Beruflich Dokumente
Kultur Dokumente
Winston Sayes (s0539276) Muhammad Zia Ul Aein (s0534559) Farrukh Javaid (s0541360)
Theme: Greece Euro Crisis - A Look into Greece Crisis, Why It Happened and the Progress since the Crisis, Bailouts and Consequences
Submitted: 16.Jan.2014
Contents 1. Introduction ....................................................................................... 3 2. Trade Balance and Current Account ..................................................... 4 3. Countrys Competitiveness Compared to EU Member Countries ............ 7 4. Why Euro Failed Greece? ................................................................. 11 5. Interest Levels on Long Term Government Bonds ............................... 16 6. Bailouts for Greece ........................................................................... 19 7. The Effects of Bailouts and Austerity Measures .................................. 21 8. Conclusion ....................................................................................... 24 9. Bibliography .................................................................................... 25
Division of Work:
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1. Introduction
The Euro Area, consisting of 17 member states, was conceived with the Maastricht treaty in 1999, and was aimed to create mobility, growth, stability, a single currency and to unite the countries of Europe, while one can argue that the aims of mobility and a single currency have been met, on the contrary one can easily argue that both growth. Stability and a united Europe have fallen short, and even in some cases, the inverse is true, a prime example of this, and unfortunately not the only one, is Greece. Since joining the EU in 2001 Greece and its economy has declined and fallen into despair.
When one thinks of the European Union and the ongoing crisis, Greece is normally the first thought that pops into our minds, to this day Greece and the Greek people suffer and is considered the black sheep of Europe. But was it always this way in the birthplace of democracy? And if not, what events created the crisis in Greece, how did politicians allow it to happen? How a country that fulfilled all of the Maastricht Criteria, and which looked so promising, could fall so badly? And what are the consequences for Greece; are the Austerity measures destroying Greece more than helping? Is leaving the euro an option for Greece? And if not, is there a likelihood for of a third bailout?
In this paper on Greece Euro Crisis, we aim to look at some financial data regarding Greeces debt as well as its competitiveness. The paper also discusses all the bailout packages Greece has been provided with along with the research into the fact if a third bailout would be needed or not. The research also focuses on the austerity measures and what changes, positive or negative, they brought to the economy and public of Greece.
Greece's current account year for year, during its accession and even before its accession into the EU, was negative, it is however worth noting, the common misconception that a trade deficit is always bad, A deficit, as stated by the IMF, is actually a positive thing, as it potentially spurs faster output growth and economic development (IMF) America for instance has a huge trade deficit and is a considered, although not always, a financial stable country, this is partly explained by the Pitchford thesis which states that a current account deficit does not matter if it is driven by the private sector undertaking mutually beneficial trade. However as with anything, an excess is normally a bad thing, and with the example of Greece, I will explain in the following text why:
Once created, the idea of the Utopian Euro Zone soon came forth, it was seen by many as a safe haven where nothing could go wrong, investment flooded in to all countries that joined, and to begin with Greece was no exception. As stated by Sauernheimer, during 2000 and 2005 Greece was a euro success story, only after Ireland did they boast the highest growth rate in the Eurozone and their current account deficit as a percentage of GDP decreased. This was mainly due to the fact that after Greece's accession into the EU, investors perception changed (See: Figure 1, Interest rates for long term bonds), clearly shows this change in investors perception of the stability of Greece, and its economy.
The current account can be expressed as the difference between the value of exports
of goods and services and the value of imports of goods and services. . A deficit then means that the country is importing more goods and services than it is exporting The current account can also be expressed as the difference between national (both public and private) savings and investment. A current account deficit may therefore reflect a low level of national savings relative to investment or a high rate of investmentor both. (IMF)
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(Figure 1)
In contrast, during the 90 there was low confidence and thus heavy refinancing costs for the deficit states (Greece included), one can see the development of the interest rate and thus confidence levels into the lines converge in the 00s with wealthier states. This falsely put Greece, and interest rates on a level with countries such as Germany, giving Greece cheaper refinancing that was formerly only available to theses more, wealthy, stable economies. However at the same time Greeces trade balance deficit becomes excessive, and persistent dipping in double-digit numbers as a percentage of the GDP. The GDP share of current account deficit almost doubled between 2004 and 2006, only to increase substantially in the following year, (Figure 2, shows the excessiveness of, the current account balance)
(Figure 2)
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It is important to remember that while year after year, Greece trade deficits increases and cumulates, in effect liabilities are being built up to creditors which are financed by flows in the financial accounts, eventually however these creditors must be paid back.
