It's no surprise that 2012 has turned out worse for Greece. It didn't escape the 2009 downturn, , the economy contracted by half a percentage point. But unlike most of the rest of the world, which rebounded the following year, Greece has continued to shrink – 5.4 percent last year and an estimated 5.2 percent this year, according to projections from the Organization for Economic Co-operation and Development (OECD).
In many ways, Greece is the poster child for the debt crisis that has gripped the European Union and a solemn warning to other nations stuck with rising government debt. An unsustainable debt load has caused interest rates on Greece's sovereign debt to soar and forced it to seek a bailout and a debt restructuring. In return for the help, the European Union, the International Monetary Fund (IMF), and the European Central Bank have forced successive Greek governments to make huge and unpopular spending cuts, the latest one announced Aug. 1, 2012, for €11.5 billion ($14.1 billion). Even with the spending cuts and debt restructuring, Greece's public coffers are nearly exhausted, its industries are uncompetitive, and its economy continues on a downward spiral.
“When the market takes a dim view of your prospects, that sends you down that spiral,” says Tu Packard, senior economist with Moody's Analytics. “It’s punishing, really.”
The situation is so untenable that many analysts believe Greece will have to abandon the euro in the next year or two, create a new currency, and then immediately depreciate it to allow its workers to become competitive. But in the process, living standards of the Greek people would plunge.