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Avery Lin
Economics
Dr. Gen
23 August 2015
Greeces Declining Economy
Financial collapses. They are the worst situations that an economist can imagine and part of a
declining economy. Typically started from deep depressions or recessions, they result in a
decrease in the quality of living and a nations gross domestic product. Economists and countries
hope to avoid them and also hope that they will never experience deep, destructive depressions.
Averting collapses in the financial system are a top priority for economists as they aim to keep
the economy stable. This makes the market more secure to participate in and keeps the economy
from swinging wildly between phases in the business cycle. A stable economy means that people
are more encouraged to participate in the economy, increasing the demand and stimulating a
need for more supply therefore increasing the growth of the economy as a whole. Currently,
Greece is experiencing a deep depression that has crippled the Greek economy, closed the banks,
and taken its toll on the lives of Greek citizens causing the government to apply strict economic
reforms that are aimed to help stabilize the economy. However, Greeces prolonged economic
instability has left the nation with a large national debt and prompted the need for international
support. Regardless of the countrys economic state, international help from the rest of the
countries in the eurozone proves difficult to obtain as they demand bailout terms that conflict
with the current government partys beliefs and may be more detrimental than helpful to the
Greek economy as they act primarily for the interests of their own countries. Greece will be

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unable to recover economically under the punishing regime of bailout agreement terms, its
growing national debt load, and its failing banks teetering on the verge of collapse which
suggests that Greece will need more international bailouts and help to stabilize its failing
economy in the future.
Greeces failing banks and the governments lack of funding have become the most pressing
problem for Greece as it tries to salvage its economy and meet the financial needs of it citizens.
The Greek banks and government are experiencing a shortage of cash and they are unable to
provide money to the citizens of Greece as they lack the necessary reserves and funding to
continue operations. Economists and Greek officials have stated that both the government and
financial system are both close to running out of cash (Friday Deadline Greece A3). Clearly, the
Greek government and banking system did not ensure that the "banking system [was] adequately
buffered against banking crises" (Sachs 212). Banks usually have enough money stored in
reserves to be able to provide the public with cash, however they are soon finding that they did
not have enough in reserves to finance public spending. Additionally, economists usually
recommend that the banks should "hold in reserve only a fraction of their funds-just enough to
meet customers' daily needs" (OSullivan 422), but with the failing economy, Greek banks found
that they had a dwindling supply of euros and a faulty monetary policy which was not enough to
hold up the financial system when their customers decided they wanted to withdraw their money.
The decreasing reserves and threat of bankruptcy has caused the entire nation to temporarily
shutdown the banks as the European Central Bank cut off its liquidity funds. Until an agreement
is reached by the Greek government and its creditors, the banks will remain closed and citizens
will only able to withdraw a set amount of sums from their accounts. This has inspired a lack of

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confidence in the Greek banking system that could lead to bank runs similar to those in the Crash
of 1929. Hopefully, after the banks reopen, customers will not rush to withdraw their money,
though many economists think that, its clear that the minute they reopen every single person in
Greece is going to run to the bank and take out every cent they have (Williams A2). This could
cause problems similar to those that the United States had before the establishment of the Federal
Reserve System and during the Stock Market Crash of 1929. Before the establishment of a
centralized banking system, many depositors would lose faith in the banks setting off bank runs.
[Which] were widespread panics in which great numbers of people tried to redeem their paper
money at once (OSullivan 252) and effectively relieving the banks of almost all their reserves
forcing them into bankruptcy. This loss of faith in the banking system in the 1929 stock market
crash resulted in widespread bank runs as nervous depositors rushed to withdraw their money.
The combination of unpaid loans and bank runs resulted in the failure of thousands of banks
across the country (OSullivan 255). Had Greece not reached a funding deal it would have been
forced into an exit from the eurozone, or so called Grexit, and the loss of faith in the banks
coupled with a large debt would have caused Greek banks to "collapse and Athens to default on
payments due, triggering an economic earthquake in a nation whose economy is already in deep
depression" (Friday Deadline Greece A3). This would have forced the country to start issuing its
own currency and shake the integrity, stability, and confidence of the euro system which is based
off of a fixed exchange system to help simplify trade. The only drawback to a fixed exchange
policy is that it requires all participating countries to coordinate their economic policies. Because
of the close coordinations of economic policies, many nations in the eurozone could be greatly
affected by the Greek crisis and could have consequences on the rest of the world trade and