However theses low interest rates reflect financial markets not good markets, the latter are much slower in converging, this creates high inflation, making EU imports more expensive, and erodes much of the real wage of greeks. Between 1999 and 2008 nominal wages increased by 10.9 percent in Germany, at the same time rising by 36.1 percent in Portugal and by a staggering 76.5 percent in Greece (OECD 2010a). De Grauwe (2009) goes further in suggesting that much of these differences in wages were not supported by an elevation in productivity and unit labour costs, simultaneously international competitiveness substantially diverged. Normally Under a regime of flexible labour markets, this loss in competitiveness would have triggered an increase in unemployment, which in turn would have limited or even averted wage growth. But the misuse of government debt (see Figure 3). Namely In the form of increased Government spending in an effort to stem the negative effects on GDP growth and employment, eliminated this control mechanism. The public debt was used not only to provide generous social benefits, but also to inflate public sector employment .
(Figure 3)
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In Greece, per capita spending rose from 35 percent to 73 percent of German levels between 1999 and 2010. In all the troublesome states of Spain, Greece and Portugal one can seasily see the persistant spending on social security (see above)- In fact, unknowingly, a vicious circles is started, as inflation rises, competitiveness is eroded, low productivity triggering de-industrializing as imports become cheaper and greeces own products more expensive, exports begin to decrease substantially, increasing imports, and domestic jobs are lost, factories close, government spends more, employees more public servents to stem unemployment, raising debt, and the vicious cycle begins all over again.
The problem was there were countries in the European zone and especially in the Northern European countries, having higher productivity rates as compared to that of Greece.
Lets take example of Germany which is the most economically developed in the Eurozone region and form a productivity comparison with the productivity rates of Greece.
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Table A
2000 Greece
2000 Germany 5
2010 Greece 10
2010 Germany 20
Apparel/ Hour
Euro. 5 Euro. 1
E. 10 Euro. 1
E. 12 Euro. 0.60
The above mentioned table2 shows the competitiveness of Greece with the Germany.
If Greeces and Germanys Exchange rate was equal (assuming if it was equal) then the both of the workers in the two countries earn the same amount of money.
Mathematically; Cost in euros = cost in drachma *exchange rate If 1 Drachma had an exchange rate of 1 with the Germanys euro then Cost in Euro = 1 Drachma * 1 = 1 Euro
The euro and greece explained by European Union Centre , Indiana university ,
November 2011.
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But consider what would happen if the exchange rate was different between two of the countries. If 2 drachma equalled 1 euro then the equation could be like below
Cost in Euro = 1 Drachma * = .50 Then the equation shows that Greece was more competitive with respect to Germany as the same shirt was costing only .50 euros. Then Greece could have comparative advantage over the German industry. Consider the third case in which 1 drachma equalled to 2 Euros then the equation could change drastically
Now according to this equation Greece loses all its advantage to the German industry because the same shirt will cost you now 2 Euros which is twice the amount of Germany.
Soon after joining the Eurozone the wages in Greece and in European area started to increase drastically if we compare it with the German increase in wages, which was far less.
During year 2000 till year 2012 the wages increased 33.7 % as compared to only 0.6 % in Germany which actually has no comparison with the other EU states. Hence the total manufacturing cost of Greece increased manifold as compared to the other Eurozone member countries. This can be seen in the figure 43 on the next page. According to the figure Greece was on the highest landmark of increased wages and manufacturing cost followed by
Swiss bank .
