How Greece and Turkey Fared: the Eurozone Economic Crisis - Literature review Example

HOW GREECE AND TURKEY FARED, THE EUROZONE ECONOMIC CRISIS By and Submission Introduction Officially, the Eurozone is known as the Euro area. This is an economic monetary union (abbreviated as EMU) and consists of eighteen European Union member states. To become a member of the Eurozone, a country needs to adopt the euro as its legal tender (Gilson, 2006). In other words, all the 18 EU member states use the euro as the common currency. The countries currently in the Eurozone are the Netherlands, Belgium, Luxembourg, Estonia, Austria, Germany, Latvia, Finland, Italy, France, Cyprus, Greece, Slovenia, Malta, Portugal, Ireland, Spain, and Slovakia. Other European Union may join the Eurozone after meeting the set requirements of doing so. Nonetheless, states such as the United Kingdom and Denmark cannot join the pact. Looking at the Eurozone, one of the few things that are predominant is the fact that a country is not allowed to leave after it has joined; there are no provisions for that. In addition, a country cannot be expelled from the pact, joining is irrevocable to any nation. While it is a requirement for any country to use the euro as its main currency after joining the Eurozone, using the euro does not necessarily mean that a country has joined the Eurozone. Countries such as San Marino, Monaco, Andorra, and the Vatican City issue their own coins and actually have formal agreements with the European Union to use the Euro as their primary currency. The European Central Bank is solely responsible for making of monetary policies for the Eurozone and its board of governance comprises of a president and national central banks heads for the countries involved. Generally, the ECB is supposed to keep inflation under check. With help from national leaders during time of crises, the Euro group (consists of finance members of the states in the zone), which is responsible for making political decisions that hugely affect the entire zone and specifically the Euro, keep the group up and running. The Eurozone, as discussed by this paper, resulted to providing loans to member states that were struggling during the financial crisis in the period 2007-2008 (Laursen, 2013). This paper will generally compare how such countries Greece, for example, which is a member of the Eurozone, fared during the Eurozone Crisis while compared to its neighbour, Turkey, a member of the EU and a non-member of the Eurozone. Discussion The European debt crisis, commonly referred to as the European sovereign debt crises or simply the Eurozone Crisis, is arguably one of the major financial scandals that have faced the Eurozone countries today. While the whole of the Eurozone is affected by this ongoing seemingly endless debt crisis, only a handful of the Eurozone member states are in real mess of the five-year long national debts that has resulted to what has come to be known as the Eurozone crisis. To say the least, without assistance from third parties such as the International monetary fund, the FCB, or the ECB, the states having the debts are unable to refinance their debts or even help bailout the banks that, under supervision of their (banks) respective governments, borrowed money from the EU and are now over-indebted. Greece is a very good example that, in 2012, as this paper will discuss later, defaulted its loan. The Eurozone crisis followed the Great Recession that hit the world during the very first years of the 21st century (Grusky, 2011). However, irresponsibly high deficits in governments’ policies and accelerated and skyrocketing national debt levels are definitely, what spurred the eruption of the crisis some Eurozone countries are in now. Within no time, Greece was affected by the crisis and had her interest rates soar too high that governments from all the other states had to intervene to reduce how much the interest rates were spreading to the government bond. The best way to go about it, according to the Eurozone, was to rescue the four states through use of sovereign bailout programmes that were jointly provided by the European Commission and the International Monetary Fund (IMF). In addition, the ECB provided technical support to the two. The three international organisations went on to earn the nickname “the Troika”. Unlike Turkey, which is a non-member of the Eurozone, while the rates of interest increased during this period, the Eurozone did not offer such bailout packages it offered to Greece. The Eurozone Crisis is deep rooted in history. Whereas members of the EU had already signed the Maastricht Treaty in 1992 that limited the deficit spending and levels of each member state (Jenkins, 1992), some European Union countries had already failed to stay within the treaty’s confinement and had resulted to securitising their governments’ future revenues as they aimed at reducing the debt levels and deficits and had therefore considerably fallen short of international standards and the agreed best practice according to the treaty. To mask their actions, the sovereign states, mostly Greece, would use a combination of crude techniques such as inconsistent accounting and sometimes off-balance-sheet