Till 2007, Greece was one of the fastest growing economies in the Eurozone. Today, it is on the brink of a second bankruptcy in five years. How did it reach here?
Greece is part of the Eurozone, a group of 19 European Union countries that use the Euro as their currency. The monetary policy of the Eurozone is centrally managed by the European Central Bank (ECB) based in Frankfurt.
What's ECB's function?
The ECB decides the interest rates, and quantity of the currency in circulation. It is to Europe what the Federal Reserve is to the US. This, in itself, is the primary challenge to the system.
Is there a divide within the Eurozone?
Members of the Eurozone are disparate and a single monetary policy is not always viable. The economy of France or Germany is more than the combined economies of Italy, Portugal, Spain, Ireland, and Greece. While in Greece, the unemployment rate is 26 per cent, in France it is 10.5 per cent. A more federal arrangement is required where specific needs can be addressed.
How did the crisis begin?
The Greek economic crisis, in many ways, began in 2007, when its principal sector - tourism - was hit hard by global economic recession. Receipts from international tourists dropped by 50 per cent.
In 2008, the Wall Street crash hit Greece the hardest causing a 40 per cent depreciation in its already sliding economy.
In 2010, when rest of the Eurozone was recovering, Greece was crippled by widespread unemployment, large-scale spending, and high tax evasion. The same year it filed for bankruptcy.
What's the bailout all about?
The 'troika' - the International Monetary Fund, the European Commission, and the ECB - launched a Euro 110 billion bailout for Greece after it went bankrupt.
By 2011, the situation had worsened and another bailout of Euro 130 billion was sanctioned, value of Greek government bonds was reduced by 53 per cent, and private lenders were asked to cut interest rates. The lending came with harsh conditions to cut social spending, increase taxes, end tax evasion, and launch structural reforms.
Was it enough?
Turns out, in an 'extend and pretend' loop, the money that was given was enough for Greece to survive the debt-cycle, but not enough to solve the debt-crisis. The intention was to end the sovereign debt-crisis in the Eurozone, and keep Greece saddled to the economic system.
The election that changed it all
In January this year, left-leaning political party Syriza came to power on the promise of ending austerity reforms to bring in its own left-wing social agenda. However, since assuming power, the government was forced to go back on most of its campaign promises.
How did the government fail?
The closer it came to IMF's deadline of repaying the Euro 1.6 billion debt - June 30, 2015 - the clearer it became that Greece was going to default. The debate shifted to the larger question of how Greece will solve its crisis - on Frankfurt's (ECB) terms or its own.
For a while, the 'troika' was willing to lend Greece the money it needed to pay them back, but this time the terms were harsher. Prime Minister Alexis Tsipras outright rejected them, not willing to compromise his social programme for his country. He called for a referendum on whether the government should accept the terms and go for another bailout. As we saw on Sunday, the answer is a resounding 'No'.
Tsipras received the result he was hoping for. Now that his bargaining power in Brussels is bolstered, he can probably get a better bailout for Greece. However, the creditors are now more cautious about helping Greece. Matters will become clearer after the European Leaders Summit scheduled for Tuesday, where all eyes will be on German Chancellor Angela Merkel who has refused to 'pour money' into Greece.