The Greek Financial Crisis and the EU - Essay Example

Bingyan Hu Econ 475 Feb. 5 The Greek Financial Crisis and the EU (European Union) The economic crisis, originated in the US during the late 2007, rapidly spread to other parts of the world. The worst effect of the global economic downturn was seen in the European countries as compared to other countries or economic zones allied with the US in terms of international trade. The first member country of EU (European Union) to be severely affected by the global recession was Denmark being followed by other European countries like Estonia, Spain, Germany, Great Britain, and Greece among others. As argued by the industry experts, these were the most vulnerable countries to witness the recessionary effects in 2008. The effects caused by the recession had been so severe that in the later months of 2008, the recession took the shape of a financial crisis within the EU member countries (Levine and Gerow n. p.). This further contributed towards increasing fiscal challenges for the EU member countries and a rise in the public debt followed by increasing budgetary deficits due to the fluctuation in sovereign debts. Additionally, the GDP growth rates of EU member countries significantly dropped during 2008 and continued falling downwards in the immediate years (Jackson n. p.). Moreover, the labor markets also weakened during and after the outbreak of financial crisis in the EU (European Commission, 2013, n. p.). This paper will evaluate the causes of Greek financial crisis by defining the concept of sovereign debt. The discussion presented in this paper will aim at providing due significance to the political or governmental and economic witnessed by Greece in the aftermath of Euro zone crises. The reactions or assistances obtained from EU to Greece are also been examined in this paper. Furthermore, the paper attempts to identify the possible outcome if Greece exits from the Euro zone. The current economic conditions of the country will also be analyzed in this paper. The paper will further attempt to identify and assess the impacts likely to be caused on the EU with exist of Greece from the economic zone in order to regain its economic as well as political sovereignty and growth. “Sovereign debt, also called public debt or government debt, refers to debt incurred by Governments” (Nelson n. p.). Financial crisis often contributes to a rise in the government debt. Many economists advocate that when public debt are unable to contribute to the real income of the nation or the failure to generate revenues from the use of debt obtained and utilized, the condition often becomes worse postulating a highly fluctuating economic status. Moreover, it can be identified that current crisis witnessed by the world are from the major consequences of excessive government debts. On October 2009, the Greek Prime Minister George Papandreou, during his inaugural parliamentary speech disclosed the country’s serious fiscal glitches. Later, in the beginning of November 2009, the Greek Government revealed a revised budget deficit of 12.7% of GDP for 2009 which was claimed to be double than the previously estimated deficit. Since then, the sovereign debt in the nation rose abruptly among the countries of the Eurozone, causing huge challenges for the European monetary unions. Additionally, the market players beckoned the issue of debt sustainability by firmly arguing that the solvency jeopardy for these countries worsened during the course of 2010 and 2011. Contextually, the financial crisis that erupted in Greece can also be examined as caused with the Greek government’s excessive expenditure on interest free investments and heavy reliance on external capital market. This resulted in the accumulation of government debts followed by increasing fiscal deficit gaps increasing the burden of large sovereign debts (Checherita and Rother n. p.). The Greek fiscal conditions began deteriorating in mid-2007. As the EU financial crisis was gaining momentum in one hand; on the other, the Greek participation in the EU began to slow down. Undoubtedly, several factors led to the sovereign debt crisis which the Greece economy has been experiencing (Kouretas and Prodromos n. p.). The major causes behind the volatility of Greek sovereign debt can be identified in terms of large borrowing from international capital market in order to fund the successive government budgets as well as current account deficits. During the year 2009, Greece’s budget deficit was estimated to represent more than 13% of its GDP earned. Many economists argued that the current account deficit was associated with the large spending of the government without anticipating the future consequences leaving behind high external debts. Moreover, during the year of 2009, it was estimated that government expenditure accounted nearly for 50% of its GDP out of which, 75% of the expenditures were made in non-interest sectors focusing on wages and social benefits. Tax evasion was also being identified as one of the critical contributors of Greece’s sovereign debt crisis. The high level and complexity of taxation regulations in the public sectors can also be regarded as a factor causing the Greek financial crisis. Economists also identified that high wages and low productivity were other major factors causing for the financial crisis within the country. Hence, as the financial crunch in the EU region dramatically resulted in the depreciation of Euro, it contributed towards increasing inflationary rates and further intensifying the financial crisis in Greece (Madhusudhan n. p.). Notably, the global economic crisis