Bulgaria and Greece Economy Crisis - Term Paper Example

Impact of Euro Crisis on Bulgaria and Greece Thesis ment Bulgaria remains the poorest country within the European Union. However, it has taken fiscal regulatory measures to convince Euro zone members of its sincere desire to join the Euro club, which it feels will help the country to withstand the impact of Euro crisis.. Introduction This paper has selected to discuss about the impact of Euro crisis on two neighboring countries, Bulgaria and Greece. While Bulgaria is outside the Euro zone, Greece is a part of this zone. Bulgaria has taken many tough steps to regulate and discipline its financial sector, to escape the negative impact of credit boom witnessed by the country until 2004, which helped the country’s economy during Euro crisis. In contrast, Greek had loose regulatory measures for controlling its financial markets, which resulted in the country falling into heavy debt trap during the Euro crisis. The repeated bailout packages offered by other EU countries like Germany and France brought spiral impact on Greece with additional borrowings and almost nil repayments. Economy comparison review . Bulgaria has borders with Serbia, Romania, Turkey, Greece and Macedonia as it is located in the Southeastern part of Europe. While Bulgarian economy is mostly based on industrial activity, the service sector also contributes to the country’s economic development. Bulgaria is involved in the industrial production of various goods that include iron, electronics, copper, automobile components, armory weapons, among others. The foreign direct investment helped Bulgaria to register robust growth of 6% from the year 1996 to 2008.However, the financial and Euro crisis of recent past have been responsible for the country’s decreasing exports since 2008. The capital inflow also saw a reducing trend, as the GDP went down drastically after 2009. The Purchasing Power Parity reduced from $95.1 billion in the year 2008 to $90.54 billion in 2009. While services sector was responsible for providing maximum employment, the industrial and agriculture sector also contributed to this. However, around 10% of the eligible workforce of Bulgaria remained unemployed, as per the census of 2009. Many factors have added to the country’s economic and social inequality. These include weak judiciary, high level of organized crime and corrupt administration.(Bulgaria economy) The Bulgarian economy rebounded smartly after the break down of USSR, which saw the country’s living standard going down by almost 40% during 1990s. While the economy regained during the end of the year 2004, Bulgaria also suffered economically due to UN sanctions against Iraq and Serbia. However, opinions prevailed about the economic conditions of Bulgaria getting better if the country opts to join Euro Zone. While GDP of Bulgaria grew at a steady rate from 2% in the year 1999 to 6% during 2007, it reversed during the year 2008 following the Euro crisis. The country’s exports to European and non-EU members were considerable until 2007, with Germany and Italy being the biggest trade partners of the country. Bulgaria had considerable amount of import and exports with Greece. However, following the severe crisis in Euro zone countries, particularly Greece, Bulgaria could not sustain its exports to these markets, which resulted in reduced industrial production. (Economy facts) Bulgaria has the legacy of communist ideology, which it followed during the erstwhile USSR days. However, after the collapse of USSR, the country displayed signs of economic strength, as its GDP grew progressively during late 199s until 2007. The Euro zone crisis left Bulgarian economy shaking, as its exports to neighbors declined. The FDI also reduced after the year 2008. On the other hand, economy of communist East Germany displays robust growth after its merger with capitalist West Germany. This is evident from the fact that united Germany was responsible for offering repeated financial aid to Greece for reducing Greek debt. In contrast, Greece has a capitalist economy, while 40 percent of GDP is contributed by the public sector. Tourism has contributed to GDP by around 18 percent, while the immigrant workers have mostly captured the employment opportunities, since they are willing to work as agricultural and unskilled labor. The country gets major aid from EU, which contributes to almost 3.3 percent of its yearly GDP. Before the Euro crisis, Greek economy grew by around 4 percent, annually, from 2003 to 2007. However, Greece could not maintain this growth due to the world financial crisis and Euro crisis and the country could not contain the growing budget deficit. The impact of this crisis on Greek economy resulted in contraction in economy to the tune of around 26 percent from the year 2007 to 2013. Following EU’s “Growth and Stability Pact”, Greek was able to meet the budget deficit target of 3 percent of its overall GDP in the year 