Greece – A failing economy?

INTRODUCTION

Greece is a country located

in Southern Europe on the

southern end of the Balkan

Peninsula. Greece has

adjoined land borders with

Albania, Macedonia,

Bulgaria, Turkey, the

Aegean Sea and the

Mediterranean Sea. The

government system is a

parliamentary republic. The

chief of state is the President and the head of government is the Prime Minister. Current

president of Greece is ProkopisPavlopoulos whereas Alexis Tsipras is the prime minister of

Greece. Greece’s market economy is determined as a free price system. Being a part of Europe

the currency of Greece is Euros. Greece is a member of the European Union (EU) and the Black

Sea Economic Cooperation (BSEC).

According to the economic profile, Greece has a capitalist economy with the public sector

accounting to 40% of GDP. Greece has been an active participant in international trade market.

Three most active trade partners of Greece are Russia, Germany and Italy. Being an active trade

member, Greece top industrial production includes Tobacco, Textile, Chemical and Tourism.

Greece had a current GDP of $238 billion per annum. Greece government along with a stable

GDP has government debt crises of €300.064 billion which is 167.8% of GDP. The economy of

Greece is the 45th largest in the world with a high nominal gross domestic product. Greece is a

developed country with an economy based on the service sector (81%) and industry (16%).

Agriculture contributed 3.4% of the national economic output that was estimated in 2012. Greece

is also a member of the International Monetary Fund and the World Trade Organization.

BACKGROUND TO GREECE CRISES

Greece from the mid-1990s was constantly spending more than it was collecting tax. This deficit

expanded with the growing time so Greece started borrowing for neighboring countries to cover

the shortfall. Politician on the verge of fulfilling the deficit forgot about the increasing rate of

debt on the countries revenue. This has led to severe economic crisis in Greece which has

evolved into a broader political crisis in Europe that has represented the most significant setback

in over 60 years of European integration. Since 2009 these economic crisis have intensified.

These economic crises have been rooted in concerns about the sustainability of Greece’s public

finances and high debt levels which has had a broader effect on Greece economy. This has

included a collapse in economic growth, high rate of unemployment and instability in the

country’s banking system. Although the Greek economy is small which accounts to less than 2%

of Eurozone gross domestic product (GDP), many policymakers and analysts are concerned

about the potential contagion of the crisis in Greece to the rest of the Eurozone and the global

economy.

Greece also has very high level of corruption and an inflated public sector and very high tax

evasion which is obstruction for growth of the country. Between 2003 -2007, Greece witnessed

an average GDP growth of 4% but went into recession in the year 2009 due to world financial

crises. This resulted in tightening credit conditions and failure of the government to address

growing fiscal deficit. Greece has had five different governments since 2009. Similarly

governments in more prosperous economies (Germany) have faced mounting pressure to end

financial assistance. Economists argue that the outburst of Greek debt crisis was much older and

deeper to the Greek financial and political scene. In a broader and complete view, it can be

apprehended that there were number of factors that lead to debt crisis in Greece.

European leaders have failed to view that the economic crises have heightened political tensions

to a degree that has negatively affected the EU over the longer term, mainly Greece. Moreover

some Members of Congress have figured out the reason about the possible crisis in Greece is due

to United States. The role of IMF in the crisis has also been very controversial as United States is

the largest shareholder at the IMF.

CAUSES OF GREECE DEBT CRISES

Collectively numbers of factors have led to the economic crises in Greece. A number of factors

have contributed to the fiscal crisis that Greece which has been experienced since October 2009.

Some of these factors are endogenous and deal with the structure of the Greek economy itself.

This prolonged macroeconomic imbalances that the Greek economy faces and basically the

credibility problem of macroeconomic policy. Conditions that have proceeded to the economic

crises are:

Political factor: According to a political perspective, Greece has been facing significant

challenges in the last decade that has worsened its ability to perform financially in a healthy

manner. Foreign relations with Turkey and the terrorist activities within the country have also

given rise to political unrest. Furthermore, individual terrorist attacks at US targets have in the

past decade had effected diplomatic relations with the US. However, the level of these relations

remains high recently (abolishment of the special visa required for Greek citizens to travel to

US.)Moreover, corruption has been continues part of the political culture of Greece. The country

has faced a series of large political and financial scandals in the past several years (Under both

the Pasok Party and the ND Party). All the governments have publicly criticized corruption and

nepotism leading to adverse situation in Greece.

The above graph shows that Greek citizens are the least satisfied people in the entire EU nation by the way the administration is being run and the way their government functions. Greece is followed by Ireland with equal dissatisfaction on the part of the

government. On the contrary, Danish citizens are the most satisfied in EU.

Nevertheless, according to the Berlin-based watchdog Transparency International, Greece's ranking in terms of corruption fell from 62 to 80 in 2007, but Greece made marginal progress in 2008 by securing the 78th rank, behind almost every other EU nation. The graph below shows the country ranked in terms of corruption based on CPI index. In contacts to Greece, Denmark has been listed as the least corrupt country in European nation.

