Greek Debt Crisis Threatens Stability of Euro

Greece is facing a public debt crisis that may threaten the future of the euro currency. The euro is the global economy’s second most important currency after the dollar. With its economy in recession in 2009, Greece’s deficit grew to nearly 13 percent of gross domestic product (GDP), far exceeding the European Union (EU)’s limit for member states using the euro. (By comparison, the U.S. federal budget deficit for 2009, totaling $1.6 trillion, or 11.2 percent of GDP, up from 3.2 percent in 2008.) These countries, known collectively as the Eurozone, may need to come to Greece’s aid. However, Spain, Italy, Portugal, and Ireland—all with economies larger than Greece’s—also may require assistance to control rising deficits.

Meanwhile, Eurozone finance ministers are pressuring Greece to impose steep budget cuts, or face tougher measures. EU authorities are investigating complex financial transactions that allowed the Greek government to hide its growing public debt. For a nation embroiled in a debt crisis, part of the solution typically involves a currency devaluation. But as a member of the Eurozone, Greece cannot devalue its currency without affecting all the other member states.

The Greek government likely must cut spending to rein in its deficits and avoid defaulting on its debts. Such cuts could provoke labor strikes and riots. EU officials are downplaying the likelihood that Greece might leave the Eurozone. The consequences of such a move could cripple the EU’s monetary-union project. A forced return to its old currency, the drachma, wouldn’t be easy for Greece, and might not bring about any economic improvement.

Related Links

• Euro’s Future in Question Even if Greece Saved: Soros
  This Reuters article explores the problematic future of the euro, in light of efforts by the European Union to save Greece from its debt crisis; includes comments by billionaire investor George Soros.
  (Source: Reuters, February 22, 2010)
• Greece Gets a Month to Sort Out Its Books
  This article discusses the steps taken by the European Union to address the problems resulting from Greece’s public debt crisis.
  (Source: MoneyWeek, February 19, 2010)
• Greece’s Euro Dilemma
  This article dissects the problems that Greece and the European Union face as a result of that country’s debt crisis.
  (Source: The Guardian, February 15, 2010)
• The Euro
  This Web page, part of the Economic and Financial Affairs Web site of the European Commission, explains how the euro was introduced, which countries use it as their official currency.
  (Source: European Commission; accessed February 26, 2010)