Economic Crisis in Greece and its Impact on the Euro - Essay Example

Economic Crisis in Greece and its Impact on the Euro Introduction: The economic crisis in Greece tends to threaten the country’s position in the European Union. The budget crisis in Greece may misplace its foothold in the nation. Deficit reported by Athens has been found to be four times the limit of the European Union, which implies that Greece could be facing a threat of losing the Euro as its national currency. Frustrations of farmers getting demonstrated through blockage of border crossings, highways or ports, clearly indicates that Greeks have become distressed having no intentions to let go (Poggioli). Uncontrolled expenditure, inexpensive loans and failure to execute monetary transformations over a couple of years has left Greece in a very poor condition when the worldwide financial recession had hit. The levels of debt and shortfalls surpassed the limits that have been set by the euro zone (CNN). As per the Euro is concerned, since its introduction in the year 1999, its value had declined substantially against the US dollar, as well as certain other currencies. The flaw was to a degree credited to outflows of capital from Europe. However, by 2007, the euro was valued at 53 percent higher than its value that was in 2001. The high interest rates in Europe in comparison to US interest rates had triggered the rebound of the euro, and attracted inflow of capital into Europe (Madura, 167). The report conveys a detailed study on the economic crisis prevailing in Greece and its impacts on the Euro. Background to the Crisis: The euro zone was incepted in the year 1999, and several independent states forsaken their own national currencies in support of a universal currency, the euro. The euro was mainly adopted because a number of advantages were expected to get bestowed by the monetary union on the countries that participated. Countries like Greece, which generally have high inflation, the adoption of euro could benefit by lowering the inflation and the nominal interest rates as well. Lower inflation rates encourage greater borrowing and lending, decreases the possibility of competitive devaluations, introduces a common measure of value across countries thus bringing transparency in competition across countries, and also reduces risk by eliminating exchange rate fluctuations. These advantageous features of a common currency subsist till price stability is delivered by the central bank of the monetary union and is plausible. In the case of the euro zone, the European Central Bank had rapidly recognized its anti-inflation recommendations and became credible (Provopoulos, 1-2). In spite of the above mentioned advantages, there are certain costs relevant to the adoption of euro as the common currency. A country joining the euro zone becomes incapable of setting its own domestic economic policy. Also, it no more possesses the ability to alter the nominal exchange rate of its currency. Low financial discrepancies and resilient labor and product markets is particularly important in the euro zone. The euro zone does not have a fundamental economic power that can restructure economic properties from a low-unemployment area to a high-unemployment area to lessen the consequences of unbalanced distress. Also, owing to differences in language and culture among the different countries in Europe, labor is more mobile in the United States than in here. Hence, regulation systems are required for the euro zone at a national level. Lower economic inequity and elastic product and labor markets offer mechanisms to ease the modification to alarms (Provopoulos, 2). The Greek Economy 2001-2009: With the entry into the euro zone, the Greek economy seemed to enter a new period experiencing strong development and low price rises. The changes brought about in the economic environment with the adoption of the euro provided crucial benefits for a country like Greece that had experienced constant budget deficits, and high inflation rates levels from the early-1980s till the mid-1990s. However, along with the advantages, long term problems were cropping up for the country’s economy. Throughout the period from 2001-2009 the deficits were increasing above the standards set and the debts were not being reduced. The new economic policy increased the government spending. According to the euro standards the inflation rates in Greece were very high. The increase in wages also exceeded the average standards. With both prices and wages rising at moderately soaring rates, competitiveness deteriorated. The high growth rates and waning competitiveness, increased the current account deficit, which already had already crossed 7 per cent of GDP in 2001, to around 14 ½ per cent of GDP in both 2007 and 2008. The current economic disaster is the result of the lack of policy responses to the discrepancies (Provopoulos, 2-3). The Crisis in the Greek Economy: The current economic problem indicated a phase of the crisis that exploded in 2007, following the crumple of the US sub prime mortgage market, and increased with the downfall of Lehman’s Brothers. Yet, in the first two years of the worldwide economic slowdown, the Greek economy remained unaffected. In the economic slowdown of 2009, two advances jointly disordered the relative harmony in the Greek financial markets. Firstly, the newly-elected government in Greece proclaimed that the 2009 economic shortfall would be 12.7 per cent of GDP, which was more than twice of the forecast made by the previous government. The expectation was that the 12.7 percent figure would go through further growing adjustments, increasing it to 13.6 percent of GDP. Secondly, creditors were asked for six months’ debt by the Dubai World, the corporation that was in possession of the Gulf emirate government. This action made the financial markets around the world upset and led to an increase in risk hatred (Provopoulos, 3). The credit rating of Greece, the ability of the country to reimburse its debts, has been reduced to the lowest level in the euro zone. It is probable that it will be analyzed as a financial failure by the investors from overseas. Thus the country has to struggle to repay its bills as on the other hand the interest rates go on increasing (CNN). As the fiscal situation in Greece can be seen to worsen rapidly, the attention of the financial markets and rating agencies was turned towards the continuity of Greece’s economic and peripheral disparities. The perception that was previously believed that association in the euro zone would offer an intense obstacle against risk was removed with surprise. It had become apparent that, while such an association provides security against exchange-rate