- Greece saw its trade and budget deficits rise significantly after adopting the euro, as its labor costs increased more than countries like Germany, hurting competitiveness. - The EU's system of destination-based VAT taxation compounded Greece's loss of competitiveness. - Greece had budget deficits over 3% of GDP for decades, causing its debt-to-GDP ratio to exceed sustainable levels and rise to 198% by 2012. - Tax revenues in Greece fell drastically from 24% to around 2% of GDP from 2000-2009, exacerbating its deficit problems.

1. THE RULE OF REACTION -
GREECE DEBT CRISIS & ROLE OF TAXES IN THE DEBT CRISIS
A man possesses the most important factor and driving force of nature which we call as
“behavior”. “Behavior dynamics” gives birth to a rule which while we read is very similar to
Newton’s third Law of motion. The rule is read as -
“For every action there must be pre-calculated set measures of reaction deciding flow, measure
and direction for the state”
As per me in the above rule exists basis of survival for any economy. The “set measures”
mentioned in the law includes in it tax policies and laws governing transactions at its occurrence
till its completion as one of the most important governing tool-
Government being the control unit of state and policy making body, uses tax as device to drive
the economy in a particular direction by taxation on goods, services and income. Where
taxation policies give direction, the policy framing for levying and collection of taxes has several
considerations for every government and legislative body while framing them. The current state
of economy (GDP), maturity of the economy, the sentiments of every demography towards the
economy, common interest, and geography, infrastructural maturity of the economy,
unexplored arenas, strategic pacts and agreements with other countries are those
considerations. With all the considerations at place, the independence of the Government to
frame the tax policies and its control over the currency of the country is the key which can help
it to face every crisis and bring economy on the path of recovery.
For Greece crisis and the role of European tax policies in the crisis, it all starts with the Maastricht
treaty where lye the existence of Euro.
Maastricht Treaty & harmonization of Taxes -
The Maastricht treaty which dates its birth on 7th February 1992, took birth to unify Europe under
one umbrella. The umbrella which the Maastricht treaty constructed under it asked its members
beneath to have the fiscal policies “sound” with the maximum limits set for inflation, debt-GDP,
Exchange rate and long term interest rates. The treaty further did give birth to European
Community treaty (which will be termed as EC treaty further in the article) which in its heart had
harmonization of Tax policies and observance of the rule of fiscal neutrality in
Community trade, i.e. equal tax treatment for domestic production and imports from other
member countries. Where EC treaty focused on complete harmonization of taxes between
the member nations they created a new turnover Tax system VAT, the same was achieved
at the cost of maintaining Tax barriers which was necessary for collection of VAT & excise
duties in the country of destination. The EC treaty, lead to harmonization of Customs duty
as well which meant a single point levy & collection of duty for exports and imports to and
from all the member nations that meant that the member nations will not have customs
duty levy between the member nations. The harmonization of indirect Taxation, lead to –

2.  Increase in the volume of Trade.
 Harmonization of VAT law (content)
 Harmonization of content and layout of the VAT declaration
 regulation of accounting, providing a common legal accounting framework
 detailed description of invoices (article 226) and receipts (article 226b), meaning that
member states have a common invoice framework
 Regulation of accounts payable.
 Regulation of accounts receivable.
 Standard definition of national accountancy and administrative terms.
The VAT harmonization lead to increase in the trade volumes expediently but the increase was
not uniform for every member state. The Intra-Community acquisition of goods a taxable
transaction for consideration crossing two or more member states were dealt as follows -
The exporting member state zero-rates the VAT. This means that the member state of the
exporting merchant does not collect VAT on the sale, but still gives the exporting merchant a
credit for the VAT paid on the purchase by the exporter (in practice this often means a cash
refund). The importing member state "reverse charges" the VAT. This means that the importer is
required to pay VAT to the importing member state at its rate. In many cases a credit is
immediately given for this as input VAT. The importer then charges VAT on resale in the normal
way.
The 1999 introduction of the euro as a common currency reduced trade costs among the
Eurozone countries, increasing overall trade volume. However, labor costs increased more in
peripheral countries such as Greece relative to core countries such as Germany, making Greek
exports less competitive. As a result, Greece saw its current account (trade) deficit rise
significantly. The VAT system of destination based consumption tax where the importer bore the
VAT to be paid to the government on imports, further compounded the effect of increase in the
input costs which finally created a huge current account gap for Greece. The Chart displays the
position of Greece current account deficit compared to that against Germany from 1999 – 2013
-

3. (The Figures represented on Y axis is in EUR Million).
A trade deficit means that a country is consuming more than it produces, which requires
borrowing from other countries. Both the Greek trade deficit and budget deficit rose from below
5% of GDP (a measure of the size of the economy) in 1999 to peak around 15% of GDP in the
2008–2009 periods. Another potential driver of the inflow of investment into Greece was its
membership in the EU, which helped lower the yields on its government bonds over the 1998-
2007 periods. In other words, Greece was perceived as a higher credit risk alone than it was as a
member of the EU, which implies investors felt the EU would bring discipline to its finances and
support Greece in the event of problems.
As the Great Recession that began in the U.S. in 2007–2009 spread to Europe, the flow of funds
from the European core countries to the periphery began to dry up. Reports in 2009 of fiscal
mismanagement and deception increased borrowing costs; the combination meant Greece
could no longer borrow to finance its trade and budget deficits.
Government Spending and Tax to GDP:-
Greece had budget surpluses from 1960–73, but since then it has had budget deficits. In 1974–80
the government had budget deficits below 3% of GDP, and in 1981–2013 deficits were above 3%
of GDP.
The long period of budget deficits caused a situation where, from 1993, the debt-to-GDP ratio
was always above 94%. In the turmoil of the global financial crisis, the situation became
unsustainable (causing the capital markets to freeze in April 2010), as the downturn had caused
the debt level to grow rapidly above the maximum sustainable level for Greece (defined by IMF
economists to be 120%). According to "The Economic Adjustment Programme for
Greece" published by the EU Commission in October 2011, the debt level was even expected to

