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Greece is finding it difficult to manage its public sector deficit as a tool to improve its economy. What alternatives are open - Essay Example

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Introduction Greece is the 32nd largest economy in the world with a GDP in 2010 of US$ 320 billion (CIA factbook). Greece became a member of the EU (European Union) in 1999 and member of the EMU (European Monetary Union) in 2001. Since 2009, the Greek economy has seen negative growth…
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Greece is finding it difficult to manage its public sector deficit as a tool to improve its economy. What alternatives are open
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"Greece is finding it difficult to manage its public sector deficit as a tool to improve its economy. What alternatives are open"

Download file to see previous pages The figures 1a below shows the evolution of some key macroeconomic indicators for Greece from 2006 to 2010 Figure 1a GDP growth and Unemployment for Greece from 2006 – 2010 Source: IMF The Economic problems for Greece The macroeconomic problems for Greece are aplenty. The GDP is contracting and unemployment rising. Most importantly, its debt has been constantly increasing for the last many years and as of end 2010, it was 143% of its GDP (as shown in Figure 1b below) with current deficit at 13% of the GDP. The current financial mess in Greece came to the open when the newly elected government announced in October 2010 that its current deficit had been falsely reported for the last few years. This revelation led yields on Greek government bonds and interest rates for new credit to rise astronomically, meaning that it was no longer viable for Greece to raise money from the market to maintain the levels of government spending that it had been doing since many years. The key priority now for Greece to overcome its economic woes is to bring its debt to more sustainable levels with a first target of not more than 100% of GDP. Figure 1b Gross debt as percentage of GDP for Greece 2006 to 2010 Source: IMF Option for Greece to alleviate its economic woes The Greek economy enjoyed growth from 2003-2007 largely due to high government spending. Historically, public spending accounted for a large part (>40%) of the GDP. Since public spending is not a luxury that Greece enjoys anymore, it needs to bring the economy back to growth through other means with the top priority of bring debt levels down to instil investor confidence in Greece. Because Greece is a member of the EMU, it has no longer the option to devalue its currency (to help make exports more competitive) or to control its monetary policy that best suits its own economy (interest rates and inflation). Given this, Greece could consider exiting the EMU - by exiting the EMU and dropping the Euro as its currency, Greece would revert to its original currency, the Drachma. It would no longer be under the control of the ECB for its monetary policy and it can devalue its currency and let its exporters get the competitive advantage. However, this would bring largely negative effect on the investors in Greece and would affect the investment coming into Greece. The overall effect may be a little to no change in the GDP but a largely disgruntled EU. So, Greece must look at options (with staying in the EMU in mind) aimed at reducing its overall sovereign debt and improving the economy. The possibilities for Greece then are: a) Reduce sovereign debt by restructuring the debt Clearly, sovereign debt is the biggest economic problem for Greece today. It is at a highly unsustainable level of 143% of the GDP. This means that any new loans for Greece would come at very high interest rates. Now, Greece could either simply default on its debt or it could try to restructure its debt. A debt default would mean even lower investor confidence which may not be a very positive sign for Greece. It could however, try to restructure its debt by: 1) Extending the maturity of its debt 2) Reducing the face value of the debt 3) Combination of both 1 and 2 above Extending the mat ...Download file to see next pagesRead More
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