Greece Financial Crisis - Coursework Example

Greece Financial Crisis Financial crisis is a situation whereby large value of assets in a country’s s is lost. Various factors lead to the financial crisis such as banking panics, financial bubbles, currency crisis, and sovereign defaults. These factors mostly lead to the stock market crashes where the value of the stocks decreases and thus investors’ losses on their investments. However, these situations do not directly result directly to real changes in the economy not until a recession of a depression follows them. This situation has affected Greece over the years and has caused devastating effects in the economy of the country, the euro trade block, and the world at large. This paper looks at the into detail the Greece economic crisis, its causes and effects, the benefits member nations of the Euro were anticipating through gaining membership. In addition, the paper looks at the possible costs that were anticipated, why Greece and a few other countries are now considering the costs of leaving the euro economic trade block very high, and the possible options they have to remedy their current problems. Moreover, the paper gives a recommendation of the best measures the country would take to get out of the crisis. Causes of Greece Financial Crisis Unstructured Government Problem Greece over the years, had allowed corruption and tax evasion to thrive. This problem has continued to escalate over the years and the country can no longer have control over its people and taxes. The European Union recently released information revealing that Greece loses in the region of 30 per cent of its income taxes owing to tax evaders. The result of this corruption is the many years that it has been allowed to thrive and now, the country has lost regulation of its money therefore allowing the debt to pile up. Therefore, members of the European Union, other countries in the economic trade block have to participate in order to relieve the country off some of its debts and prevent it from total bankruptcy (Wall Street Journal web). Corruption in Greece began long ago before the country could join the European Union. However, some economic analysts argue that the country should not have been allowed to join the Eurozone. Because of this arguments and evaluations, Greece engaged in creating better economic conditions by cutting the inflation rate of the country by a large percentage. In addition, the country put up measures that reduced the interest rates of the country in a move to reduce borrowing money from the financial institutions. Moreover, the country reduced its deficit to below 3 per cent that meets the requirements to join the Eurozone. However, the county cheated into joining the Eurozone since as later discovered, the countries had not essentially met the requirements to join the Eurozone. The country’s government later on self-proclaimed that it deficit has never been below 3 percent since year 1999 (Plummer and, Laurence web). Bail-Out Problem Due to the increase in financial crisis surrounding Greece, countries around the world agreed upon saving Greece from its own financial crisis. In 2010, various countries agreed upon giving the country a 110 billion euro bailout. This was meant to save the country and the consequences that it would have on other countries in the world. However, the bailout amount was not enough. Other member countries proposed another plan, whereby they would give the country 120 Billion Euro bailout. This plan was meant to help Greece for a short period which was a short-term effort meant to delay the big problem. However, economists predict that Greece would not be able to fund itself by the year 2014 (New York Times web). This means that the current amounts of 330 billion euros is not enough to fund the country. The consequences of Greece crisis have been tremendous in that they have affected other people in other countries. The most affected of them all are the members of the euro zone. Citizens of these countries have been forced to pay an addition taxes to their governments, which have contributed to the bailout plans. Recent information released by the European Union shows that every household in the Eurozone pays an equivalent of 535 euros to aid the Greek debt. The information further reveals that these figures will increase by 2014 to 1450 euros for each household (New York Times web). Benefits of the EURO When the Euro zone was founded, there were great expectations from willing members of high economic growth and achievements. One of the main benefits that these countries expected is the reduction in transaction costs. This means that the cost incurred in changing currencies will be minimized or removed completely. This measure would help save the enormous resources of other countries, which are reflected in the margins of currency dealers in a more competitive market. Formation of the euro zone started in the 1990s whereby a commission was set to study and analyze the benefits of joining the euro. The commission found out that the members of the European Union would benefit on average from savings in dealers margins of cross to 0.4 per cent of the country’s gross domestic product (Wall Street Journal web). However, not all countries would have the same margin of benefit of 0.4 per cent. The countries, which have a more advanced banking system such as Britain, would have a margin benefit of 0.1 per cent of the country’s gross domestic product. This is because the large proportions of currency exchanges between the pond and the Euro would take place through the banking system, for instance, the in inter-firm trade payments or credit card payments (Wall Street Journal web). Moreover, the member countries of the euro zone economic trade block had high expectations that joining euro would eliminate exchange risk uncertainty. This would happen by eliminating unstable fluctuates in the exchange rate, which would destroy the profitability of exports. However, this move undermines business confidence in investing. Therefore, with a solitary monetary currency confidence in commercial activities should improve leading to greater trade and economic growth (Thom and Walsh, 1111: Plummer and, Laurence web). In addition, member countries of the Euro zone hoped to attain price transparency by joining