4. worsen into a highly unsustainable level of 198% in 2012, if the proposed debt restructure
agreement was not implemented.
(The data on Y axis is in % of GDP)
The Tax structure which existed and was functioning at levels as high as 24% of GDP (Total Tax to
GDP ratio) of which the indirect Taxation revenue to GDP was as high as 15% of GDP (Indirect
Taxes to GDP ratio) as on 2000 and other taxes revenue was as high 4.2% (Other Taxes to GDP
ratio) in 2000, fell drastically to a level nowhere around 2%(Total Taxes to GDP Ratio) in 2009. The
graph shows the fall in Tax revenue –
(The data on Y axis is % of GDP)
The Deficit which was 3.2% as on 2001 rose as high as 15.7%. The levels of deficit which was
claimed to be 6-8% by the previous government of Greece prior to 2009 was declared by new
government of George Papandreou in February 2010 to be improper disclosure and the new

5. statistics represented as high as 12.7% of Budget deficit which was restated in April 2010 to be
13.6% and final revised calculation as per Eurostat’s standard resulted into a deficit as high as
15.7%.
Putting together every fact above mentioned together and the misreporting by Greece, I
analyze the crisis further at a situation which drove the entire world attention towards Greece.
FACTS -
 The Greek government's bond auction in January 2010 had the offered amount of €8 bn
5-year bonds over-subscribed by four times. At the next auction in March, the Financial
Times again reported: "Athens sold €5bn in 10-year bonds and received orders for three
times that amount". The continued successful auction and sale of bonds was, however,
only possible at the cost of increased yields.
ANALYSIS –
 The classical theory of Budget Multiplier which says taxes Depends on Income and gives
the formula for balanced budget as –
Y=C+I+G
If find the break the above concept further –
It is read as
C=b(Y-T)
T=t*Y
G=t*Y
Y=b(Y-tY)+I+tY
Y*(1-(b-bt+t))=I
Y=I/(1-b+bt-t)
Here Y=Income (which is to be considered as 100%)
C=Consumption
G=Government Expenditure
T=Tax %
b=retained earnings % (Total Earnings – Investments)
I =Investments
Considering the Final result of formula where Y=I/(1-b+bt-t), where the taxes are inversely
proportional to Investments means an increase in the tax rates in the economy effects
the Income and the Investments position inversely.

6. This classic formula run in perfect manner in the above situation where though the bond issue for
Greece was successful in January 2010 the events which then came ahead where George
Papandreou in February 2010 restate the deficit to 12.7% further to 13.6% and finally as per
Eurostat it rose to 15.6% it heavily affected the economy. Where after the restatement of deficit
the Government had the increased the Tax rates as high as 40% in the economy to grapple up
with the worst position of Tax to GDP ratio. Under such circumstances the rating agencies
downgraded the Greek economy to junk status in late April 2010. This led to a freeze of the
private capital market, requiring the Greek financial needs to be covered by international
bailout loans to avoid a sovereign default.
This can be well known by Keyns third argument of Excessive Savings from the General Theory o f
Employment, Interest & money which reads –
“Keynes argued that saving and investment are not the main determinants of interest rates,
especially in the short run. Instead, the supply of and the demand for the stock
of money determine interest rates in the short run. (This is not drawn in the graph.) Neither
changes quickly in response to excessive saving to allow fast interest-rate adjustment.
Finally, Keynes suggested that, because of fear of capital losses on assets besides money, there
may be a "liquidity trap" setting a floor under which interest rates cannot fall. While in this trap,
interest rates are so low that any increase in money supply will cause bond-holders (fearing rises
in interest rates and hence capital losses on their bonds) to sell their bonds to attain money
(liquidity).”
This perfectly fits in the situation where after the rating agencies considering the Greece
Economy as Junk, and the Economy grappling with the Debt to GDP ratio as high as 180% there
was crack in the economy and instant supply of Money in the economy was required and as
well the payments were due towards Troika. The Slightest increase in the Interest rate increase in
the Bond Market lead to huge momentum towards sale of bonds where investors wanted to het
their principal, with the Bond prices continuously crashing, finally leading to the a situation of
Complete mess in Greece.
I would finally like to quote keyns argument of Excessive savings which holds true for Greece
which enjoyed surplus from 1960 ended in 1973 which reads excessive saving, i.e. saving beyond
planned investment, is a serious problem, encouraging recession or even depression. Excessive
saving results if investment falls, perhaps due to falling consumer demand, over-investment in
earlier years, or pessimistic business expectations, and if saving does not immediately fall in step,
the economy would decline.

7. The classical economists argued that interest rates would fall due to the excess supply of
"loanable funds". The diagram below, adapted from the graph in The General Theory of
Employment, Interest & money, shows this process. (For simplicity, other sources of the demand
for or supply of funds are ignored here.) Assume that fixed investment in capital goods falls from
"old I" to "new I" (step a). Second (step b), the resulting excess of saving causes interest-rate cuts,
abolishing the excess supply: so again we have saving (S) equal to investment. The interest-rate
(i) fall prevents that of production and employment.
The end of 1973 marked the beginning deficit conditions for Greece where unplanned measures
and factors many other which may have been untapped by me in my article must have
resulted in a situation of complete defiance of the rule which I had quoted earlier
“For every action there must be pre-calculated set measures of reaction deciding flow, measure
and direction for the state”
The loss in a plan and mistake in the construction of this structure for the economy where for
every action from the environment of the state there is measured reaction lead to a downfall.