Why the International Institutions Have Failed in the Economic Recovery of Greece - Case Study Example

Discuss the factors in which the international institutions have failed in the economic recovery of Greece Name Date In the past decade Greece has been characterized by an increase in external loans. Greece has been relying heavily on international capital markets to acquire financial support that will contribute in funding its government budget and numerous account deficits. The increase in loans by Greece is mainly attributed to the weak revenue collections, poor social and economic reforms and the low rate of borrowings from the European Union and the International Monetary Fund. This report will evaluate the factors which have hindered the EU and IMF as international institutions from succeeding in helping Greece recover from the economic crisis experienced in the country. Since the 19th century, a number of nations experiencing financial crisis have been faced by opposition by their governments to fulfill their debt obligations (Hilsenrath, 2010). According to Reinhart (2009) financial crises in most instances contribute to an economic downturn, increased government deficits and debts, in addition to low levels of revenues in a country. During an economic recession, some countries tend to be faced with a sovereign debt crisis as is the case with Greece. For instance in 2010 the International Monetary Fund and Eurozone members organized a financial aid for Greece in order to avoid a Greek government default as well as the influence of Greece financial crisis to other European nations (Reinhart, 2009). These two international institutions offered a sum of $ 145 billion to the Greece Government in order to assist the country in recovering from this economic crisis. In addition to this the European Union (EU) also contributed $636 billion towards Greece’s financial recovery and also to put a stop to a contagion of the crisis to other European countries (Hilsenrath, 2010). Greece is currently relying on globally coordinated projects since the year 2010 in order to assist the government of Greece in reducing its fiscal deficit. International institutions such as the European Union and the International Monetary Fund have funded the country in implementing structural reforms which will contribute in increasing the labor markets in addition to upgrading the nature of labor competition in Greece (Erlanger et al, 2010). International institutions have brought a positive impact to the economic growth of Greece by encouraging economic developments since 2010. These institutions have offered both financial aid and support for Greece to be able to achieve fiscal sustainability, reduce debts and decrease unemployment in the country. However, despite the continued financial support from international institutions, Greece continues to suffer from economic crisis and some economists fear that the country’s government might default eventually (Hope et al, 2010). In the years 2001 through to 2007, the GDP of Greece increased on an annual basis with a rate of 4.3% (International Monetary Fund, 2009). The high economic rates were attributed to the accessibility of credit at low rates from international institutions in addition to public investments which are financed by the EU and the central bank. According to Becatoros & Eddy (2010) this led to an increase in government expenditures and budget deficits in addition to an increased and inadequate public administration. Greece’s deficit was fueled by the costly administration and health care facilities that were heavily facilitated by tax evasion as well as lack of discipline in borrowing. According to Becatoros & Eddy (2010) in the year 2004 the spending power of the Greece public administration rose drastically and was identified as the highest compared to any other country in the OECD. Over the past few years the extravagant spending of public expenditure has continued in this country despite any assistance by external institutions to help in economic recovery in Greece. For instance in 2009, public spending in Greece accounted for 50% wages and 75% other non profitable factors such as wages and social benefits (International Monetary Fund, 2009). Despite the efforts by the EU to finance schemes that assist in eradicating unemployment in Greece, over staffing and poor productivity in the public sector remains a setback for Greece (European Union, 2004). This continues to remain a contributing factor to a poor economic growth in the country. Studies have revealed that the aging population in Greece has placed a huge burden on the public spending since the working population of individuals at the age of 65 and above in Greece is expected to grow from 19% to 32% by the year 2006 (Mollenkamp and Bryan-Low, 2010). Structural reforms by the EU and the IMF have failed to assist Greece because Greek’s public pension schemes were expected to increase from 11.5% to 24% in 2005 through to 2050 respectively. This reveals that the assistance being provided to the Greece government is not helping the economic crisis in the country but rather fuelling its failure (European Union, 2007). The implementations of structural reforms as well as fiscal measures have placed stern warnings on the consequences of inequality, economic recession and fiscal consolidation. Despite all these efforts in Greece, income distribution still remains worse which is accompanied with a decline in real incomes while poverty and unemployment is on the rise (Economist Intelligence Unit, 2010). These social impacts have been blamed on the subsequent lack of safety nets that are unreliable in addition to a poorly planned non social spending on pensions. The introduction of changes in the scheme for long term unemployment benefits by the EU has failed tremendously due