originated in the US which later spread to other nations across the world including EU region (Nemwth n. p.). In other words the economic crisis in US contributed to the financial crisis in EU member states which unveiled severe weaknesses in the overall functioning of the financial and economic system in the EU region. In this regard, many economists argued that financial crisis in the year 2008, erupted initially in North America where many financial sectors of these regions were contaminated due to malpractices conducted by the participants in the US financial market. It was further argued that financial crisis in the US during 2008-2009, has led to the exposure to unmanageable fiscal policies around the globe including the Eurozone which had also contributed towards the slow growth rate of the global economy. Moreover, failure to perceive the impact of the financial crisis in its initial years of outbreak also led towards the occurrence of a worst situation in the EU region. Failure to anticipate the magnitude of the financial crisis resulted in the dramatic fall of EU GDP by 4.1% during the year 2009. The financial crisis also contributed in the rise of average fiscal deficit in the EU region. The average fiscal deficit, which accounted for 0.7 % of EU’s GDP in 2007, rose to 6.3% of EU’s GDP in the year 2009.The rise in the average fiscal deficit further led to significant rise in the public debt in the EU member countries including Greece (Taylor n. p.). Thus, it can be identified that the financial crisis in Greece was due to the economic and financial crisis that originated initially in the US economy during 2007-08. At the same time, political implications of the financial crisis took a drastic shape in its nature which further increased vulnerability in the Eurozone. In the financial crisis ridden countries like Greece and Spain, severe public protests were also witnessed at several occasions resulting in severe fluctuations and alterations n the political system of these countries. From an overall perspective, it can also be observed that the financial crisis situation in Eurozone led to conflicting circumstances between the countries having sound fiscal status such as Germany and those countries having negative fiscal position like Greece (Kenny n. p.). Furthermore, the heavy dependence of the Greek government on international capital markets as well as the continued depreciation of Euro can also be associated with the major reasons acting behind the financial crisis witnessed by Greece. The financial crisis in the EU resulted in the serious and intense actions of EU member countries and their respective government towards integrating their efforts for sustaining a steady growth and financial stability ensuring better financial and economic future within the EU region. It was previously forecasted by the European Central Bank (ECB) and the International Monetary Fund (IMF) that uncontrolled and disorderly defaults in Greek debts may be extremely risky and have negative impacts on other EU countries. Consequently, both the ECB and the IMF agreed that such defaults should be avoided in order to limit the impact of Greek sovereign debt crisis on other EU nations. However, the European leaders were able to avoid the disorderly defaults but were unable to put Greece on the clear path of recovery when another crisis erupted in the year 2011 (Nelson, Belkin and Mix n. p.). During the year 2010, the IMF and the European leaders asserted three-year package amounting €110 billion in the form of loans to Greece at prevailing market interest rate. With respect to €110 billion loan package to Greece, EU countries guaranteed to contribute €80 billion while INF guaranteed for €30 billion for its economic recovery. ECB also played a significant role to ensure financial stability within the Euro zone. Contextually, the ECB, for the first time, announced that it will be buying European government bonds from the secondary market in order to increase confidence of investors (Nelson, Belkin and Mix n. p.). Again during July 2011, the European leaders affirmed a second financial assistance to Greece of €109 billion in total. It was ascertained that the second assistance package would grant loans to Greece at a much lower rate than the previous financial assistances provided in May 2010. Hence, it can be witnessed that the EU member states, the ECB and the IMF continuously engaged in providing aid to Greece so that the country can return the track of prosperity one again. Essentially, the departure of Greece from the Euro zone shall also have a significant impact on the Greek banking sectors. In relation to this, the departure of Greece would dramatically reduce the faith of domestic investors and simultaneously, the deposits held with the domestic banks would also shrink drastically. The exit of Greece may also have legal implications which could lead towards restrictions of free movement of goods within the Eurozone trading partners. Moreover, the departure of Greece from Eurozone may also lead to significant devaluations of the Drachma (the Greek Currency) which may further result in increasing price for imported goods. Thus, the exit of Greece from Euro zone may lead towards turmoil in the Greek banking sector, increased costs of cross-border trades, high inflationary rates, and depreciation of the currency value (Drachma) followed by civil unrest within the country (Dun & Bradstreet Limited n. p.). Moreover, due to the possibility that the new Drachma would depreciate on the departure of Greece from Eurozone, and simultaneously, increasing inflation would ultimately reduce