International Institutions and the Economic Recovery in Greece - Case Study Example

INTERNATIONAL INSTITUTIONS AND THE ECONOMIC RECOVERY IN GREECE Name: Course Tutor University City Date Question2 Are international institutions such as the International Monetary Fund (IMF) and the European Union (EU) helping or hindering economic recovery in Greece? Discuss, incorporating or countering the “democratic deficit” argument in your answer. International Institutions and the Economic Recovery in Greece The International Monetary Fund (IMF) and the European Union (EU) have been in the forefront of fighting the sovereign debt crisis that hit several European Monetary Union countries from 2009. Amongst these countries is Greece, the country has been facing difficulties with the terms of the European economic and monetary union. Greece as a small economy has been unable to devalue its currency in order to regain economic competitiveness as a member of a single currency. It has been established that the Euro zone economic structure does not adequately address the economic vulnerabilities faced by the small economies during such times of economic crisis. As such, Greece has continued receiving financial assistance and different economic adjustment programs from the IMF and the EU among other intentional institutions. The IMF has been playing a part in the elaboration of the economic development programs for the affected economies across Europe, closely monitoring their progress on a quarterly review that focuses on set economic missions. Nevertheless, the democratic deficit in the EU has played a part in the restricting the momentum of the recovery. The Economic Crisis in Greece The economic crisis that hit Europe had its effect on Greece from rate 2009. Different rescue plan have been put in place, however, they have been met with heavy criticism and a negative societal reaction owing to the economic consequences associated with the plan. According to El-Agraa (2011), some of the consequences associated with the crisis include increased levels of unemployment, real incomes have been cut down by 20-50%, and a degradation of public services that become heavily understaffed owing to the downsizing the public sector. The plan comprised of drastic cuts in expenditure, dismissals, closures, and mergers of different public organizations. In addition, a large privatization plan was put in place. This has seen a growth in poverty and labour insecurity, and with it a fragile government and a weakening social consensus has developed. The economic crisis has been marked as the worst in Greece since the end of the military dictatorship of 1974. The crisis has brought out the vulnerabilities in terms of structural weakness, heterogeneities, and influences of the Euro zone, and the weakness it bears in regards to the crisis of the financial capitalism. In addition, the crisis brought to light issues that were previously thought to have been solved such the common currency issue. The EU and IMF have been consistent with a promotional model of internal devaluation of the economy in Greece. Leaders have evaluated the exit of Greece from the Euro zone to be more costly than its continued association. As such, rescue plans have been devised based on such ideas as wage and pension reductions, public sector downsizing, and privatization would play a part in increasing competitiveness and attract investors (Lane, 2012). The plan to be implemented agreed between Greece and troika on fast track reforms only resulted in a vicious circle of recession, unemployment, poverty, and heavy disinvestment in the country. Despite difficulties faced during the crisis, Greece has made tremendous progress in the reduction of fiscal imbalances. The government has taken up a fiscal effort to close 15% of the country’s GDP in the underlying adjustments. Nevertheless, the economic and financial crisis has played a part in uncovering the weaknesses of the EU system of governance especially in a fiscal and monetary dimension (El-Agraa, 2011). The Economic Crisis and Democratic Deficit Democratic deficit is a concept invoked principally with the argument that the EU and the various bodies suffer from a lack of democracy, whereby it seems inaccessible the ordinary citizen owing to the fact their methods of operations is so complex. As such, the issues of democratic legitimacy have increasingly turned to be sensitive to every step of the European integration. Different treaties set up have lengthened the scope of the co-decision procedures not just in Greece but also across EU member countries (Featherstone, 2011). Despite the democratic deficit powering the people and the legislature in the EU, it brought about an argumentation of people’s Euro sceptic feelings, and in turn, restricted the momentum of recovering from the economic crisis. If future progress is to be attained, especially getting of rid of deflation, then technical terms such as realising of liquidity by the European Central Bank should be relied upon. Therefore, democratic deficit measures such as breakthroughs in non-political mechanisms should be dropped since they are bound to slow the process of economic recovery in Greece (Triantafyllou, and Angeletopoulou, 2011). However, it is important to note that the democratic deficit of the EU is not the cause of the crisis in Greece and Europe as a whole (Ruffert, 2011). As such, it should be understood that European fiscal and financial problems were not triggered by the democratic deficit. The crisis originated in the United States owing bad loans securitized in uncertain financial products, and widely traded over the counter, that is, lacking transparency and traceability. The risk management of the financial institutions involved got out of controlling owing to seductions from short-term gains. When the calamitous consequences started to take shape, many financial institutions quickly approached bankruptcy. Thus, the democratic deficit is not blame as an initiator