Economic factor:According to an economic perspective, Greece has been one of the fastest

growing economies in the EU since the 1990s when it has recorded strong GDP growth,

outperforming EU averages. Liberalization of the financial sector and low interest rates also lead

to a significant expansion in consumer credit and demand. However poor government budgets

and poor competitiveness of the Greek economy increased the deficits at a high rate. Greek

exports also became increasingly uncompetitive due to an increase in labor costs and higher

inflation than other EU member-states.

Furthermore, in the touristic sector that is considered to be the most important sector of Greek’s

economy also faces low profitability due to increasing labor costs and poor labor quality in the

sector. The latest World Bank report suggests that Greece is ranked 142 among 178 countries

when it comes to the regulation of employment. Even the increased wages have not kept in pace

with productivity development of the country. The springiness of the labor market has also

contributed to a poor competitiveness of the Greek economy. However it cannot be ignored that

Greece is performing very well in real labor productivity.

The above graph represents the change in GDP of different European Nation after the 2008 crises. Compared to all other European nations, Greece has been the mostly adversely effected economy whereas Germany has been the most consistent and

stable economy.

International banking crisis (2008): The international banking crisis of 2008 is closely

linked to the Greek debt crisis. The Greek debt level was consistently high even before 2008.

Greece faced immense hurdles than compared to other European nation because Greece faced

issues of uncompetitive economy, administrative weaknesses and rampant tax evasion. European

Commission estimated in 2006 that 30% of Greek taxes – or 3.4% of the Greek GDP – were

unpaid. When international credit crisis spread in 2008-2009, Greece was recorded of low reform

capacity matched by inherited economicweaknesses that made Greece very vulnerable. Thus, the

Greek economy lacked competitiveness which accounted to deficits in foreign trade. The Greek

government subsequently became incapable of paying back their debts. This led to the reduction

in the price of Greek bonds, the wake of the global credit crunch. Greek government took no, in

other words Greek government acted irresponsibly with its fiscal policy and debt accumulation

leading to economic weaknesses that became apparent during the global credit crisis in 2008.

GREECE DOWNFALL: 2000-2008

Greece joined the European Union in 2002 and outgrew most of the other European countries.

The outgrowth was a Greece was a result of high government and consumer spending resulting

from low interest credit. This led to major debt crises in starting from 2007 that flawed economic

model of Greece. The chronic overconsumption in the public sector spilled over to the private

sector exposed major gaps in the economy in terms of competitiveness and productivity. The

large public andprivate sector spending between 2000 and 2008 (97% of the cumulative GDP

growth was driven by consumption) created a deteriorating trade balance, as the demand could

not be met by foreign and domestic investment. Due to this Greece’s debt burden turned out to

phenomenally high (214% of GDP in 2008) with public debt (111% of GDP) and consumer

lending (15% of GDP) the highest in Europe. This was due to the fact that since joining the EU,

Greek’s had easier access to funds both internally and the externally because of enjoying credit

ratings similar to Germany.

“(The eurozone) resembles a fine riverboat that was launched on a still ocean in 2000. And then the first storm that hit it, in 2008, started creating serious structural problems for it. We started leaking water. And of course, the people in the third class, as in the Titanic, start feeling the drowning effects first,”-Yanis Varoufakis said in an interview with Channel 4 News.

The graph above represents that Greece, compared to rest of its peers has a high consumption pattern which led to high GDP but at the same time, investment was the lowest with negative growth in exports.

Since 2002, Greece never managed to reap economic benefit from its membership with European

Union. The exports of Greece never pay for its import. However the reason for Greek’s fueled

growth was due to the higher domestic investment and domestic demand that was inflated by

ample credit by public sector. The government spending increased by 6.5% from 2000-2009 to

keep up with the expenses by increasing public employees salary and pension. During the same

period, Greek government income also reduced by 5% of GDP.

The above graph represents the Public expenditure incurred during the period of 2000 2009. It is clearly visible that most of the‐ expenditure was allocated towards social benefits, instead of supply side reforms.

THE GREEK DEBT CRISES: 2010

In May 2010, the European Union (EU) and the International Monetary Fund (IMF) approved a

110 billion euro loan package to the Greek government in return for promises of spending cuts to

sharply reduce the Greek public deficit. The plan, negotiated by German Chancellor Angela

Merkel and Greek Prime Minister George Papandreou, was intended to cover the borrowing

needs of the Greek government through 2013. In spite of this rescue package and another, 130

billion euro, package put together between July 2011 and March 2012, the debt crisis in Greece

continues into 2012.

To further cover up, Greek bonds were given the lowest possible rating, in July 2011 meaning

that the Greek government has selectively defaulted on some issues. The countries that have

suffered debt crises and were threatened by such crises got into trouble in different ways. The

two crucial common characteristics are that each countries like Greece experienced a deep and

prolonged recession and needed to frequently sell large quantities of bonds, either to finance

large fiscal deficits or to roll over—and make interest payments on—a large public debt.

