the expected revenues the government aims at raising and the spending. The budget is normally read annually, passed and approved by the parliament. In most commonwealth countries the annual budget is known as the annual financial statement of the country. This document estimates and anticipates government revenues and the government expenditures. Most often, the government gets revenues from sales taxes, Import Duties, and corporate taxes. All are computed as per statutory rates. There are three types of budgets; balanced budget, surplus budget and deficit budget. A surplus budget is where incomes exceed expenditures, a balanced budget is where incomes are equal to expenditure, while a deficit budget is where expenditures exceed the incomes.

Austerity measures are official economic actions taken by the state to fix adverse economic conditions. According to Matsaganis & Leventi (2011), the government may reduce the level of spending or impose high taxes. These policies end up stabilizing the currency of the country. They restore competitiveness when wage cuts are effected in the public sector. Increases the public funds necessary for undertaking public investments. Austerity may lead to unemployment when government spending decreases. Reduction in jobs in the public sector and in private sector when high taxes are imposed. High taxes will reduce disposable income negatively affecting consumption and spending.



Beeson, G., & Slesinger, R. E. (2015). Economics. Guilford, Ct: Dushkin Pub. Group.

Lynn, M. (2011). Bust: Greece, the Euro, and the sovereign debt crisis. Hoboken, N.J: Bloomberg Press.

Matsaganis, M., & Leventi, C. (2011). The distributional impact of the crisis in Greece. Colchester: Univ. of Essex, ESRC Research Centre on Micro-Social Change.