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confidence in the country to manage its internal affairs. Financial collapse in any country can
affect the rest of the world such as the Great Depression did after the collapse of the United
States economy. But, Greece must first secure a bailout agreement with its creditors in order for
additional emergency funds to be given to the Greek banks. Even after more funds have been
given to the Greek banks, tight limits on withdrawals will still be imposed and it will take time
for the banks to build up the necessary amount of reserves along with a stable economy before
austerity measures are lifted and the country can pull out of its depression. Additionally, if the
government and banks run out of money, it will force them to default on significant payments
due to the International Monetary Fund and the European Central Bank as well as force them to
exit the eurozone sending the economy into chaos. Without a stable financial system and
government, Greek citizens are less confident and have less incentive to participate in the
economy causing the economy to shrink further into a depression.
Consequently, this threat of defaults and inability to provide Greek citizens with their needed
money has forced Greece to act quickly and try to reach a satisfiable financial agreement for all
parties involved. Greeces attempt to raise taxes and cut spending are aimed at increasing
additional revenue, however the government should instead aim to reduce the countrys growing
national debt. Greece seems as though it will start applying reforms that fit into contractionary
fiscal policies, instead of expansionary policies, which aim "at slowing the growth of total output
[which] generally fall into either or both of two categories: decreased spending and raising taxes
(OSullivan 390). Recently, Greece has had to outline a strict regiment of austerity to prevent
banks from going bankrupt and avoid a total economic collapse. Citizens may only withdraw set
amounts of money, about $67 and for pensioners $134 a week, and even then, the banks may

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soon run out of money since the European Central Bank has decided to cut emergency funds.
This has made Greek citizens spend money on only the most essential items and has lowered the
demand for items that are considered indulgences. This has prompted Greece to quickly reach an
agreement for bailout terms with the other eurozone nations to avoid an economic collapse. The
government's new proposals for reforms include more austerity measures and tax increases that
Greek voters had previously voted against. These austerity measures had already shrunk "the
economy by a quarter since 2009" (Chu and Tsiantar A3) and will shrink it further as Greece's
citizens demand less causing supply to dwindle. This slows the economy and causes the GDP
(gross domestic product) of the country to decrease. A shrinking economy will also lower the
GDP per capita and cause the economy to fall further into its economic depression. Faced with
limited time and few choices, since other eurozone nations refused to give much flexibility in
their terms of a bailout agreement, Greece capitulated to its lenders demands and will enact a
reform bill that will raise taxes, cut pensions, and impose yet more austerity on the beleaguered
Mediterranean nation (Chu and Tsiantar A3). They say that this "program of spending cuts and
tax increases is aimed at securing at least an additional $55 billion from the creditors to keep the
economy afloat for the next two years (Williams and Tsiantar A3). Bailout money and revenue
generated from increased taxes should help the country service and start to repay its debts from
its two previous bailouts and discretionary government and public spending. However, though
increasing taxes will help generate much of the needed revenue, economists argue that, "fiscal
adjustments mostly on the spending side are better suited for avoiding large
recessions" (Blanchard 51). Reducing the budget deficits will help slow the growth of national
debt, however it still is not enough to allow the country to pay off a large amount of its debt and

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restore the country's devastated economy. Greece should try to cut government spending and try
to keep taxes low to entice the public to participate more actively in the economy which would
slowly help stabilize the economy and restore confidence in the economy with its increased
stabilization. Greeces plans to cut spending and raise taxes will discourage people from
participating in the economy and provide the country with less revenue and harder time paying
off the national debt.
Furthermore, the large national debt and activation of policies that its creditors demand has
lead Greece and many other economists predicting that some form of debt relief is needed for
Greece to pay off the debt. Unless lenders to Greece decide that they will allow the debt to be
rescheduled or partially forgiven, Greece will not be able to pull itself out of its economic
depression. Greece has had much trouble repaying its creditors because of its growing national
debt and continuous deficits, lowering the countrys economic growth. As the deadline for
proposed reforms approached, many economists, the United States and the International
Monetary Fund-argue[d] that a return to growth [was] impossible under such a debt load (Chu
A3). They argued that the Greek economy is unable to stimulate growth and return to prosperity
under the debt it needs to repay and the strict reform measures that other European countries in
the eurozone want Greece to comply with in exchange for bailout payments. For many, turning
to "the International Monetary Fund is often viewed as a last resort for struggling
[countries]" (OSullivan 488) for the rescheduling of a debt. However, a debt rescheduling which
involves lengthening the time of debt repayment and forgiving, or dismissing, part of the
loan (OSullivan 488) could help Greece slowly rebuild its economy and climb out of the deep
depression that the country is experiencing. Debt relief or rescheduling would give the country

