Sovereign debt crisis in Greece: A system dynamics approach to policy analysis

Abstract

Although the budget deficit modification by new elected government and following government bonds downgrading by world rating agencies directly triggered the sovereign debt crisis in Greece, the most substantial cause is its prodigal and extravagant fiscal policy. Greece has enjoyed living beyond its salary" life since it became member of Eurozone in 2001, because it can borrow heavily from international markets especially from member countries to fund its huge budget deficit. Greece requested financial support formally and formulated fiscal austerity and structural reform for exchanging 110 billion Euros bailout from both Europe and IMF. This paper reproduced the history of this issue using System Dynamics model in which the government debt is the most important researching object. System Dynamics as the most powerful problem-replication tool is also used in the paper to analyze those fiscal consolidation policies putting in a relative long-term period, which could help the official policymakers to formulate effective policies for the sake of making the government debt sustainable.