Understanding The Decline Of Greece

The research conducted in the present paper is mainly aimed at analyzing the causal relationships between the budget deficit and following macroeconomic variables: the gross domestic product, the harmonised index of consumer prices, the public debt and the real effective exchange rate, for Greece, during the period 2001-2014. The empirical study, conducted using the Vector Autoregressive Model (VAR) indicates that the analyzed variables are cointegrated, existing a reverse proportionate relationship between the budget deficit and the gross domestic product, and a directly proportional relationship between the budget deficit and the public debt. Therefore, the comparative approach of the effects determined by an unexpected rise in the budget deficit indicates a high speed and amplitude, with great persistence of the effect generated by the increase in the deficit on the real economy. Regarding the impact on public debt, it appears to be faster and with an increased amplitude and persistence. The study results do not illustrate any direct connection between the budget deficit and the other two macroeconomic variables - inflation and real effective exchange rate in the case of Greece. Hence, the exchange rate and the inflation variable react with a lower speed, less powerful and for a shorter period of time to the unanticipated increase in the budget deficit. The results reinforce the problem the arises increasingly more often, that is, if the Greek exit from the eurozone will come true or not. In terms of the accumulated debt default, the exit from the euro zone's most indebted member state of the Union seems inevitable, and the so-called Grexit could have serious consequences on both the Greek State and the stability of the whole European economy.