EMF, EU and Economic Recovery in Europe - Case Study Example

EMF, EU and Economic Recovery in Europe Name: Course Professor’s name University’s name City, State Date of Submission The Greece economy suffered a severe financial crisis since 2009, following the misrepresentation of their public finance status. Being a member of the euro zone, the country had agreed to the Maastricht Treaty which stated that the annual deficit should never exceed 3% at the end of a year and the ratio of public debt to Gross Domestic Product (GDP) must not exceed 60%.[Tay11]At the time of realization about their financial crisis, the country’s public debt had soared to a high of 129% and the public deficit was at 15% of the GDP. Their credibility to follow international agreements had faltered, leading to a loss of trust from the investors and inability to gain market access. The Eurozone area state was in a fix and had no option but to seek for help from The European Union (EU), The International Monetary Fund (IMF) and The European Central Bank (ECB), commonly referred to as the troika, becoming the first euro area country to receive such funding. They set up a programme in May 2010 where Greece was lent 110 billion euros and in turn had to agree to a 3 year memorandum of economic and financial policies. The program was to be closely monitored by the EU and the IMF through their quarterly reviews.[Int13] This paper seeks to discuss the impact of the financial assistance to the Greece economy and the conditions tied to it and finally determine whether the international institutions are helping or hindering its process of economic recovery. The paper also seeks to understand the concept of democratic deficit and demonstrate how it relates to the economic situation in Greece. In order to best understand the situation, the essay will discuss the various conditions stipulated in the memorandum of financial and economic policies, the expectations of the troika when initiating the program and the overall outcome, after the lapse of the three years. The first round of Austerity measures, as required by the memorandum, were carried out in March 2010 followed by the tax reforms in 2010. Policies to reduce on the fiscal deficits were put in place, indirect taxes were increased and new direct taxes introduced. Clampdowns on tax evasion were instituted, and the pension benefits of the citizens were cut down .Public sector pays were cut down, mostly affecting the health, personal social services and education sectors. The rise in the value added tax (VAT) from 19% to 23% led to rising inflation, also contributed to by the rising prices of oils.[Nic11] All this measures were put in place to act as a budget consolidation mechanism, in a bid to get the country back on its own footing. During the setting up of the program, IMF projected that if the programme were to run successfully as planned, the growth of the country was to resume by 2012 and the unemployment would decrease to 14.8% the same year. They also expected the government to be able to regain market access by 2013 and that debt restructuring would no longer be required. Three years down the line, however, none of these had been achieved, and the government had plunged into deep recession. By 2012, unemployment had risen to over 25% and the debt ratio had risen by more than 20% to get to 149%.[And14] As a result of the program, the economy underwent various changes, both positive and negative. Among these were; 1. Effects on the labor market With unemployment levels soaring, job insecurity became the norm in both the public and private sector. The salaries and wages were cut to a minimum, and the retirement age increased while the pensions received by those over 60 years were also reduced. 2. Public sectors With funding to the various sectors cut down, most of them faced difficulties in financing their operations. In the health sector, the suppliers of pharmaceutical products either reduced their supplies or stopped providing them all together. The doctors and nurses became highly demotivated because of the cuts in their salaries. Worst hit was the research and innovation sector as there were no means to fund their research and activities. The production and construction sectors too have declined, suffering losses of more than 80% of the gross value.[Int14] 3. Financial Institutions With the increase in taxes and a decrease in the revenues, the banks in Greece faced a myriad of bad loans, with the number of these held by the banks rising from 4.7% in 2007 to 33.5% in 2014. Investments in the country have also dropped further, by around 37% from 2007 when they were at their peak. [Dim14] It is therefore justified to conclude that the financial assistance from the troika is yet to be deemed fruitful for in 2012, the government had to seek for another loan from them, and two years down the line, the government still seeks a third economic adjustment program with growth stability not being visualized in the near future. [Dan15] states the main reasons for the Syriza party’s rejection of the financial assistance from the troika was because the program was counterproductive- it led to weaker demand that caused weak public finances and hence more hefty austerity conditions would be imposed. In the definition of a democratic deficit, [Cou99] describes it in a governmental setting where the flow of influence from the people, believed to be the main stakeholders in a government, is impeded in some way. Democratic deficit is a term that emerged in relation to the European Union, in assessing its operations and performance. It should however be noted that the EU is not a state although it has various features of a typical state and therefore cannot be compared to other states in terms of its democratic proceedings. The major problem facing this institution is the implementation of correct disciplinary measures against any of its 28 member states that is discovered to not being able to live up to the policies it signed up for. The major issues bringing out the perception of the EU having a democratic deficit were brought about by the EU treaty amendments, most of which were successful. The issues of contention include the reduction of powers held by the member states as a result of the removal of their veto from the EU council of members and the EU infringement on a state’s sovereignty as its executive has more power and national parliamentary control has been decreased.[Gia98] In relation to Greece’s financial crisis and how the troika responded to it, the EU can be said to have a democratic deficit. This was first evidenced by their lack of well laid out policies on debt restructuring. This, in essence, is what left uncertainty on the minds of investors on the way forward on whether to continue investing in the country. Even though the Greece itself was also reluctant and had numerous political calls for the termination of the Troika programme or its exit in the Euro zone, the EU, by not making clear the huge public debt it owed, reduced its chances of quick recovery from the crisis. Similarly, the various conditions and austerity demands accompanying the financial help given to Greece was a huge impediment to its economic recovery. As such, the country is still in debt to the troika, even to this moment, and is therefore still subject to their loan conditions. The country still has to institute more labor reforms and move to negotiations at firm level and still has to meet the debt targets. It should be remembered that failure to meet any of outlined conditions, tougher austerity conditions would be imposed on it, plunging the nation into deeper recession.[Mar15] The ECB shut out the interbank lending markets for Greek banks. In February this year, the central bank stopped accepting Greek bonds as collateral for funding. Instead, it provides a program, The Emergency Liquidity Assistance (ELA) that provides some amount of funding to the Greek Central Bank, which then makes it available to the other Greek banks. With the number of deposits leaving Greece every year increasing, and the large number of non-performing loans held by these banks, the decision by ECB to shut the lending markets is therefore a backward drag towards even more economic recession. The failure of the economic recovery program can as well be linked to the troika. The implementation of the program can be said to have been insufficient as well put by [And14]in their writing; ‘A fundamental problem of the program-and incidentally of all countries adjusting to high debt levels and prices- was the inconsistency between attempting to regain price competitiveness while at the same time, trying to reduce the debt to nominal GDP ratio’. Their response to the crisis was very slow, so by the time the funding arrived, it was in no position able to help stabilize the already falling economic situation. This essay concludes that if the Greece government would have realized the bad financial state it was in early enough when it still had other options to choose from, and would not have therefore have to seek for assistance from the troika, its economy would have stabilized by now and the country would be experiencing positive growth for in as much as the international organizations offered a solution to the state they were in, they are the real reason why the country is yet to regain market access and has a load of debts to settle, most of which are owed to the same institutions. References Tay11: , (Taylor, 2011), Int13: , (International Monetary Fund, 2013), Nic11: , (Nicos, et al., 2011, pp. 13-17), And14: , (Andre, et al., 2014), Int14: , (International Monetary Fund, 2014), Dim14: , (Dimitri, et al., 2014), Dan15: , (Harari, 2015), Cou99: , (John, 1999, pp. 107-135), Gia98: , (Majone, 1998, pp. 3-5), Mar15: , (Mark, et al., 2015, pp. 5-12), And14: , (Andre, et al., 2014), Read More