of the economic crisis in Greece; however, policies associated with democratic deficit may be slowing a quick recovery from the economic crisis (Streeck, 2011). International Institutions and the Greece Economic Crisis The international institutions especially the IMF and the EU have been fighting to resolve the economic crisis in Greece by being part of the rescue action. The IMF, for instance, has been participating in the financial assistance and economic adjustment programs that have been initiated in Greece and other countries affected across Europe such as Poland and Ireland. IMF’s participation has been characterized by contributions in the form of financial assistance by contributing over a one-third of the emergency funds. In conjunction with other international institutions, such as the European Central Bank and European Commission (EC) in Troika, the IMF played a part in the elaboration of different economic adjustment programs. In addition, closely monitored its progress via quarterly reviews ensuring economic recovery was on track (Featherstone, K. 2011). As part of the assistance offered by international institutions in solving the debt crisis in Greece, the IMF have made numerous proposals and have also been involved in the discussions on different approaches that would be used in the fight against the debt crisis, and avert future crisis. For instance, according to Arghyrou and Tsoukalas (2011) collaborations with the IMF and EU developed internal guidelines for implementation of joint programs that would work towards debt crisis recovery. These programs were designed to use the comparative expertise of both organizations, drawing extensive cross-country and financial crisis expertise from the IMF, while the EU would assist in the embedment of the financial assistance program as set by various institutional frameworks of the EU. According to the events of 2009, the International institutions played a part in assisting towards economic recovery in Greece. Whereby, the newly elected Greek government set it projections for 2009 budget deficit of 3.7-12.5% of their GDP. This was followed by the worsening of the public deficit ended in 2009 and marked the beginning of a foreign debt crisis. Financial markets did not react in the favour of Greece, as they feared they would default on debts. It is at this point that EU joined by the IMF announced granting financial support to Greece and offer an economic adjustment programme. The collaboration between the EU and IMF was prompted by the increasing interest rates burdens, and the fact that banks had not fully recovered 2009 economic crisis (Nelson, Belkin, and Mix, 2010). It should be noted that, the European Council as a three-year adjustment program had adopted the first financial assistance program for Greece. This program sourced its funding from financial assistance by EU offering 80 billion pounds in the form of bilateral loan, and the IMF offered 30 billion pounds in the form of an SBA, which the standard lending instrument of the IMF. The Greek government, the European Commission (EC), the European Central Bank, and IMF oversaw this program. The financial rescue plan was later to be named Troika, with the program focusing on high public debts of Greece, the lost competitiveness in the Greek economy. Thus, the IMF and the EU assisted Greece in its recovery by closely monitoring of the established program via quarterly system reviews (Matsaganis, 2011). In 2011 July, the EU as part of helping Greece out the economic crisis, it announced a new program whereby it aimed at filling a prospective financing gap of 109 billion pounds. The largest part of the financial aid would result from reduced lending rates and extended debt maturity of up to 30 years, ensuring an improved sustainability and refinancing of the Greek government debt. Later on, the IMF would also announce its continued support and new financial resource that would back the Greek government in creating a comeback from the financial crisis it was entangled into (Cini, and Borragán, 2013). Despite the democratic deficit slowing the implementation of some of the proposed changes, international institutions such as the IMF and EU lending programs have been associated with a sharp and sustainable redirection of the course of economic policy. In case of Greece, IMF and EU provided the financing while the country puts in place a program of policies that address the actual and potential imbalances. Depending on the progress of the program, then the involved international institutions continue to offer financial and policy support to the country (Lane, 2012). Conclusion In conclusion, international institutions such the IMF and EU aid in the economic recovery in Greece. Despite the democratic deficit slowing the implementation of some policies under debt crisis recovery, the aid and policies accorded by such institutions as the IMF go a long way in aiding an economic recovery in crisis stricken countries like Greece. In the case of Greece, the IMF and EU were involved in the rescue actions geared towards fighting the debt crisis that hit Greece and other European nations. Reference Arghyrou, M. G., & Tsoukalas, J. D. (2011). The Greek debt crisis: Likely causes, mechanic, and outcomes. The World Economy, 34(2), 173-191. Cini, M., & Borragán, N. P. S. (Eds.).(2013). European Union Politics. Oxford University Press. El-Agraa, A. M. (2011). The European Union: economics and policies. Cambridge University Press. Featherstone, K. (2011). The JCMS Annual Lecture: The Greek Sovereign Debt Crisis and EMU: A Failing State in a Skewed Regime*. JCMS: Journal of Common Market Studies, 49(2), 193-217. Lane, P. R. (2012). The European sovereign debt crisis. The Journal of Economic Perspectives, 26(3), 49-67. Matsaganis, M. (2011).The welfare state and the crisis: the case of Greece. Journal of European Social Policy, 21(5), 501-512. Nelson, R. M., Belkin, P., & Mix, D. E. 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