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Lessons learned from the Greek Financial Crisis

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The principles of Keynesian economic theory are considered as effective financial intervention plans and are very effective in resolving economic crisis (Keynes., 1936), especially when governments “responsibly” apply them with clear understanding of the current situation and future forecasts. This is one of the reasons an economic index from the Heritage Foundation ranked Greece poorly among other countries for having the worst policy performance in Europe–such that is comparable only to some sub-Saharan African countries (Heritage., 2015).

However, another major problem for the Greek economy was its adoption of the same monetary policy with other EU countries. Greece joined Eurozone in 2001 and enjoyed very low interest rate from the ECB, including a single currency which encouraged excessive borrowing and spending until the huge debt accumulation and consequential relapse in 2010.

Government intervention through stimulus has different results.

Further, austerity measures have proved less tolerant than fiscal stimulus but they produce powerful short-term results. Despite the fact that both austerity and stimulus have long-term negative effects, they are also effective in stabilizing out-of-control market forces which present greatest challenges in global economy and are often the only way a government can stabilize trade imbalance (Baldwin & Giavazzi., 2015).

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Every government, in its bid to restructure the economy, carefully considers how it can use incentives to boost economic growth without driving the economy further into debt – a situation which is less likely to occur through fiscal stimulus. This was exactly what happened when the IMF decided to break the lending rule by turning a blind eye to how sustainable the Greek debt was and providing it with funds (IMF., 2015).

However, using austerity as a measure against economic depression may pose worse problems in the long run. For instance, spending cuts are required to implement austerity programmes when an economy is in turmoil but critics on the fiscal approach, in contrast, argue that the commercial strategy stimulus can also weaken economies. This implies that applying one control measure or using reduction of government debts may not produce the desired result (Munevar., 2016).

In the words of Alogoskoufis, the problem with Greek economy is “not simply a debt crisis” but “a dual confidence crisis”. Leaders in both developed and developing countries covet China’s path to economic recovery which was facilitated by a tightly managed, top-down decision-making apparatus which avoided bureaucratic bottlenecks. The historical results prove that an autocratic regime with incompetent personnel cannot achieve meaningful feats but promoting effective public sectors and adopting the right economic strategies can provide a balance (Nancy & Francis., 2011).

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