the disposable income for households in the economy, such initiative shall make the conditions for operating businesses in the international context for Greece more difficult. It will also require considerable effort from the Greek Government to re-build it central bank for adjusting its fiscal structure. Additionally, the Greek Government may also require in making contraction in the public sector and re-orientation to private sector in order to produce quality goods and services for exports (PricewaterhouseCoopers n. p.). The recent financial crisis that erupted in the EU during 2010 has significantly impacted Greece. The crisis has created a state of financial and economic unrest as well as it has led towards critical political response to emerging situations (Kanellopoulou n. p.). Notably, experts argue that the Greek economy is in its sixth year of recession. Contextually, Greece is seriously engaged in consolidating its economic and financial conditions. In this course, several reforms and initiatives have been undertaken in order to take the country towards the path of steady growth followed by financial stability. In order to deal with the financial crisis situation, the Greek Government is acting erratically to control the state of economic downfall and mitigate the unavoidable political costs. Apparently, the Greek Government has been under tremendous challenges due to the financial crisis and resulting pressures from its lenders. In order to reduce this pressure and recover it from the huge debts, the Greek government has been argued to get involved in enforcing unfair and ineffective measures directed against the weaker section of the economy, including the pension schemes and other welfare programs. Contextually, Greece has been able to reduce the government fiscal deficit to 9.45% of its annual GDP in the year 2011 that was previously observed to be 15.6% in the year 2009. Furthermore, it is expected that the margin of fiscal deficit will be reduce in the current fiscal year i.e. in 2013-2014 in Greece. However, the GDP growth for the third quarter of the 2012 was contracted by 6.9% from 7.9% of the same quarter in 2011. The financial crisis in the EU caused an inevitable impact on EU member countries as well as other countries like the US owing to its highly interdependent trading relationship. However, the worst implication of the financial crisis has been on Greece. The financial crisis has raised questions against Greece to either remain as a member state of EU or to quit. Many economists perceived this situation as quite serious and complex. Moreover, it has been viewed that if Greece exits from Euro zone, the aftermath implications on both the Euro zone and Greece may be severe. Furthermore, it has been argued that if Greece exits the Eurozone, it will be followed by other countries like Spain and Portugal disrupting the growth potentials of the overall economic zone (Trading Economics n. p.). Hence, the initiative of Greece to exit from Eurozone may be observed as quite likely to lead towards capital market speculation resulting in untoward responses which would further provoke sovereign debts on the part of other fiscally poor countries like Spain, Portugal and Italy among others. Additionally, if such circumstance arises it would in turn result in another global recession that would in fact affect not only the Eurozone but rest of the world as well. Greece’s departure from the Eurozone may have negative impacts on the credit growth rate due to the reduced profitability in European banks as a consequence of significant write-offs of Greek debt. Followed by collapse of the Greek banking sector, the departure of Greek from the EU may also have serious impacts primarily on the Balkan region where most of the Greek banks are active. It is also perceived that the exit of Greece from Euro zone also lead towards slow GDP growth rate in the EU in the successive few years causing the appreciation of the British Pound as well as the US Dollar against the Euro, further result in weakening price competiveness of the Eurozone countries (Nelson, Belkin and Mix n. p.). The economic crisis originated from the US during 2007-08 led its worst impacts on the EU member countries such as Greece, Spain Ireland, and Portugal among others. The sudden eruption of the financial crisis significantly contributed in the increasing fiscal deficits and growing sovereign debts. Nonetheless, Greece can be categorized as one of the worst affected countries in the Euro zone. The effects were examined to be more hazardous for Greece owing to various factors including its replacement of the national currency with Euro in 2001. Apart from governmental or sovereign debts and continued currency depreciation, there were other domestic factors such as tax evasion, corruption and rigidness in political structure leading to unfavorable consequences in Greece. The significant assistances were provided in the form of loans to Greece by European leaders and the IMF as well as the ECB in order to rescue Greece from the crisis situation. However, it seemed that the efforts were not enough to assist Greece to enter the clear path of development. Due to the financial crisis, many arguments against the departure of Greek from Euro zone were made. However, it can be identified that if Greek exits from Euro zone, it is likely to impose severe negative impacts on Eurozone. Work Cited Checherita, Cristina and Philipp Rother. The Impact of High and Growing Government Debt on Economic Growth.Working Paper Series no 1237, Aug. 2010.Web. 05 Feb. 2013. 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