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the immediate neighbours Italy and Spain. France remained in the middle. The best of all the countries was Germany. A comparison between Greece and Germany can be seen in Figure 5.
(Figure 4)
1. Increase the Production per hour 2. Decrease of wages 3. Devaluation of the currency.
The currency devaluing would have allowed Greece to sell its products at cheaper costs even the cost of good producing was ever increasing. But due to single currency EURO Greece was not able to control, regulate or deregulate the Currency as it gave up this right with the adoption of the euro. Hit Hard by the crisis, Greece in the present condition working hard to cover up the government deficits and take to revive of the economy. The austerity measures are hard and due to these the wages of Greece in the year 2012 reduced to 30 % whereas in Germany the increase in wages rate is about 10 % and it is expected that Greece would be back to the original level of competitiveness by the year 2015.
4.1. Inflation
Inflation is something very important which can be seen in the Greece economy and its contribution to the overall problems of Greece. For the reference purposes refer to the Figure 6 (next page).
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(Figure 6)
In the case of Greece, it happened for the first time in 45 years that the consumer prices actually adopted a deflationary pattern and as a result pushing the prices down due to high recession the country is in right now.
The rise and fall in the inflation of Greece can be seen in the perspective of different eras of time and during the different regimes that took over Greece.
1947 to 1974:
During the twenty years soon after the civil war that ended in the 1949, the average inflation of Greece remained to 4 % which was in accordance with the average of the OECD which was also 4 %.
1974 to 1994:
During this era that inflation rose sharply especially till 1990 to the level of 16 % which was about 10 % more as compared to the OECD member states which remained at the average of 4 %.
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Reasons for Convergence of Inflation Rate: Inflation convergence was due to the following reasons:
In spite of all the efforts, the inflation rate remained one % higher than the other EU member states till 2000. This was the point in spite of all the efforts, due to inflation, that Greece started to lose competitiveness in comparison to other member states, thus increasing wages, to fight the inflation which made the products costly rendering in loss of markets and internal imbalances.
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(Figure 7) After this the other term Greece was hit with stagflation. When the second oil shock hit the world the growth of economy was reduced from 7.2% in 1978 to 0.7 % in 1982. Inflation was increased during the period from 13.2 % to the all time high of the 22.5% in 1980.
In electoral 1980 , which was seen around the world as the world recession phase due to the oil shocks the Public debt of greece rose from the initial 2.3 % to the 9 % in 1981. The explosion of the Sovereign debt pr the public debt exploded in the coming years
Greece and Beyond: The debt Mechanism of Euro, by Mathias Baumgarten and Henning Klodt. Kiel institute of World Economy. Aussenwirtschaft 65 jahrgang (2010); Heft 4, Zurich. Ruegger p365-377
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1. Price Levels
The overall purchase levels are depicted by the overall purchasing power parities of the consumer price index of the deficit states as compared to the PPP of Germany = 100 considered. The purchasing power parity from 1991 to 2000 can be clearly seen in the Figure 8 below.
(Figure 8)
An explanation in the lower prices in the poorer states can be explained by the Balassa Samuelson Effect (see e.g; Siebert and Lorz 2006)5 which is International Trade tends to equalize the Prices of tradable goods, while the prices of nontradable goods (services) may differ across the state. Therefore the price levels raise so appreciably in the poor countries as compared to the rich or the wealthier states that it certainly takes them time to recover from the differences as when the countries with different economies and productivity level are united under single currency regime, then the productivity differences are eliminated and the aggregate price tends to increase sharply. This increase in aggregate prices without improvement in productivity level will render the poor country incapable of competing with the rich countries.
