Communication Problems that Plunged Greece into a Public Debt Crisis - Case Study Example

Communication problems that plunged Greece into a public debt crisis Student’s name Course University Date Introduction Often times, reports have surfaced of how investors, celebrities, and rich businessmen fell into serious debts or cash crunch forcing them to declare a state of bankruptcy. A closer look on this phenomenon would point to one common thing; serious debts. Usually, individuals, financial institutions, government bureaucracies, and markets have to maintain a particular fiscal status and if need some money has to be borrower. However, there are conditions of borrowing that are normally set by lenders such as interest rates and the repayment period. At the same time, the borrower has to carefully plan on how the borrowed amount is going to attract revenues through investments or other such activities; otherwise, the cost of borrowing will become a liability pushing the borrower to more financial turmoil. This leads to situations such as bankruptcy mentioned above. Individuals incur higher financial outlays more than revenues. The case study such a similar phenomenon that occurred previously but on a global scale; The Greek economic crisis. In late 2009, Greece plunged into one of the most economic crisis to have been witnessed in her country from which it is yet to fully recover. A number of factors fuelled Greek's plunge into economic turmoil including global great recession, weaknesses in the economy structure, and a dwindling lenders' confidence. These fears were mainly caused by Greek's government decision to misreport on its inability to meet its debt demands. This was evident from previous report on debt levels, weak economic activity, high nominal and real interest rates, high inflation, and the deficit of government's account (Manessiotis 2010, p.4). About two years ago (2012), Greece was one of the countries (in the developed category) and within the Eurozone to fail in repayment of IMF loans with a debt soared to $353B. It had the highest sovereign debt default besides a very high risk insurance cost. While this was happening all along, lawmakers and the executive have been at logger-heads in approving and passing austerity measures and economic reforms. Previously, the leaders were in a state of denial partly because of political influence from the electorate who did not see the sense of external aid. However, their stance has had to change especially with tough EU conditions that demand economic structural changes for Greece to remain as its member. A bail-out program was required though this did not go down well with anti-reforms including most of the Greeks themselves. Actually, government services could not be supported because of lack of cash. Having looked briefly at circumstances surrounding Greek's debt economic crisis, the following sub-themes are worthy exploring to understand the trend of this phenomenon from its onset to the current status. The beginning and root causes of the crisis Kouretas and Vlamis (2010) expounds on two categories of causes that saw Greece plunge into fiscal crisis; endogenous and exogenous. Endogenous factors consist of the structure of the economy, prolonged imbalances of the macro economy, and credibility challenges of macroeconomic policies. Exogenous factors are concerned with effects of recent financial turmoil and the timing of Europe’s response to the crisis. A widening public deficit coupled with lack of external competitiveness played a significant role in deteriorating the fiscal status of Greece. Lack of external competitiveness implies more imports than exports because other global competitors are preferred to you hence lower export volumes. The Greek budget deficit was revised upwards to 15.4% for the year 2009. With a huge public expenditure routine at hand, the government had no option but to borrow consequently increasing the public debt. At the same time, the debt to GDP ratio continued to soar because of the proposed long-term EU rescue package. Political dynamics were another key factor the influenced the Greek economy because a socialist government inaugurated on the late 20th century implemented economic policy programmes that encourage much borrowing from the markets. Essentially, the borrowed money was to raise the standards of living of people/households. Since the government was not able to satisfy its budget constrain (inter-temporarily), the public debt became unsustainable in the long run. More so, the Greek government did not have a sound fiscal consolidation programme (false fiscal data reporting) during high growth spells and this turned to be a mess because of lack of government’s credibility. For instance, the newly voted government in mid-October 2009 reported a budget deficit of 12.7% of GDP contrary to the previous regime which argued that the deficit would not be higher than 6.5% percent of GDP (Kouretas & Vlamis 2010, p. 395). Besides, Greek’s entry to the European Monetary Union (EMU) led to a further current account deficit (Malliaropoulos 2010, p. 395). As a way of facing the twin challenge (credibility and growing budget deficit) in addition to poor structural reforms, the government opted to give out new bonds at higher interest rates and short maturity times compared to giant EMU nations like Germany. According to Tsoukalis (2010, p. 1), “When the news broke out, the new government was slow in response, trying to reconcile electoral promises with hard reality….” Exogenous causes This drew in a lot of attention to geopolitics because there was no clear commitment from Eurozone nations to support Greece especially the Germans. However, the Maastricht Treaty does not forbid all EU member states or any one of them to assist a country in financial crisis (IMF). The European Central Bank (ECB) was also concerned with the downgraded government bonds being used as collateral in bailouts (liquidity provisions) presented. As a result, financial institutions reserving these bonds faced a lot of problems. Interestingly, EU policy makers were debating the legality of bailouts at this dire time of need for the Greek government. Lack of a solidarity fund at the EU level meant extended instability of the Greek economy because the union is a monetary one and not an economical one having a Federal Budget. There exists a common monetary policy at a supranational level of EU but economic policies remain with national policy makers (Kouretas 2010, p. 396). The economic policies include budgetary policies, credit regulations, social, wage policies etcetera. Therefore in the case of Greece, there was a lacking of adjustment and response mechanism at the supranational level characterized by the lack of European solidarity. The last external factor to have worsened the Greek economy