GREEK’S CRISES TODAY

"The crisis afflicting some years now our place was marked by a highly tragic dimension. The increase in suicides. Those that are least known, since experts believe that their number always is considerably higher".– Kathimerini

Greek debt crises have affected the society in numerous different ways that has made their

system dysfunctional. The most characteristic feature of the Greek current crisis is the steep

rise in joblessness. The

unemployment rate had

fluctuated around the 10% mark in

the first half of the previous

decade. It then began to fall until

May 2008, when unemployment

figures reached their lowest level

for over a decade which has been

6.6% of the labor force only. Long-term unemployment increased even faster to 889,000

workers or 18% of the labor force in the first quarter of 2013. More than one-third of all

workers in Greece are self-employed, the highest proportion in the EU. Job losses in the form of

business closures have been significant among the self-employed.

Rise in relative poverty has been modest in Greece. Relative poverty in Greece rose from 20.0%

in 2009 to 21.3% in 2012. National incomes in Greece have also fallen from €570 per month in

2009 to €622 per month in 2012. Anchored poverty has risen from 20.0% in 2009 to 37.0% in

2012. However, with respect to age in Greece, relative poverty appears to be significantly falling.

The reason to this is the high pension services that have led to recession in Greece. Relative

poverty has risen for all other age groups, especially for children, reflecting the impact of job and

earnings losses for people of working age. Relative poverty has increased more steeply in

Athens, even though it remains higher in other cities and in rural areas of Greece.

This graph shows incomes that are below poverty line. In 2013 it climbed up to 45%.

CONCLUSION/ANALYSIS

Athens needs to raise $67 billion to pay back creditorsand have to manage a mountain of public

and governmental debt. Greece faces default and European Union — led by France and Germany

— has started to negotiate a bailout. According to the Boomerang voting, European Union voted

to bail out Greece from the Eurozone, however this has not been the case as the laws of

European union does not allow any nation to be disintegrated. The scenario of Greece, even

today, has not been any better than compared to 2000 or 2008. The people of Greece are still

facing extreme hardships followed by social and economic challenges. Although, In my opinion,

the major reason for the crises in Greece is due to the political instability and high corruption rate

that has led to such failing crises in Greece.

To overcome such crises, Greece really needs to work on its short and long term policies. New

programs should be implemented that stabilized the domestic economy of Greece. Furthermore,

Greece should also work on increasing its exports rather than being dependent on prices import

items. Tourism industry of Greece should be flourished again so that revenue is generated in

Greece that can help the nation overcome debt.

To cater the drawbacks of Greek’s crises, The European Financial Stabilization Mechanism

appears to have successfully reassured the Eurozone scenario for the time being. This mechanism

however does not solving the root causes of the problem. Therefore numerous European

countries, mainly Greece will still need to take difficult steps to increase their industrial

competitiveness and improve the state of their public finances.Hence other effective mechanism

and policies as such should be introduced that led to sustainable economic development in the

arena.

References

https://www.aei.org/wp-content/uploads/2015/06/Lachman-Testimony-June-2015.pdf

http://greekeconomistsforreform.com/wp-content/uploads/Reform.pdf

http://www.independent.co.uk/news/world/europe/greece-debt-crisis-explainer-a-history-of-how-the-country-landed-itself-in-such-a-mess-10365798.html

https://faculty.chicagobooth.edu/anil.kashyap/research/papers/A-Primer-on-the-Greek-Crisis_june29.pdf

http://oru.diva-portal.org/smash/get/diva2:797941/FULLTEXT01.pdf

http://www.slideshare.net/praveenmr1989/greece-financial-crisis-case-study?related=3

https://jsis.washington.edu/hellenic/file/Shelby%20Woods%20Thesis%20copy.pdf

https://www.fas.org/sgp/crs/row/R44155.pdf

http://www.bankofgreece.gr/BoGDocuments/The%20root-causes%20of%20the%20greek%20sovereign%20debt%20crisis%2005%2005%202011(3).pdf

http://studenttheses.cbs.dk/bitstream/handle/10417/2529/dimitrios_papadimitriou.pdf?sequence=1

http://core.ac.uk/download/pdf/6262507.pdf

https://www.washingtonpost.com/news/wonk/wp/2015/07/05/as-greece-votes-heres-everything-you-need-to-know-about-the-nations-crisis/

http://www.econ.umn.edu/~tkehoe/papers/EurozoneCrisesEPP.pdf

http://library.fes.de/pdf-files/id/10314.pdf

Topic – ‘Failure story (Greece)Course – Development and Planning

Submitter to: Mr. Akhtar ZebSubmitted by: Hareem Syed (1217-106)

Date: 22nd December 2015Semester: BS-SS (7)