Greece and Beyond: The debt Mechanism of Euro, by Mathias Baumgarten and Henning Klodt. Kiel institute of World Economy. Aussenwirtschaft 65 jahrgang (2010); Heft 4, Zurich. Ruegger p365-377
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(Figure 9)
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(Figure 10) Todays deficit governments have the long history of Re-Financing7 their debts at the higher cost. This was the state of Greece in 1991. This was because of higher inflation rate of 13.2% and higher debt accumulation which was about 100 % as compared to the average 70 %8 of Euro zone. Due to the situation prevailed at that time, investors were not confident whether Greece would recover from the situation and were trust deficit. Second important thing that investor or the markets thought that the Government might go Insolvent and might not be able to repay their debt obligations which resulted in higher risk premium rates for Government bonds.
Re-Financing is the term used in Macroeconomics. Defining that Government Buy loans to finance their existing activities of government in case of Budget deficits. When they are not able to pay back their debts, they again need to borrow the huge loans to pay back the interests plus original amounts. this is called Re Financing 8 According to ECB the standard for Budget Deficit is 3% and the sovereign debt is about 60 %. The euro and greece explained by European Union Centre , Indiana university , November 2011.
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(Figure 11)
The very initial sign of this came in the year 2009 onwards when there has been seen a staggering difference in the Greek government bonds as compared to the German bonds. Therefore the serious crisis led to the trail of events which completely shattered by the global financial crisis and then at last the European union set up the
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special support program for the Greek government which with the active participation of IMF.
These bail out packages and their implications and the austerity measures will be dealt in the later section completely
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(Figure 12) The first bailout package for Greece was released in May 2010 and it amounted to 20bn. The 20bn was comprised of 5.5bn from International Monetary Funds (IMF) and 14.5bn from Eurozone. The bailout amount was received by Greece in the form of instalments. The first instalment for Greece was released in May 2010 amounting 20bn. The second and third instalments were released on 13th September 2010 and 19 January 2011 respectively. The fourth instalment amounting 10.9bn was approved on 16 March 2011 followed by fifth instalment on 2nd July 2011. The sixth and final instalment was paid out in December after a significant amount of delay amounting to 8bn.
taxes. There were many other implications and effects of first bailout, not actually according to the expectation of IMF and EU but they are discussed later in the implications section. According to IMF and EU, the first bailout package could have solved all the problems, which was very unrealistic and as expected, everyone saw that only one bailout package was not enough. At the same time, the Greek bond yield kept getting worse which was a sign for Greece getting kicked out of the private financial markets. Before even the first two years of the bailout 2010, the leaders of the euro countries decided to provide Greece with another bailout package amounting to 130bn. This bailout package was significantly important because without it the country default was on the edge.
reduction, cutting in public sector, elimination of social and benefits programs, increase in taxes, and structuring of pension systems. In the case of Greece the devaluation of currency was not possible due to the fact that Euro is used by all the countries in the Eurozone so the alternative of this was seen as decrease in salaries, wages and pension benefits. Greece and IMF/EU were very confident that the austerity measures would show positive and immediate results but within a few months of first bailout instalments, the measures back-fired. The small-sized business were not able to keep up and started to shut down at record levels. One of the worst hit factors is unemployment and the upward trend can be seen in figure 13.
(Figure 13) The employment rate for Greece got worse since 2010 (year of first bailout package) and it stands current at more than 27%. The age group which suffers the most from the unemployment is 15-24 years and the trend can be seen in Figure 14 (next page).
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(Figure 14) Tax revenues were also getting affected by austerity measures even though the general taxes were increased as well as across-the-border sales tax along with the reduction in the amount of income taxable. All these measures and changes were supposed to increase the tax revenues but the state revenues, according to GSA (Greek Statistical Authority), were lower in year 2011 as compared to year 2009, even though the year 2009 was actually pointed as the year of the absolute fiscal derailing (Malkoutzis and Mouzakis 2012). The inflation and purchasing power of Greek people is declining with every passing day and the proof is the negative growth in the GDP since 2008 and it took a deep dive in year 2010. The data can be seen in Table B. Table B:
Even after seeing such drastic effects of austerity measures which helped the recession get even deeper with every year and tax revenues falling, Greek government was and is still being pressured to take even more austerity measures.
