Financial Crisis in Greece 2010-2013 - Essay Example

of 16 December Financial Crisis in Greece Background The Greek economy has been suffering due to a huge fiscal deficit and heavy government borrowing, in much greater proportion to the size of its economy. The level of government spending increased dramatically after Greece joined the Eurozone and adopted the Euro as its official currency. A generous public sector meant that the government spent increasing amounts on public sector salaries while GDP did not grow in proportion. Public borrowing was undertaken heavily but grossly underreported leading to a debt-to-GDP ratio much above the 3% target. By 2009-2010 it became clear to investors that Greece would not be able to pay its creditors because of a huge fiscal deficit and government debt. The ongoing global financial crisis worsened the economic outlook for the country and it appeared that the country would default on its loan payments. Causes of the Greek Financial Crisis According to Dellas and Tavlas (2013), one of the main causes of the Greek debt crisis was the absence of an adjusting mechanism between money growth and credit growth. Historically, Greece has been running high public debts compared to its GDP which went largely ignored by foreign investors. As a result, there was little incentive for the country to reduce current and fiscal account deficits. Dellas and Tavlas (2013) explain that part of the reason was the fact that Greece did not use the gold standard and its currency was pegged to the Euro. There was an over-reliance by investing and financing countries on the willingness and enthusiasm by Eurozone core countries including Germany to bailout the Greek economy in case of a debt crisis. Throughout this period, the Greek economy continued to charge low interest rates in order to stimulate investment in the economy. As a result, the public borrowing continued to increase pacing the way for a sovereign debt crisis. In a paper presented at the Bank of Greece workshop, Manessiotis (2011) explains that poor fiscal discipline and lack of competitiveness in the economy were major factors that contributed to the crisis. These aspects of the economy should have received urgent priority following Greece’s entry into the Eurozone. Fiscal deficit ran up to 5.3% of GDP after 2006 whereas the target was 3.0%. Moreover, in 2008 the situation worsened with revenue falling by 1.3% compared to GDP while expenditures exceeded GDP by 1.2%. These problems were further exacerbated by the international financial crisis that began in 2008. Conditions Imposed by IMF on Greece In 2010, it became nearly certain that Greece could not meet its sovereign debt payments and would inevitably default. The implications for the entire Eurozone region would have been severe. Hence, in May 2010, the Eurozone in collaboration with the International Monetary Fund (IMF) prepared a bailout package worth €110 billion of which the IMF was to contribute €30 billion to enable Greece to improve its economy and avoid defaulting on its debts (Financial Post, 2013). This bailout package was subject to certain conditions. Mainly, the conditions required Greece to improve its fiscal performance and make the economy more competitive and open. The first condition imposed by the IMF required Greece to implement austerity measures in order to control the fiscal deficit. It was required that Greece reduce its public spending in order to narrow the fiscal deficit. Secondly, the fiscal debt problem was to be controlled by a policy of privatization of public assets. This measure would prevent the government from incurring additional debts to finance public organizations. By the end of 2015, the IMF required €50 billion worth of public assets to be privatized. Finally, the IMF required Greece to implement structural reforms in the economy to make it more business-friendly and competitive. This would stimulate business activity and help to strengthen the economy. However, the conditions have not been met satisfactorily mainly because of the failure of the Greek government to provide accurate data to IMF teams and persistent decline in GDP (Financial Post, 2013). Impact of IMF Conditions on Business Environment Contrary to the expectations of the IMF, the impact of the conditions has not been satisfactory. The business environment has suffered as a result of the austerity measures and privatization policies under the IMF bailout program. Poku and Therkelsen (p. 233) explain that unemployment has risen in the wake of the austerity measures and privatization with 30,000 public sector employees losing their jobs. Despite the austerity measures, annual output fell by 10 percent between 2010 and 2011. Furthermore, the rising debt-to-GDP ratio has been resistant to the terms of the bailout with the European Commission estimating the ratio to go up to 198 in 2013 (Poku and Therkelsen, p. 233). While the bailout package was implemented in 2010, the Greek economy has failed to emerge from the recession which has been persisting for the fifth year in a row. In 2011, the IMF announced a second bailout package for the economy with further conditions of reductions in public spending. It is estimated that 150,000 more public sector jobs will be lost and unemployment will rise. None of these conditions is conducive to business activity and shows the failure of the IMF plans to rescue the Greek economy. These effects came about mainly because of the inaccurate projections of the IMF by overestimating the ability of the Greek economy to reverse the downward trend. Measures Taken by Greece to Resolve the Crisis The Greek government has taken several important measures to resolve the economic crisis and improve the business environment. Despite the weaknesses of the IMF bailout package, the government has pursued a strong policy on going after tax evaders. Tax evasion is a big problem in the Greek economy. Since 2010, the government has developed programs to reduce tax evasion but none of these have been effective due to bureaucratic