2007-2008. However, the country could not maintain this figure, as it had reached the deficit level of almost 15 percent in the year 2009. The austerity measures taken by the country following this resulted in the deficit level to go down to around 4 percent by the year 2013. Greek had to adopt tough reform measures, like overhauling of pension and health-care systems, decreasing tax evasions and government expenditure, which resulted in countrywide labor union strikes. In addition, the country’s rating was reduced to lowest possible rank by a leading rating agency. To counter the crisis, IMF bailed out the country by providing short and medium term loans to the tune of around $ 147 billion for the Greek debt repayments. Many Euro zone governments also contributed to this fund. The tax increases and cuts in government spending followed this. However, the country could not meet its deficit reduction obligation and was given another bail out by the Euro countries and IMF. This fund amounted to almost $169 billion in the year 2011. Out of this, around $41 billion was utilized by the banking system of the country for meeting its capital requirements. This resulted in the country promising further tough austerity measures, as the country set its target of introducing around $ 7.8 billion through these measures. The political leadership of Greek was compelled to introduce steps that resulted in lower government spending in health-care sector, privatization of public undertakings and increase in tax collections. The government’s coalition partner, Democratic Left, withdrew from the coalition because of the government’s action for privatizing the state’s Television and Radio Company. Since Greek government could not carry out the further reform programs, the country’s leaders delayed the disbursement of bailout funds until the end of year 2013. However, the indicators of country’s macroeconomic conditions displayed the positive signs of economic revival. This resulted in strengthening of investor confidence during 2014. (Economy, nd) Bulgaria is eager to join Euro zone Bulgaria has been fighting the dilemma of joining Euro zone, as many political leaders of the country felt that it would prosper by being the full member of European Union. The country was not able to enjoy the positive impact of joining this league before the Euro crisis began. This resulted in Bulgaria remaining one of the poorest countries in European Union. Being keen to join the Euro club, Bulgaria has taken several steps to reform its financial system. These include freezing of pension and salaries for its workforce. However, the proximity of the country with Greece has added to the worries of Bulgaria, as many influential EU members of the Euro club are of the opinion that the country can go economically down like Greece. In addition, a considerable number of Bulgarian banks are owned by Greek banks and any financial problem faced by Greeks can directly affect the Bulgarian banking sector. Hence it remains a ticklish issue for the Bulgaria to convince the members of Euro zone that the country will not go down as Greek did.(Smilov) Greece and emerging economies Before the creation of Euro zone, all countries in the emerging markets group were doing well, because of economic reforms adopted by them. This combined with efficient macroeconomic policies brought boom to all emerging economies. However, the situation changed after the establishment of Euro zone. The Euro crisis has its background in the sub-prime crisis of USA. Thus, impact of crisis on individual Euro zone countries depended on their exposure to investments in US assets. Following Euro crisis, many individual countries could not recover, mainly due to single lender for all banks in the zone being the European Central Bank (ECB). Greek could not mange its financial markets and banks in an efficient manner, along with huge current account deficit. The country had another bout of economic crisis in 2010, which also engulfed Ireland, Italy, Spain and Portugal.(Frenkel nd…pp3) Bulgaria took timely action to contain credit boom of early 2000s During the years before Euro crisis, Bulgarian National Bank adopted strict banking disciplinary measures to counter any negative cyclic impact on its banking sector due to the credit boom witnessed by Bulgaria before 2004; which kept the market participants under control. The credit boom was caused partly by the inflow of foreign capital into the country. Accordingly, the banks introduced many reforms and regulations to tighten the loan lending norms, along with increasing the required capital reserves. These measures reduce the risk levels for the banking sector. The other regulatory steps taken by the country also helped it to contain the credit boom of 2000 to 2007, which resulted in economic stability during the following years. Such steps included strict asset classification guidelines, tighter credit controls as well as credit ceilings.