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The Eurozone helps Greece avoid bankruptcy— for now

in International Business

The Eurozone helps Greece avoid bankruptcy— for now

A deal was struck on Friday in Brussels that would give the Greek government four more months to avoid bankruptcy while it tries to come up with a long-term recovery plan. However, at this point, that seems easier said than done.

Since the massive bailout Greece received in 2010 from the European governments to keep its economy afloat, the nation has consistently struggled to meet the conditions of its creditors (who are mainly other European countries, the European Central Bank, and the International Monetary Fund). In order to meet those conditions, Greece must achieve a debt-less primary surplus of 4.5 percent GDP over the next 10 years. Historically speaking, accomplishing this feat is extremely difficult, and according to some, even impossible. Between 1970 and 2000, only three countries have been able to do that (Singapore, Norway and Belgium), and all three of them were in far better fiscal conditions than Greece is in currently. Singapore was an Island run by a benign autocracy, Norway had its huge wealth of oil to rely on, and for Belgium, the 1990s in general were a time of growth. According to Panizza and Eichengreen, countries that hold a primary surplus for many years are likely to be enjoying a good economy, which Greece doesn’t have.

In order to maintain a primary surplus, Greece must decrease its government spending.  According to the Atlantic “this depresses the economy, and deprives the government of income. That, in turn, makes it hard to maintain a surplus without cutting government spending even further.” Even with all those complications, in order to receive the €270 billion Greece needs to keep its economy going through June, the government has to present an appropriate plan, by Monday, to its European creditors that shows the strategy they are going to use in order to cut these costs.

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