this trade block. This was due to the use of a single trading currency, which would make it easier to compare prices in different European countries since all of them would use the euro. More benefits would result from this move in that they would source cheaper raw materials for manufactures and thus cheaper finished products for consumers. For instance, in the UK, the price of a new car is much cheaper than in any other country. The use of a single currency would help largely reduce the price differentials (McConnell 5). Furthermore, the use of the euro single currency trading system would create improvement in the inflation performance of the member countries. This would be achieved using the European commercial bank, which would regulate the interest rates policies for the whole region. It will in addition be committed to keeping inflation low. This will be more advantageous to countries with higher inflationary tendencies such as Serbia and Montenegro. However, other countries outside the euro zone have been able to maintain low inflation tendencies therefore raising debate (Mankiw 10). Moreover, the Eurozone would increase inward investments from countries out of the European Union since the firms would take advantage of the low transaction cost within the Euro area. In addition, the financial sector could benefit and economize on foreign currency reserves. This means that it would be easier to do banking and insurance with a single currency, or even buy German shares on the London stock exchange (Krugman and Wells 8). Costs of Joining the EURO Joining euro would also require the member countries to incur some costs. One of them is the cost of replacing the currency. This would occur in the cost of replacing the machines for printing money. Replacing an individual country currency is an expensive exercise, which requires the country to spend too much money. Moreover, the member countries would lose their autonomy over economic policy (HM Treasury web). This would be facilitated by the European commercial bank that would be setting the interest rate for the whole region. This is a big blow to these countries since they would lose a significant part of their monetary policy. Joining the euro zone can also be hazardous for countries that are in different stages in the business cycle. For example, Ireland and Spain were growing faster than other European countries in 2005 and therefore needed high interest rate to curb inflation (Flandreau 8). However, if the European commercial bank had set low interest rates in favor of the other euro zone members, curbing inflation would not have been achieved. However, in 2009, the same countries, Spain and Ireland were experiencing deeper downturn than the rest of the Eurozone countries. This means that this countries needed lower interest rates in order for them to grow (New York Times web: Deepashree and Agarwal 8). Furthermore, countries would lose some independence over Fiscal Policy. This is because the Eurozone require countries to borrow less than 3 per cent of their GDP. This means that member countries will have to try to uphold the economy at comparable stage to other countries (Blanchard 8). For instance, Ireland had high economic growth that was criticized for increasing spending, that increases aggregate demand. In addition, joining the Eurozone would expose the Asymmetric Shocks to more volatility. This means that if one country experienced an outside shock it might require a dissimilar response. However, this is no common with a single trading currency. An example is the reunification of Germany, which required higher interest rates to help cut inflation, but this was not noble for several other countries (Barro 8). Greece and other countries are now facing a hard task of upholding the requirements of the euro zone. One of the main reasons is the differing trend in the interest rate that is offered by the European commercial bank. This has been facilitated by change in the economic trends off other countries. For instance, when Greece, Ireland, and Spain are experiencing an economic down turn, other countries in the trade block are experiencing a boom. This creates a dilemma to the European commercial bank on the level it is supposed to create the interest rate for borrowing money (Barrell and Dury 625). Solution to Greece Crisis One of the major solutions to Greece crisis is to seek out new bailout plans from the European Union. This is because the country is facing a race against time in order for the country to fulfill the demands of the international lenders and qualify a new sustenance to avoid credit defaulting (Arnold 5). Secondly, the political turmoil between the ruling party and the opposition should be halted to salvage the country from deepening financial crisis. Greece prime minister George Papandreou and his ruling Pasok party should strike an agreement with the opposition New Democracy party which recommends more austerity measures to be undertaken (Barrell 54). Furthermore, if the above-mentioned measures are not meet, Greece should quit Eurozone. This will enable the country to adjust its interest rates, and encourage borrowing which propel the country to retracing its financial position (Aristotelous 87; New York Times web). I consider Greece quitting the euro zone to be the most appropriate solution in the long term. This is because Greece will be able to adjust its own monetary and fiscal policies, which are fundamental for any country to prosper economically. Works Cited Aristotelous, Kyriacos. “Exchange-Rate Volatility, Exchange-Rate Regime, and Trade Volume: Evidence from the U.K.-U.S. Export Function (1889–1999).” 2001. Economics Letters 72: 87–94. Arnold, Roger. Macroeconomics. Boston: Cengage Learning, 2010. Print. Barrell, Ray. “The UK and EMU: Choosing the Regime.” National Institute Economic Review 180: (2002). 54–71. Barrell, Ray and Dury, Karen. “Choosing the Regime: Macroeconomic Effects of UK Entry into EU.” Journal of Common Market Studies 2000. 625–44. Barro, Robert. Macroeconomics: A Modern Approach. Boston: Cengage Learning, 2008. Print. Blanchard, Olivier. Macroeconomics. New York: Pearson Prentice Hall, 2008. Print. Deepashree and Agarwal, Vanita. Macroeconomics. New Delhi: Tata McGraw-Hill Education, 2006. Print. 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