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more time to stabilize its economy and gain enough revenue to start repaying part of the debts
that it owes. The prospect of a debt rescheduling, however, is viewed as unlikely to be accepted
by the countrys creditors even though many economist and government officials have expressed
that because Greeces debt is more than 175% of GDP, [it] is unmanageable and needs to be
reduced or rescheduled for payment over a longer period (Williams and Tsiantar A3). This
means that Greeces debt is large enough that most of it cannot be paid back in the time frame set
by the countrys creditors. The inability of Greece being able to repay a debt could lead to
another economic crisis and the need for additional foreign aid and bailouts in the coming years.
Without a debt rescheduling, there is a higher chance that Greece will have to default on
payments due in the future years and that they will eventually exit the eurozone. In addition to
debt rescheduling, Greece should try to control interest and tax rates so that they remain low and
not push Greece further into debt with a lack of citizen confidence. Without a debt rescheduling,
the national debt will grow as "every year there is a budget deficit, and the federal government
borrows money to cover it (OSullivan 405). This increases the amount of money that Greece
has to repay and increases the chances that the country will need additional international help
and more bailouts in addition to its previous bailouts. Eventually, Greece will need more time to
pay off its debts and return to a stable economy.
The demands that Greece faces for a bailout agreement from the rest of the countries that use
the euro are unreasonable and will not allow for Greece to recover from the economic crisis it is
experiencing. The austerity measures, raised taxes, and other fiscal and monetary policies that
the country plans to enact will instead push the country further into a depression. Though Greece
may not want to implement the reforms that have been proposed by the other eurozone countries,

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it has no alternative since it wishes to remain in the eurozone and use the euro as the nations
currency. The recent bank failures have left the country weak and in desperate need of financial
help and this has caused the government to enforce more strict austerity measures on the nation
that the citizens had voted to reject. This has lead to increased doubt in the government and the
thought that the country will not recover economically quickly. Lack of faith, will further reduce
the economy while tax increases and spending cuts are used to increase revenue and decrease the
national debt. This has left the country hoping that more favorable terms can be negotiated and
that its creditors will acquiesce to a plea for a debt rescheduling which is favored by the
International Monetary Fund and economists from around the world. Without some form of debt
relief and with the installation of the difficult policies and measures that will be activated, Greece
will face the need for more bailout agreements in the coming years. Economists in Greece know
that they have a while until the economy completely recovers from its large debt, but they hope
to avoid another financial collapse from the reform measures that will be implemented. After all,
financial collapses are not part of a thriving economy.

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Works Cited
Blanchard, Olivier, et al. In the Wake of the Crisis: Leading Economists Reassess Economic
Policy. Cambridge: MIT Press, 2012. Print.
Chu, Henry. Spoonful of Relief for Greece. Los Angeles Times. 17 July 2015: A3. Print.
---. A Friday Deadline for Greece. Los Angeles Times. 8 July 2015: A3. Print.
Chu, Henry and Dody Tsiantar. Greek Economic Reforms Approved. Los Angeles Times. 16
July 2015: A3. Print.
OSullivan, Arthur and Steven M. Sheffrin. Economics: Principles in Action. Eds. Joyce
Barisano, et al. Boston, MA: Pearson Prentice Hall, 2007. Print.
Sachs, Jeffrey D. Common Wealth: Economics for a Crowded Planet. New York: Penguin Press,
2008. Print.
Williams, Carol J. A Glimpse of Post-Euro Life. Los Angeles Times. 11 July 2015: A2. Print.
Williams, Carol J. and Dody Tsiantar. Greece Submits Reform Package. Los Angeles Times.
10 July 2015: A3. Print.