(Spendzharova) The measures taken by Bulgaria to counter the impact of Euro crisis included maintaining robust capital reserves, while issuing ordinances for reducing risk exposures and credit risk. Accordingly, the application of risk-averse policies consistently has helped the country to keep its economy from collapsing after the Euro crisis. However, the increasing number of non-performing loans can be a concern for the country during the coming years. The consistent commercial regulations helped Bulgaria to have relatively stable economy. However, the land values could not remain stable due to increasing subsidies in agriculture sector, enforced by European Union.(Bulgaria) In contrast, Greece had restrictions to act independently for curbing its current account deficit and reforming the banking system, as the ECB and IMF declared their terms, along with the bailout funding. One of the reasons is the presence of many Greek banks in Southeastern Europe. Due to fall in the consumption of Greek exports in this region, the country’s banking system could not withstand the Euro crisis of 2008. In addition, Greece had instable political atmosphere and tension along its borders with neighboring countries. The country required huge expenditure on defense activities. All these issues combined with other factors have made Greek vulnerable to external pressures, like Euro crisis.(The changing World, nd 36-7) In addition, Greek economy faced the worst financial problems, aided by Euro crisis, because the country started borrowing heavily since it merged with EU zone. The country’s inability to keep up with the reforms created spiral of further bail out loans. This in turn deepened the country’s crisis further. The situation worsened with both major parties, New Democracy and left party pursuing their individual programs that resulted in enhanced borrowing. The country could not carry out necessary reforms, post 2008, as faulty systems and regulations kept the country from paying off the debts. This led to further erosion in Greek image in international markets and within the EU region. There was no political will present in the country to carry out such reforms. In fact, some political quarters felt that the country should not meet its obligation to pay off the debt. In addition, the private lenders of Greece kept on pouring funds into the system before the EU crisis, while they could not share the responsibility, after this boom faded away and crisis loomed large over the country. These creditors held back at the crucial time when burden sharing for repayment of loans was necessary. This kept the problem alive without any solution and left Greece with no intention to return the loans. However, the situation arose due to inefficiency on the part of country’s political and financial system during the boom and subsequent crisis.(El-Erian, 2012) Greece could not contain its current account deficit and tax evasions, during the crisis. This resulted in a domino effect for other Euro zone countries, as Spain, Italy and Ireland, among other EU nations, followed the default route. This cascading effect brought further financial tensions to Euro zone countries, particularly Greece. The country finally was under heavy debt to the tune of $608 billion, which created ripples in the country’s financial circles.(Possible Greek default, 2011) Conclusion The lack of political will and absence of well-established financial regulatory systems resulted in deterioration of Greek economy. Although the country got bailout packages from other EU members, Greece was unable to pay off the debt. In contrast, Bulgaria being a non-EU member had advantage due to its geographical location to expand its trade ties with other non-EU as well as Euro zone countries. However, Bulgaria is trying to find ways of joining Euro zone for better prospectus. Reference List Bulgaria, (2014) 2014 Index of Economic Freedom, [online} Available at: [Accessed 02 Jan. 2014] Bulgaria Economy, 2010, Economywatch.com, [online} Available at: [Accessed 03 Jan. 2014] Economy Facts of Bulgaria, nd, Bulgarian-South African chamber of Commerce, [online} Available at: [Accessed 03 Jan. 2014] Economy, nd, Turkey vs. indexmundi.com/factbook, [online} Available at: [Accessed 30 Dec. 2014] El-Erian.M, Who is to Blame for Greece’s Crisis, May 2012, The Guardian, [online Blog] Available at: [Accessed 30 Dec. 2014] Frenkel. R, nd, What have the crisis in Emerging markets and the Euro Zone in common, nd, itf.org, [online, pdf] Available at: [Accessed 30 Dec. 2014] Possible Greek Default, today’szaman.com, [online] Available at: [Accessed 30 Dec. 2014] Smilov. D, 2012, European Council of Foreign Relations [online} Available at: < [Accessed 03 Jan. 2014] Spendzharova. B.A, 2014, The Linits of Counter Cyclic Bank Regulation [online} Available at: [Accessed 03 Jan. 2014] The Changing World and Greek Economy pp36-37, nd google books, [online] Available at: [Accessed 30 Dec. 2014] Read More