or rather out-of-record transactions. The country, like Cyprus, would also use a series of credit derivatives structures and complex currency to ensure that the rest of the EU does not understand its predicament. For Greece, the acts ended with the election of a new government and their actual situation of having huge budget deficits caught the public eye. What followed were a couple of European states fearing sovereign defaults, which consequently sparkled the wave of the respective government debts being downgraded. In the early 2000, Greece had one of the fastest economies in the Eurozone whilst having one of the largest structural deficit. While it was, expect that every other country suffer from the financial crisis in 2007-2008, Greece was in a worse situation as it majorly depended on tourism and shipping, industries particularly sensitive to business cycle changes. To keep the country’s economy functional, Greece’s economy was characterised by heavy spending that saw the country’s debt levels greatly increase. In spite of the radical, upwards revision of the projection for the October 2009 budget deficit, its borrowing rose very slowly in the beginning. By April of the following year apparently, Greece was becoming more and unable to borrow. In the 23rd of the same month, however, Greece had figured borrowing an initial €45 billion loan from the European Union and the International Monetary Fund so as it could cover its financial needs for the following months in the current financial year. According to Deceanu et al. (2010), Standard & Poor’s, just a few days following Greece borrowing the amount, slashed the country’s sovereign debt rating amid fears that default was prospective. Greece had had its debt rating slashed to BB+ or rather “junk” status during which the investors could see losses of their money amounting to 30 or even 50%. In regard to the downgrade, like the lira in Turkey, the euro currency and stock markets in the world declined. Both situations proved very hostile for incoming foreign capital. On 1st of May in 2010, Weisbrot and Montecino (2012) note that Greece developed a number of austerity measures meant to secure another loan, a three-year €110 billion loan to be precise. This caused public outrage as massive street protests, riots, and unrest followed the borrowing of the loan. In October 2011, the aforementioned Troika offered Greece a second loan totaling €130 billion to act as bailout but under condition that Greece implemented a debt restructure agreement besides developing further austerity measures (Weisbrot and Montecino, 2012). To effect this, George Papandreou, the then Greek prime minister announced a referendum on December the same year Greece received the bailout from Troika. However, the Prime Minister would then drop the call after caving in to pressure from other members of the EU who threatened withholding a €6 billion loan that Greece had shown interest in by December the same month. While the austerity measure helped reduce Greece’s chief deficit (that is the financial deficit before any payments of interest) from the country’s 10.6% of its GDP (a total of €24.7bn to be precise) to just 2.4% of GDP the following year, the country’s recession worsened during the same period, 2010-2011. It became worse than it had been since its beginning in 2008. During this period (2010-2011), over 111,000 Greek companies went bankrupt and therefore about 40% of the total Greece population losing their purchasing power and the initial 7.5% of seasonal adjusted employment growing to a record 27.9% between September 2008 and June 2013. With Youth unemployment ratio hitting 16% in 2012, the country’s unemployment had risen from 22% to over 62%. In addition, the population’s share of the group at “risk of poverty or social exclusion” rose from 27.7% (just above the 23.4% of the EU27-avarage) in 2009 to about 33% in 2011, just two year apart. In February 2012, an International Monetary Fund official negotiating the country’s austerity measures admitted that it was her excessive spending cuts that were destroying Greek economy. According to Lynn (2010), the best thing to do to reduce the impending situation facing the Eurozone, is to have Greece withdraw from the Eurozone and simultaneously reintroduce its drachma as its own currency and make sure that the currency hits the market at a debased rate. Nonetheless, if Greece left the euro, the exit would prove very expensive to the country. Devaluation of its currency, according Lynn (2010), would be as high as 60%. Inflation on the other hand would be as high as 50% while the country’s debt-to-GDP ratio would increase to over 200%. UBS, on the hand, warned that there could be a bank run and hyperinflation if Greece left the euro (Feldstein, 2010). Furthermore, a possible civil war following a military coup could be impending if the country was forced out of the Eurozone. According to Lynn (2010) since Greece is evidently in a position where it cannot service the debts, the Eurozone National Central Banks, commonly abbreviated as NCBs, is seen to lose debt claims amounting to €100bn. The Troika saw the situation ahead and thought of bailing out Greece providing it with a package