How Did Greece’s Economic Turmoil Put The Global Economy At A Standstill?

Table of Contents (click to expand)

The global economy today relies to a great extent on World Trade, so a financial crisis in one nation affects the entire word in interconnected and potentially disastrous ways.

A labor strike in Taiwan affected the detergent prices in the department stores of California. This is a prime example of globalization. Our planet has never been so close or tightly connected. As technological advancements continue to remove the physical barriers between nations, new national policies are trying to do the same with economic barriers. An event occurring in one part of the globe has astounding consequences elsewhere and the world economy is somehow always affected.

The effect of a crisis on the global economy depends on the size of the country with the problem. For developed, currency-issuing nations like the United States or Japan, financial instability could drive the entire global economy into a recession, something the world has been fearing for quite some time. For relatively smaller countries, the effect might not be as pronounced, but it is still bound to create its own ripples in some way or another that will ultimately impact the global economy.

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Why Do Economies Depend On Each Other?

Many developed nations these days claim to be self-sufficient. This may be partially true, but the full authenticity of their claim is pretty difficult to assess. Global Trade has grown by about 40 times since the last century and about 25% of all goods produced today are exported (World Data). This data in itself signals the level to which Global Trade has affected the world economy, and the main reason behind this is the productivity restrictions of certain regions. Brazil is the leading coffee supplier to the world and Saudi Arabia has a major stake in the oil market. The climate of Saudi Arabia is not suitable for growing coffee, and there are no oil rigs in Brazil. As such, these countries, like every other nation, try to specialize and optimize the output they’re able to produce.

world trade exports constant prices
Value of global exports over time

The term Specialization simply implies doing what you are best at. In any society, the blacksmith deals in metal, as he possesses those skills, while a farmer takes care of the food supply, as he has the fertile land. If the farmer decides to enter the blacksmith’s market by devoting some time towards that trade, he would fail. This would affect the society overall, as there would be a decline in the food supply and a surplus of metal (some of which would be of a low quality). Thus, each member of an economy has unique sets of talents that dictate his ability to perform certain tasks.

The global economy has been subject to specialization for a long time, but we only realized its importance and consequences more recently.

Also Read: How Does A Country Decide Which Good To Export?

Greece’s Economic Downfall

Since the advent of structured human civilizations, the world has witnessed the rise and fall of many central powerhouses that essentially dictated the global economy. The United States of America undisputedly holds the title today, and if those with their pockets full and eyes on the future are to be trusted, China is the next in line.

However, if one goes back to the 10th Century BCE and asks about the greatest empire, the Greeks would be the universal answer. Greece had it all—one of the most perfect political structures ever imagined and an excellent economy. The Greeks practically controlled all Maritime trade of that period (with the Red Sea playing a big role). However, the Greece that we see today is not even a shadow of the great empire it once was.

Parthenon temple on a sunset with pink and purple clouds(anyaivanova)s
Parthenon temple, Acropolis in Athens, Greece (Photo Credit : anyaivanova/ Shutterstock)

In 2015, Greece defaulted on its first of many debt payments to the International Monetary Fund. Now, this might not seem like a very big deal to some readers, but allow me to explain. The Greek economy had already been struggling since the 1980s (due to risky financial ventures by its government) and the ‘Global Financial Crisis’ of 2007 had far-reaching effects on that country. The inflation rates surged to unimaginable heights and a vicious cycle of recession led to the worst level of unemployment the country had ever seen. Most of Greece’s creditors backed out by 2014 and those who remained placed strict norms that guaranteed their repayments, but provided no real development for the country. As a result, the country continued to borrow where it could, despite having no real means of repaying those debts.

Also Read: What Is A Recession And What Causes One?

How Did Greece’s Economic Downfall Affect The World Economy?

The long-term viability of the Euro project (the unification of currency and trade in all of Europe) relies on the shoulders of its constituent members. As such, when Greece fell, many questions were raised regarding the policies followed by the European Union for safeguarding the financial position of its member nations. Investors from around the world lost a lot of money and, as a result, the stock markets tumbled everywhere.

Greek Debt Compared to Eurozone Average
Greek Debt Compared to Eurozone Average

Global investors started reconsidering the European Union’s policies and lost some of their faith in the Euro. As a result, the currency was hit hard. It continued to fall, in comparison to the US Dollar and the Chinese Yuan. Owing to the weak Euro, the fiscal deficit of European countries increased, and trade was hit heavily. In the meantime, China seized a major portion of the export market that usually belonged to the European nations.

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Greece had been the main trading partner for almost all the Balkan countries, so its debt crisis naturally affected the growth of all these nations. Except for Albania, all the other Balkan countries (Serbia, FYROM, Montenegro, Croatia and Bosnia and Herzegovina) showed a negative real GDP growth after the breakdown of Greece’s economy (World Bank).

A Final Word

The Greek financial crisis was bad news in every corner of the world. However, people failed to realize this until the crisis knocked on their front door. This is something the world needs to understand quickly and efficiently. Currently, there are signs of a global economic slowdown and an impending recession all around us. The biggest reason for this has been the US-China trade war and uncertainty between the European Union nations.

Globalization has provided many benefits over the years. The global standard of living has raised sharply with the rise in trade and the volatility of production output has reduced thanks to the diversification of risk. However, this all brings different types of problems to the table. Underdeveloped nations who were never a part of this trade uproar have degraded further, as they cannot compete with the large-scale production capacities of their developed counterparts. As such, we need to look out for them, because as Greece has shown the world once again, even a small nation can shake the stability of mighty empires.

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References (click to expand)
  1. Braddon, D. (2012, July 6). The Role of Economic Interdependence in the Origins and Resolution of Conflict. Revue d'économie politique. CAIRN.
  2. (2018) Trade and Globalization - Our World in Data. Our World in Data
  3. Ozturk, S., & Sozdemir, A. (2015). Effects of Global Financial Crisis on Greece Economy. Procedia Economics and Finance. Elsevier BV.
  4. Why the Greek Debt Crisis is a Problem for the Entire World .... The Brookings Institution
  5. How a trade war would impact global growth. The World Economic Forum
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About the Author

Rajat is an undergraduate student of BTech at BITS Pilani (India). He likes all kinds of sports and has represented his college for Athletics several times. He also loves to sing and play the guitar. He enjoys watching movies and likes to read about financial management and the stock market.