lethargy. The Greek government has also passed tax reforms to increase government revenues in order to control the fiscal deficit. In January 2013, the Greek parliament passed tax reforms that resulted in corporate tax rates increasing from 20 percent to 26 percent. As part of the reforms, the tax brackets have also been reduced from eight to only three. Various tax exemptions have also been withdrawn as part of these tax reforms. It is expected that these measures will help to resolve the crisis by increasing government revenues by €2.5 billion in 2013 and 2014 (Martin, 2013). However, as reported by Reuters (2012) Transparency International does not find the government doing enough to resolve the crisis. According to its report, corruption is a primary concern when evaluating the government’s efforts to improve the economy. Laws that are conducive to corruption and bribery are in effect and the government remains reluctant to take strict against to amend those laws. Such lethargy and reluctance can undermine the positive steps the government has taken to resolve the debt crisis. Perspectives on the Greek Debt Crisis The liberal view generally attacks capitalism for placing the control of factors of production into the hands of an elite minority that uses it to exploit the masses. In this perspective, the Greek debt crisis emerges as an emphatic example of the weakness of the capitalist model and its inherent self-destructiveness. Critics of capitalism have argued that the debt crisis and the government’s response to it are indicative of the inequality and unfairness in the capitalist system. The Economist (2010) argues that the leftist policies of hosting a large public sector have been the undoing of the Greek model which has made large numbers of layoffs and austerity measures necessary. The liberal view contends that current measures are insufficient to resolve the defects of capitalism. The national or rightist view has been gaining popularity in Greece as a result of the rising levels of unemployment and inflation according to Matsa (2013). The rise of the nationalist Golden Dawn party reflects the growing conservatism among the Greek population and the anger against the actions taken by the government to resolve the crisis. The nationalists have adopted an anti-immigration stance and have vocally criticized the IMF and other lenders as contributing to the precarious economic condition of the country. Their criticism is directed against government officials and policy makers whom the nationalists criticize as being collaborators of international lending agencies in damaging the economy of the country. In the 2013 elections, the nationalist party emerged as the third largest party in Greece. The structuralist view focuses on the long-term effects of policy decisions as opposed to political repercussions. According to Brooks (2012), the views of the structuralists support the recommendations of the IMF. The main argument of the structuralists is that public spending damages the economy. They argue that the bloated size of the public sector in Greece was the main reason for the fiscal deficit and consequent debt crisis. According to Brooks (2012) the underlying structural flaw is the large share of the public sector relative to the private sector. Hence, the policy of reduced public spending and increased privatization are supported by structuralists as a move in the right direction for Greece. The structuralists believe that these measures will fix the underlying flaws in the Greek economic system. The perspective of the European Union (EU) is synchronous with the bailout plans of the IMF. They have been committed in seeing Greece honor its commitments to carry out reforms in its economy such as implement austerity programs and make structural reforms. Throughout the debt crisis, there has been a risk of Greece having to leave the Eurozone. At the same time, the EU members have been supporting the country’s continued membership of the Eurozone. Despite this commitment, the ultimate decision about membership of the Eurozone rests with the member country. In order to deal with such an eventuality, the EU is taking steps by making contingency plans in case Greece decides to leave the monetary union. Conclusion The main problem with the Greek economy is structural. The government needs to renew commitment to overhauling the system and making the public sector more efficient. The private sector needs to be encouraged to come forward by improving economic regulation and instituting tax reforms. At present, the performance of the government has been disappointing because it has been unable to respond to rising levels of unemployment and inflation with incentives for private-sector investment. By implementing tax reforms, public revenues can be increased through tax revenues. At the same time, anticorruption measures should be implemented across the board so that international investors regain trust in the economy. Works Cited Brooks, Davis. “The structural revolution.” The New York Times 7 May 2012. Web. Dellas, Harris, and George S. Tavlas. “The Gold Standard, the Euro and the Origins of the Greek Sovereign Debt Crisis.” Cato Journal Fall (2013). Financial Post. “IMF says it lowered bar for Greece bailout program.” Financial Post 5 June 2013. Web. Manessiotis, Basil, ed. 2nd Bank of Greece Workshop on the Economies of Eastern European and Mediterranean Countries. Athens: Bank of Greece, 6 May 2011. Web. Martin, Ben. “Greece passes key tax increases.” The Telegraph 12 January 2013. Web. Matsa, Katerina Eva. “Rise of Greek nationalist ‘Golden Dawn’ party coincides with Greece’s economic crisis.” Pew Research Center 2 October 2013. Web. Poku, Nana K., and Jacqueline Therkelsen. Globalization, Development and Security. In Collins, Alan (ed.), Contemporary Security Studies. 3rd ed. Oxford: Oxford University Press. 2013. Reuters. “Greece doing little to fight corruption, group says.” Reuters 29 February 2012. Web. The Economist. “The unkindest cuts.” The Economist 24 June 2010. Web. Read More