worth €130 billion that was supposed to happen if the country imposed more harsh austerity measures supposed to reduce its spending with €10bn in 2013 up from €3.3bn in the previous year. In March 2012, however, Greece finally defaulted on her debt, becoming the largest default by a government, surpassing that of Russia in 1918 (Borensztein and Ugo, 2008). The default also became the biggest debt restructuring deal ever and affected over €206 billion of the country’s government bonds (Porzecanski, 2012). By May 2012, it was feared that Greece may not be able to form a new government and the possibility of an anti-austerity win axis saw speculations that the country could soon be leaving the Eurozone, a phenomenon that became known as “Grexit” and one that started governing international market behavior (Pogatsa, 2014). However narrowly, the Centre-right’s victory in the elections revived hope that Greece would eventually honour its debt and obligations to remain a member state of the Eurozone. The best way the incoming government saw of dealing with the debt was to immediately ask the Troika to grant them an extended deadline to 2017 before having Greece being required to reinstate the budget into a self-financed state. Technically, this was equal to asking for a €32.6bn worth bailout of extra loans for the period 2015-2016 (Porzecanski, 2012). Porzecanski adds that following this move, Greece passed an austerity package amounting to €18.8bn and went on to include a midterm financial plan besides a labour market reform. The Euro group then lowered the interest rates and prolonged the maturity periods of the debts. Turkey is affected by the Eurozone crisis as most other countries outside the Eurozone are. Looking at the fact that Turkey’s largest market for its exports is the EU, it is goes without saying that any effect on the stability of the European Union market greatly affects how the country fares. Unlike Greece though, Turkey does not receive the bailout packages from the Troika. Nonetheless, Turkey is not at a bad situation as Greece is. To mention the least, Turkey’s currency, the lira, is not doing all that bad. While the country, alongside Brazil, India and even South Africa have become known as the “fragile five”, it is evident that Turkey is doing the best among these countries (Roubini, 2014). Turkey cleared its debt with the International Monetary Fund and thus started lending the institution money. In other words, while Greece is having a difficult time clearing its debt with the Eurozone, Turkey is not indebted to any Troika and is indeed lending money to a member of the Troika itself, the IMF. Still, Turkey is said to be getting ahead of itself. Recent development shows that the country is facing a very weak currency, the lira. According to Kannan (2008), as an emerging market, it is expected that the country does face capital flights thus causing dire fiscal stress. What happens is that there begins with a boom in the economy that attracts foreign investors. A cycle of positive feedback, rise in foreign capital that shoots up the value of assets results to even more attraction of foreign capital which greatly boosts the local capital bringing about a consumption binge tendency. Unfortunately, the growth is highly dependent on incoming foreign capital and any decrease would greatly affect the country’s economy. A change in sentiment ensues as the country seeks to reverse the capital flow, which pushes away foreign investors. The result is a situation where there is more outflow of foreign capital and thus the value of the assets falls and thus more foreign capital outflows ensures causing even much depressing of the prices of assets and thus a declining currency. If a country has a weaker currency, then the inflation of imports is expected to rise and the central banks have to respond through raising the interest rates so as the currency is defended. Conclusion Conclusively, both Greece and Turkey have had a rough time dealing with the Eurozone crisis. While Greece has been having the chance to have the Euro group intervene and bail it out, Turkey largely depends on aid as any developing country and is not in essence bailed out. The fact that Greece in a member of a certain treaty means that its policy programmes need to reflect what is “ideal” for the whole pact and need to meet the standards set. Unlike Greece, Turkey can develop her own policies that may not meet a ‘Troika’s’ expected standards. Like Greece, however, the possibility of having fewer and fewer investors, as the situation on the ground is not ideal proves very tragic for any economic growth during the Eurozone Crisis. Bibliography Arellano, Cristina, Juan Carlos Conesa, and Timothy J. Kehoe. Chronic Sovereign Debt Crises in the Eurozone, 2010–2012. Federal Reserve Bank of Minneapolis Economic Policy Paper, 2012. Borensztein, Eduardo, and Ugo Panizza. The costs of sovereign default. No. 8-238. International Monetary Fund, 2008. Deceanu, Liviu, et al. New Dimensions of Country Risk in the Context of the Current Crisis: A Case Study for Romania and Greece. European Research Studies Journal 13.3, 2010. Feldstein, Martin. 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