risk, it was unable to provide any defense against credit risk (Provopoulos, 4) Debt Crisis Could Bring Down the Euro: Greece is a country with a very frail and complicated financial composition which is very fragile with respect to its efficiency. The economic problems of Greece have always directed to social turbulence in the recent period of time. Since the period of time that Greece had joined the euro zone, the country has been considered as one of the poorest countries in the European Union. By entering into the euro zone, Greece agreed to a sequence of obligations that although improved the country’s communications and infrastructure but created more financial problems. The actions the Greece had taken in support to these obligations led to severe troubles, such as joblessness and rise in prices, and the government had to take a series of loans for financial assistance from the World Bank, the International Monetary Fund, the EU, and the United States (Mohtashami). The debt building of above 350 billion Euros has created a huge financial crisis in the country of Greece. Short term solution has been offered by the European Union to Greece by providing the country with a new monetary release pack up worth about 120 billion Euros, but according to economists this step would not be able to ease the pressure prevailing on the government and the people. The EU is trying to assist the country to fight with the crisis, but at the same time it is imposing a number of commitments on the country leading to pressures and obligations. Hence this is leading to more unrest among the society where people are suffering from unemployment and higher rates of inflation. The situation clearly demands for strict measures to bring the situation under control. The EU is concerned that the position of the euro may get diminished owing to the crisis in Greece. The concern comes for both Greece as well the other countries that might be equally affected. The situation might be expected to improve by the new plans in the short term, but the results would depend on the performance of the Greek government. (Mohtashami) The difficulties faced by Greece reflect problems for managing the euro, as well as likely uncontrollable performance in foreign-exchange markets, which threaten to broaden uncertainty and impact negatively the global recovery that has already arisen (“Small economies, big problems”). As a result of the crisis, the borrowing costs for those countries of Europe that are most susceptible are increasing and the value of the euro is dropping. EU officials have given warnings high levels of insecurity adjacent to the economic revival of the country. Even the rescue package provided to the country might not prove to be enough for the country to recover the situation. Although it is expected that the rescue measure might help Greece to some extent, yet it is already visible that it is broadening the split between Europe’s southern region where the monetary crisis is intense and the northern area where most of the industrial exporters exist and is best situated to take benefit of a weak euro. (London). According to some European economists, devaluation or weakening of the euro will provide stimulation for better exports, development, and equilibrium in the return to balance of payments. However one fact that is overlooked in the process is that the euro zone countries are associated to the euro which influences against individual trade policies. The hurdle of regional development is that it reprimands the strong members of a union so that they can support weak members. However, this seems to be an indefensible agreement. When the EU is impacted by these forces, it can be realized that the euro may be a victim, and Western Europe may have to return to its conventional position as a continent that had individual states, languages, histories and financial conditions. (London). Conclusion: The economic crisis in Greece can be seen to impact the country with respect to its position in the European Union where the adoption of the euro as a common currency has taken place. The budget deficits impacted from the huge amounts of loan and credits obtained by the country, has created greater economic crisis for the country. The fear lies in the fact that the crisis might impact the other countries also who are under the EU and are participants of the euro in their countries as well. Although entering into the euro zone created several opportunities and benefits for the countries, however, it also imposed several obligations. Countries like Greece who is considered as one of the poorest countries undoubtedly has started facing difficulties in fulfilling such obligations. Moreover, costs relevant to the adoption of the euro as a common currency was a major factor affecting the country. Naturally, the country faced problems, supported by the economic crisis, in managing the euro. The euro gradually seems to be affected by the prevailing economic condition thereby diminishing its value from the present circumstances. If the European Union is and gets affected by the financial crisis in countries like Greece, it is probable that the value of euro might be brought down. Specific strict measures may only be able to recover the country from the current crisis. However it is also necessary that the Greek government perform those new policies with utmost sincerity and concentration to achieve the desired results. There is a need to keep in note that the euro is not only meant for Greece but that other countries are also related, and hence measures taken should reflect emphasis on the benefits for both Greece as well as the other countries under the EU. References 1) London, Herbert, “Debt Crisis Could Bring Down the Euro, EU”, NewsMax, 2010, July 20, 2011 from: http://www.newsmax.com/HerbertLondon/London-Greece-debt-Spain/2010/05/18/id/359372 2) Madura, Jeff. International Financial Management, United States: Cengage Learning, 2008 3) Mohtashami, Mehdi, “EU fears Greek crisis is dragging euro down”, MEHRNEWS, 2011, July 20, 2011 from: http://www.mehrnews.com/en/newsdetail.aspx?NewsID=1357838 4) Poggioli, Sylvia, Economic Problems Threaten Greeces Place In EU, NPR, July 20, 2011 from: http://www.npr.org/templates/story/story.php?storyId=123234869 5) Provopoulos, George A, The Greek economic crisis and the euro, Bank for International Settlements, July 20, 2011 from: http://www.bis.org/review/r100624d.pdf 6) “Q&A: Greeces financial crisis explained”, CNN, 2010, July 20, 2011 from: http://www.cnn.com/2010/BUSINESS/02/10/greek.debt.qanda/index.html 7) “Small economies, big problems”, Times of Oman, 2011, July 20, 2011 from: http://www.timesofoman.com/viewcolumndetails.asp?.ratopic_nd=448 Read More