Term Paper: European Economic Crisis -- Greek

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[. . .] Recent OECD data show that Greece is among the least recipient of foreign direct investment capital in Europe. The cold attitude of Greece in its business dealings with countries all over the world reduces their chances of receiving foreign aid for paying out the debts (Abboushi 2012).

Inefficiencies in the Public Sector

The real appreciation of wages in the public sector and the increase of employees in the public sector of Government and municipalities led to a reallocation of capital and labour away from the private sector and especially from export oriented sectors leading to the loss in competitiveness and the increase in the current account deficit (Kouretas, Georgios and Vlamis 2010). The private sector received a setback, as it was immensely dependent on government projects and less on its own efforts for research, development and innovation. High level wage offered to government employees made the average person to search for a job in the public sector where payment is not related to productivity. This eventually deteriorated the competitiveness of Greek economy. Kouretas, Georgios and Vlamis (2010) provide an evidence of the fact that Greece experienced the highest growth increase in public spending and public administration employment which lead to a gigantic public sector during the period of 1999-2005.

Not only this, the Greek had low entrepreneurship motives and the entrepreneurs' encountered difficulties in starting up their business due to bureaucratic obstacles that further inflate corruption.

Greek Domestic Policy Responses to Debt Crisis

Austerity Measures

In order to avoid bankruptcy and bring down the deficit, the European Union and the International Monetary Fund expected the Greece government to take strict measures of austerity. The Adjustment Programme implemented by the European Union aimed at cutting down the expenditures of the Greek Government. Greek Government planned for budget cuts, freezing of wages of public sector, lifting up retirement age, putting higher VAT taxes, cutting down of pension and social service payments. The Greek pension system itself was on the brink of insolvency before the EU's implementation of the Adjustment Programme. Thus, the Programme removed the incentives for retirement before the statutory age (Taylor 2012). The austerity measures catered two core economic issues being encountered by Greece. One is the cutting down of large government budget deficits and the other being stabilization of the economy in cyclical economic downturn. However, it always remained a matter of question that how long could the Greek government count on public support for the austerity measures in this era of sharp recession.

Structural Reforms

Greek Prime Minister named Papandreou introduced long-term structural reforms for the Greek economy. These reforms cover the domains of healthcare, pension systems and public administration. His plans aimed at boosting competitiveness by fostering enhanced development in the private sector, supporting research, development and innovation and enhancing employment and economic growth. The measures included calculating pensions on the basis of lifetime contributions as opposed to the last five years of earnings. His efforts aimed at tightening public regulation and increasing accountability in Greek healthcare systems. The reforms target the increase of attracting new foreign investment in Greece by boosting export of goods and services. It intends to increase investment and development in sectors which had strong comparative advantages for trade and investment, like renewable energy sector and transportation networks. However, these structural reforms encountered the substantial challenge of maintaining public and political support for austerity measures and economic development reforms.

Financial Assistance from Eurozone Member States

France and Germany are willing to render loans of $11.2 billion and $8.4 billion respectively to Greece, if Greece sticks to its austerity plan and layout detailed deficit reduction measures for the upcoming years. The instability in Greek economy can have considerable consequences for the EU. It is expected that might spread across European bond markets and draw in countries like Italy, Spain, Portugal and Ireland as the crisis has contributed to a weakening of the euro's foreign exchange value. Germany tends to be the most influential state of the Eurozone and possesses the largest economy as well. However, it lies amongst the sceptical member states. Some statistics indicate that majority of the Germans are unwilling to render help to Greece. A major reason for this is the fact that major EU countries are also encountering financial hardships and have failed in modernising their own economies (Nelson, Belkin and Mix 2010).

Financial Assistance from IMF

In 2010, Greece asked for financial assistance from the IMF. Many viewed the outside intervention by IMF as a potential humiliation for the Eurozone, as the Eurozone failed in demonstrating its credibility and strength in taking care of its own problems. However, gradually all the member states favoured the twin-track approach of combining the assistance and aids of Eurozone states and the IMF. The IMF also stands in catering Greece with technical assistance along with provision of financial assistance. Some economists opined that the level of assistance provided to Greece by IMF would be far much smaller than the broader package of financial assistance catered by the Eurozone member states (Nelson, Belkin and Mix 2010).

Pros and Cons of the Greek Debt Crisis Issue

The European Union and its member nations, the International Monetary Fund and the European Central Bank played their roles in catering the Greek debt crisis by relying on bailouts and austerity measures. The austerity plans have contributed little on fiscal woes and have only stirred up anti-governmental tension among the Greek population (Vickstrom 2012). On one hand the European officials accepted the Greek plan for resolving the debt crisis through fiscal consolidation process, yet they were unaware of the potential hazards that were encountered on the other side of the picture. The increase in taxes and drastic reduction in government spending paved the way for major declines in economic activity and increased illiquidity in the economy. This led Greece towards unemployment and pushed the country into an era of recession. Due to declining economic activity, the budget revenues won't be increased by charging of higher taxes. Now the Greek government was attacked by two sides. On one side it has to reduce its deficit via restrictive fiscal policy, while on the other side it had to maintain its economy for sustained growth which can be achieved by expansionary fiscal policy. The instruments of fiscal policy are the only tool on which the Greek government could rely, as Greece is a part of the Eurozone and it is not possible for it to have an independent monetary policy. Moreover, there doesn't exist any possibility for currency devaluation for solving the current problem of stabilizing the economy (Todorivic and Bogdanovic 2012). Although the Greek state and its citizens have sacrificed a great deal to cope up with the EU/IMF bailout requirements, yet it seems that Greece may be even closer to default than before the intervention of the European Central Bank and the IMF. Greek citizens are now much concerned about the worsening economic conditions. As the Greek citizens watch their pensions diminish and their benefits disappear, they are becoming less supportive of the severe austerity measures being implemented. Austerity measures have been instrumental in identifying areas of wasteful spending and have made the financial institutions in Greece more transparent. As the situation aggravates in Greece, it continues to receive additional funding but with the requirement of implementation of much severe austerity measures for curtailing the excessive government spending. The continuous need of Greece for bailout referendums has increased uncertainty pertaining to Greece's ability of covering up all its debts.

Greece made the decision of remaining a member in the Eurozone and taking assistance from other EU states and the IMF. The decision of remaining a member of the Eurozone and as a result having other states make explicit decisions about national economic conditions is crucial for Greek government. Greece has had the option of financing its own budget deficit and increasing the competitiveness of its exports, if it had quitted the Eurozone and adopted and devalued a new national currency. However, exiting the Eurozone possesses the danger of future borrowing costs to be much higher for Greece (Mitsoupoulos and Pelagidis 2012).

Prospective Solutions for Dealing with the Debt Crisis in Greece

At present Greek has a negative outlook, possessing a limited number of possible outcomes. Despite the aid and loans from the EU and IMF, Greece is encountering immense difficulties in coping up with its debts. This dilemma requires proper management of the excessive debts. Following are some of the prospective solutions, which can serve instrumental in dealing with Greece debt crisis.

Growing the Economy out of Debt

The most effective method in resolving the issue of excessive debts would be to grow GDP at a much faster rate than the debt. The reduction in Debt-to-GDP ratio would accompany fewer pains. This however necessitates the need for identifying the sources of economic growth. Due to lack of competitiveness described previously, Greece could count on miraculous trade aversions or internal devaluation for boosting up the… [END OF PREVIEW]

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