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8. Conclusion
Greece is losing the race both economically and politically. With the loss of the countrys currency, we have also seen in previous parts of the paper that Greece has a high public debt and it is losing its competitiveness. According to our findings, it is not in the favour of Greece to leave EU because that would make it more difficult for Greece in the future to borrow as the costs will be much higher. It would be impossible or rather out of question for Greece to convert the current obligations from Euros into New Drachmas. Greek debtors would not be able to repay the loans because they will be way too expensive and that will lead to defaults from Greek investors and the associated Greek banks. We have also seen that the austerity measures of increase in taxes and spending cuts lead to a high unemployment rate and deep recession. The austerity measures provided Greece with fewer results and more economical and political issues which answers our research question that if austerity measures destroyed Greece more than helping it. If Greece and the trio EU, IMF and ECB follows the same pattern of austerity measures over and over again, Greece will have a deeper recession, the standard of living will keep getting lower and the country will be even more upset politically and all of this will not lead to anything but more debt and higher chances of default. By having a wage moderation system in order to keep low production cost, Greece could try to make it exports competitive thus moving towards an export-led growth. By making use of fiscal policies which act more like conservative, the government could encourage more savings and also think in the direction of privatization so that the burden is taken off it. This definitely is not an easy way because many money thirsty rich people from other countries are waiting to hear if privatization begins so that they can buy cheaply into that. Tourism and shipping are also two areas where Greece can focus some of its efforts for monetary gains. Even though trade is always the one to receive the maximum amount of focus but at the moment Greece has to do or die.
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It is very much clear at this point that Greece entered the EU before getting fully prepared both competitively as well as economically.
9. Bibliography
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http://lapasserelle.com/billets/greek_crisis.html
Angelos Antzoulatos, Adonis (2011) Greece in 2010: A Tragedy Without(?) Catharsis, International Atlantic Economic Society
Antzoulatos, Angelos Adonis. "Greece in 2010: A Tragedy Without(?) Catharsis." Thesis. International Atlantic Economic Society 2011, 2011. Springer (n.d.): 250-55.
De Grauwe, Paul (2009), The Euro at ten: achievements and challenges, Empirica 36 (1), pp. 520
Dunn, Bill. "The European Debt Crisis." Thesis. Department of Political Economy, University of Sydney, Pg. 1-3 Greece and the IMF. IMF. Web. 22 Dec. 2013. <http://www.imf.org/external/country/GRC/index.htm>.
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Husain, I., & Diwan, I. (Eds.). (1989). Dealing with the Debt Crisis. Washington, D.C: The World Bank.
K. Fouskas, Vassilis, (2012) Insight Greece: The Origins of the Present Crisis, Insight Turkey Vol. 14 / No. 2 / pp. 27-36
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Klodt, Henning & Baumgarten, Matthias (2010), Greece and Beyond: The Debt Mechanics of the Euro and, Aussenwirtschaft, 65. Heft IV, Zrich: Regger, S. 365 377
Martin Feldstein The Failure of Euro. Published in The Foreign Affairs, January/February 2012 Issue. http://www.nber.org/feldstein/fa121311.html.
Mathias Baumgartner and Henning Klodt Greece and Beyond: The debt Mechanism of Euro, by Mathias Baumgartner and Henning Klodt. Kiel institute of World Economy. Aussenwirtschaft 65 jahrgang (2010); Heft 4, Zurich.
Polychroniou, C. J. "GREECES BAILOUTS AND THE ECONOMICS OF SOCIAL DISASTER." Levy Economics Institute of Bard College, 2012. Web. 20 Dec. 2013.
Sauernheimer, Karlhans (2011), Greece: Bailout Packages, Current Account and Foreign Debt, Johannes Gutenberg University Mainz CESifo Forum
Thomsen, Karen Fasano. "What Measures Did Europe Take to Contain the Crisis?" (April 2012): 1-20.
Zahariadis, Nikolaos, (2010), Greece Debt Crisis A National Tragedy, Mediterranen Quarterly 21:4
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