was the 2007 global crisis which originated from the U.S. loan market crisis and affected her major trading partners usually he Balkan countries (Vlamis & Karousos 2010). Implications of the Greek Fiscal Crisis and future challenges for Eurozone Any one member of the Economic and Monetary Union (EMU) that seems to evade debt obligations does not do that in the interest of another EU member country. The general feeling once such a scenario occurs is general loss of confidence in EU’s ability to deal with broad economic and fiscal challenges. Another subject of concern was the fear of Greek default (that is if it happened) conversely affecting Eurozone financial institutions and bond markets the held a significant amount of the Greek bonds. Apparently, a debt crisis in one country would have triggered another general crisis in other EU countries perceived to have similar budgetary challenges; for instance, Spain, Portugal and Ireland. The spillover effect of Greece’s debt crisis into Balkans was possible because of trade and financial links involved. The market share of Greek banks in the South-Eastern European and Balkan economies was quite considerable. Lastly, Greece had an option of leaving EMU voluntarily and quitting Euro implying establishment of her national currency. Consequently, the new national currency would be devalued implying a larger debt, international capital markets would close doors to Greece (Eichengreen 2007), and she would be locked out of international markets without any possibility of borrowing. Communication as part of the solution to the crisis Looking at the causes and effects of this crisis, the EU fraternity had to work out solutions (long-term and short-term). First, it was noted that one of the causes to have led into the crisis was false reporting as concerns the status of the budget deficit. Government leaders misinformed the public and other EU member countries; dangerous mode of mass communication. A piece of study from the University of Canberra explained that, “mass media is a powerful force in modern society and our daily lives…involves sending a single message to a group. It allows communication to a larger population….” Until the government leaders were honest to communicate the truth to people and strong EU economies such as German, France, and Britain, they would stay longer with the debt problem until total collapse. Inter-personal and group communication between pro-government legislators and the opposition was another major challenge that delayed consensus appertaining the austerity measures and fiscal reforms to be passed and approved. Actually, political ambitions compromised some of tough decisions to be undertaken which would affect the citizens directly and indirectly. While the government tried to show the essence of implementing crucial economic reforms, the opposition created a negative impression that government policies and agendas. Their primary message was to showcase how the government in place (then) ruined the economy. In business communication, “there are three distinct types of messages usually communicated verbally: primary, secondary, and auxiliary” (Hassling 1998). In late 2009, the crisis became unbearable and the Greek leadership could not misinform the public or EU members any more. The record had to be set straight and a solution had to be found though with tough conditions on the Greeks. However, a misunderstanding always arose between international funders and EU bigger economies on one side and the Greek government on the other side. Previously, there was incredibility on the part of Greece government and confidence was lost on how they would implement austerity measures once a bailout was approved. Also, Germany and her counterparts being countries that could fund this programme, they demanded that comprehensive reforms be passed, approved and implemented. The hitched communication between these two parties delayed a remedy coming forth. However, Greece decided to adhere to the set conditions including privatization of some government enterprises, cutting on pension funds and social security funds, and cutting on other unnecessary public expenditures. Though not a typical business organization, the economic analysis shown above would be likened to many situations that happen at the organizational level. If the expenditure plans are not well crafted and the borrowing to support this spending increases with time, the organization is bound to fall into a serious debt. At the same time, organization leaders ranging from small businesses to government executives have a responsibility of giving true information to the citizens and other stakeholders. Any written or oral communication that is made public or mass in nature should have facts without any false information because consequences may turn out to be dire. At first, the Greek government lost investors and international lenders’ confidence because of misreports and she had a hard time convincing the EU and IMF to initiate a much needed long-term bailout programme. Poor communication between pro-government and opposition leaders meant delayed consensus on how reforms would be implemented. Parliamentary bills on economic reforms would hardly pass in the house because of misunderstandings, political interests and competition. Therefore, effects of a breakdown in communication between different entities (Greek government, EU members, financial institutions, and legislators) were evident because of a prolonged response to the crisis both from within and externally. Proper communication in business quarters, organizations, investors or government is a requisite for trust and confidence among stakeholders. Reference Eichengreen, B, 2007, ‘The Breakup of the Euro Area’, NBER Working Paper 13393. European Central Bank, 2010, ‘Quarterly Euro Area Accounts’, Frankfurt: European Central Bank. Habermas, J, 1984), The theory of communicative action, Vol. 1. Beacon Press, Boston, MA. Hasling, J 1998, Audience, message, speaker, McGraw-Hill, Boston, MA. Malliaropoulos, D 2010, ‘How much did competitiveness of the Greek economy decline since EMU entry?’ Eurobank Research, Economy and Markets, vol. 5, no. 4, pp. 1-16. McLean, S 2005, The basics of interpersonal communication, Allyn & Bacon, Boston, MA. Kouretas, GP & Vlamis, P 2010, ‘The Greek crisis: causes and implications’, Panoeconomicus, vol. 2010, no. 4, pp. 391-404. Tsoukalis, L 2010, ‘We can’t go on like this’, ELIAMEP Special Paper, n.p. University of Canberra, (n.d) Management Communication, 1st edn. University of Canberra, Canberra. Vlamis, P and Evaggelos, K 2010, ‘The Greek banking expansion in the Balkans: An overview of developments in the light of the recent financial crisis. Mimeo (in Greek)’, n.p. Wood, J 1997, Communication in our lives, Wadsworth, Boston, MA. Read More