to the poorly structured governing body of the social programme (ELIAMEP, 2010). Nonetheless, the health care system has also continued to suffer regardless of the implemented reforms aimed at rationalizing the power of public spending administration. It is important that the government of Greece together with these international institutions to activate various policies in the economy that will strengthen the effectiveness of labor inspections and liberalize the labor markets. Additionally the government of Greece has displayed signs to default or restructure due to the increased debts deficit. This predicament still remains despite the financial assistance and reforms by the EU and the IMF (European Union, 2007). According to Becatoros & Eddy (2010) the European Union has neglected the democratic deficit in Greece. Greece’s urgent need for financial aid has led the EU to neglect the democratic deficit felt in Greece. Nevertheless, the EU regardless of its democratic commitments and ideals, the institutions has never participated in any form of democratic organization or functions. The EU efforts to include Greece into the financial plan contributed to the situation whereby the country is in great debt as well as experiencing democratic deficit. The government of Greece has a fragile government coalition which together with the failed reforms implemented by the EU has contributed to social unrest and an increase in extremist political factors. All these factors combined have greatly contributed to the democratic deficit in Greece which is characterized by is increased political instability as well as illiberal polity (Economist Intelligence Unit, 2010). According to the Economist Intelligence Unit (2010) the challenges that Greece is facing due to austerity policies imposed by the EU have heavily contributed to the perception that Greece has lost control over its nation. The lack of a stable political and social reforms have manifested in the country by creating a rift between political leaders and the citizens. The existence of extreme social and polical movements has created the democratic deficit gap in Greece which the EU policies have failed significantly to tackle (Bacatoros and Eddy, 2010). The efforts by the EU to influence political leadership and political decisions have not been successful in any way due to lack of a proper political reform system by the EU as well as resistance from the government in Greece. In addition to this the IMF solely focuses on financial aid and therefore do not influence any political elements in Greece. This report has discussed the areas in which international institutions such as the European Union and the International Monetary Fund have failed in helping Greece recover from its economic crisis. The report has discussed a number of areas in which the financial aid offered to the republic of Greece has been ineffective. Some of the specific areas include debt deficit, democratic deficit and unemployment. It is evident from this report that Greece does not only need financial help but also needs to reform it political and social agenda. Additionally the lack of proper financial spending by the government of Greece, also been a contributing factor to hindering the assistance offered by the EU and the IMF. The low rates of borrowing have encouraged Greece to continue borrowing thus increasing their debts and contributing to political and social instability in the country. In order to assist Greece in achieving both political and economic changes, the EU and IMF, need to advise the government of Greece on strategic measures in which it can contain its debts and develop them in a number of ways that can increase economic activity in the country. Continued supply of loans from the IMF instead of helping in reducing public spending has encouraged public funding consumption. Otherwise the IMF should instead support privately funded investments in Greece in order to counteract the impacts of increased public spending in the country. Finally the EU and the IMF need to use the public funds allocated to Greece to encourage a relevant, growing and business corporate nation. Greece should be hindered from accessing financial aid in any manner. References Becatoros, E. and Eddy, M. (2010). “Greece Still Under Siege Despite Aid Pledge,” WTOP. Economist Intelligence Unit, (2010). “Greece Economy: An Austere Future,” Economist Intelligence Unit. Erlanger, S., Bennhold, K. and Sanger, D. E. (2010). “Debt Aid Package for Europe Took Nudge from European Commission, (2004). Report from the Commission: Greece, Brussels, May 19, 2004, http://ec.europa.eu/economy_finance/sgp/pdf/30_edps/104-03/2004-05-19_el_104-3_en.pdf. European Commission, (2007). Recommendation for a Council Decision Abrogating Decision 2004/917/EC 9 on the Existence of an Excessive Deficit in Greece, Brussels. Retrieved From: http://ec.europa.eu/economy_finance/sgp/pdf/30_edps/104-12_commission/2007-05-16_el_104-12_commission_en.pdf. Hellenic Foundation for Foreign and European Policy (ELIAMEP), (2010). Economic Fact Sheet Greece 2009/10, March 2010; “Is Greece Heading for Default?,” Oxford Economics. Hilsenrath, J. (2010). “Q&A: Carmen Reinhart on Greece, U.S. Debt and Other ‘Scary Scenarios’,” Wall Street Journal. Hope, K., Politi, J., and Fifield, A. (2010). “G20 to Look at Monetary Fund Initiative,” Financial Times. International Monetary Fund,(2009). World Economic Outlook, October 2009 and European Commission, DG Economic and Financial Affairs. Retrieved From: http://ec.europa.eu/economy_finance/publications/european_economy/public_finances_emu_en.htm. Mollenkamp, C. and Bryan-Low, C. (2010). “Greece Leaps One Key Hurdle,” Wall Street Journal. Reinhart, C. (2009). “The Economic and Fiscal Consequences of Financial Crises,” VoxEU. Washington,” New York Times. Read More