When the euro was first introduced in 1999, Greece was left out because of its high budget deficit and inflation. Embarrassed by the isolation, Greece appeared to clean up its act and fix its finances and macroeconomic fundamentals. By January 2001, it was able to adopt the euro as its official currency.In November 2004, however, Greece admitted that it had fudged the figures to gain entry to the eurozone. Since 1999 its budget deficit had never been below the EU limit of 3% of GDP. It was also revealed in early 2010 that Greece had paid Goldman Sachs and other banks to hide the true amount of its debt and borrowing.
Euro adoption led to a cycle of debt-financed growth and deficit spending. Greek sovereign debt spreads fell, allowing it to borrow cheaply. Access to cheap funds allowed it to continually pump-prime the economy, leading to higher growth.
The Greek economy expanded by an annual average of 4% from 2000 to 2007, one of the highest rates in the eurozone. With higher growth, government officials rewarded themselves with higher incomes and pensions and generous leave credits and bonuses. The bureaucracy is also bloated and overstaffed.
In October 2009 Prime Minister George Papandreou took office and revealed that the deficit was much higher than the previous government had claimed. His response? Austerity measures, including slashing salaries and pensions, and increasing taxes, given that around 5 million Greeks (6 out of 10) pay no income tax. These moves were not accepted by the public, but were necessary to obtain the European and International Monetary Fund (IMF) rescue loan packages (worth €110 billion and €130 billion).
Greece is already on its sixth year of recession. In the first quarter of 2013, the Greek economy contracted by 5.3% from a year earlier, the largest decline in the EU. In Q1 2013, tourism receipts dropped by 3.7% from the previous year. Exports of non-oil goods fell by 6.5% y-o-y in Q1 2013, according to the Bank of Greece.
The economy is expected to shrink by another 4.2% in 2013.
In 2012, the country’s budget deficit stood at 6% of GDP, down from a staggering 9.5% of GDP in 2011, 10.5% of GDP in 2010 and 15.8% of GDP in 2009. Greece expects to cut its budget deficit to 4.3% of GDP this year, following debt relief measures imposed by the government.
Greece’s national debt is projected to reach 175.2% of GDP in 2013, up from about 156.9% of GDP in 2012 and 165.3% of GDP in 2011.
In 2012 the country’s current account deficit was about 5.3% of GDP, which is expected to improve to 2.8% of GDP in 2013, and 1.7% of GDP in 2014.
Consumer prices rose by about 1% in 2012 from a year earlier. Greece is expected to experience negative inflation in both 2013 and 2014, of -0.8% and -0.4%, respectively, according to the European Commission.
Unemployment rose to 26.9% in April 2013, the highest rate since ELSTAT started publishing jobless data in 2006. In 2013, the country’s overall unemployment rate is expected to increase to 27%, from 24.3% in 2012.
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