Economy of Greece: Characteristics and Debt Crisis

Introduction

Economy Background

Greece joined the Organization of the North Atlantic Treaty (NATO) in 1952 and the European Union in 1981. Greece also joined the eurozone area in 2002. In the Europe region, Greece is ranked 43rd among Europe’s 44 nations, and its general rating remains below the regional and global averages. Recently, the economic freedom rating for Greece is 57.7 and making its economy the 106th freest in 2019 Index. With strong improvements in fiscal health and financial freedom exceeding a substantial decrease in judicial efficient, the general rating has raised by 0.

4 points. Due to the latest economic adjustment program in 2018, the government has faced an enormous policy constraint and meet with a large level of general government debt. Greece has made the growth in renovate macroeconomic stability and executing the initial fiscal adjustment, but the GDP is still consumed too much by the public sectors, and the job growth and productivity are obstructed by the rigid labour market. In August 2018, Greece left an eight-year bailout program after a $370 billion universal salvage bundle adapted on economic reforms and deeply disliked strictly measures.

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Economy growth has proceeded which is led by shipping and tourism, but the unemployment and public debt are still high. As usual, Greece’s economy has been based on agriculture. The sector constitutes 3.5% of GDP and utilizes 11.9% of the labour force. The major crops are tobacco and cotton which are the third-largest European producer. CITATION 19ht l 2052 (Foundation, 2019)

Causes of the Greek recession

The situation of the Greek recession is a possible result of the wrong policies applied in the last 25 to 30 years.

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This methodology is closely connected with monetary extravagance and insufficiency of Balkan nation government, unfair and infertile taxation system, unsustainable retirement, low competitive power, populist practices of political parties and organizational and political problems in European Union and Euro Zone. Greece became the tenth member of the European Union in 1981 and launched Euro as local currency. This was thought to bring more advantages and to accelerate the modernization of the economy. In the beginning, Greece has been benefited from the strength of the euro. It is like other nations in the euro area. This had brought such positive impacts to development, high inflation and credibility of economic policies. However, it was seen that it brought about some negative effects as well. Remarkable will increase public spending together with wrong political choices, causing serious problems in the competitive power of the country and big financial instability. During 2004, Greece has announced that it had lied on getting over the Maastricht Criteria. No sanctions were imposed by the EU because Germany and France were also spending up the limit at the time. There was uncertainty about precisely on what sanctions that should be applied. They may expel Greece, but that could weaken and disrupt the euro. The EU wants to reinforce the euro capacity in the international currency markets. A muscular euro can help to persuade other EU nations to accept the euro such as the United Kingdom, Denmark, and Sweden. This is quite vital to explain the case of Greece as the debt continued to increase until the crisis broke out in 2008. CITATION htt l 2052 (Amadeo, 2019)Effects of the Greek recession Quite a big part of the foreign debt is public debtIn the last 20 years, a dramatic increase is seen in Greece’s foreign debt. Greece loaned foreign debt at the rate of 4.1% of GDP every year during the 1990s and this increased to 10.2 % during 2000s. However, the state could not effectively use the money coming back from foreign debts to extend the assembly capability and nor may it understand the structural reforms to increase competitive power. An important portion of foreign debt is employed for import directed at consumption. Taxpayers are responsible for more than 80% of Greece’s debt. CITATION Ozt14 l 1033 (Ozturk & Sozdemir, 2014)

Fall in Global Competitiveness Index

Greece was at 83rd place in the Global Competitiveness Index in 2010, but it declined to 96th place in 2013. The erosion in competitiveness as well as chronic weakness of the Greek economy, explains the structure of the current deficit and why the export performance is lower than the other European countries. The imports by Greece is more than it exports so in other words, it consumes more than it produces. The state also provides several funding with foreign debt. CITATION Ozt14 l 1033 (Ozturk & Sozdemir, 2014) InflationEntry into the Eurozone provided Greece with an improved, stability-oriented condition. The foundation of the euro as the single currency establishes a major advance towards European combination. The European Central Bank was the watchman of monetary stability, while the Stability and Growth Pact should help guarantee financial control. These progressions were pivotal advantages for a nation carrying the experience of high expansion rates (being at twofold digit levels from the mid-80s to the mid-90s). Inflation rates were reduced from above 5% in the late 1990s to 1.2% in 2009, though the pattern has been rising again, because of negative impacts, for example, higher oil and nourishment costs and higher residential utilization taxes. Although inflation in the Eurozone time was low by the nation’s authentic standards, inflation was generally high by euro-territory measures. The differential with the euro zones remained high. This was expected not exclusively to the alleged Balassa-Samuelson Effect, yet additionally to different factors, for example, basic qualities of the economy connected to the failing of household markets (work market rigidities, i.e. long-term joblessness, low average occupation residency and parts, wage-setting foundations, for example, wage bartering is highly unified, wages increments in the public sector well above profitability development, and defects in the working of product markets), the determined falling of national investment funds and the effect of vitality costs on the performance of the most of sectors in the economy.CITATION Nic l 1033 (Apergis, 2011)Moreover, being a member of the Eurozone brought cheap loans and large inflows of capital. However, those capital inflows also led to inflation. Wage increases, adjusted for productivity changes, also were much higher than average increase in the other Eurozone member economies. Thus, the rapid rise of wage costs and mark-ups in excess of productivity growth has contributed to a wage-price spiral. With each cost and wages growing at high rates, fight declined. Over the period 2001-2009, competitiveness, as measured by consumer prices, declined by 20%, measured by unit labour costs declined by 25%. As a result, the current account deficit rose to about 14% of GDP by the end of 2008. CITATION Nic l 1033 (Apergis, 2011)

Youth unemployment

Teenagers in Greece are facing a serious problem after the job opportunity and employment rate occurred. Unemployment rate is increasing persistently apart from the third quarter of 2010. For the whole country, the employment rate decrease from 48% to 42% which is experienced by teenagers within 15-24 years while the employment rate of shared of employed teenagers within 15-29 years decrease from 31% to 25% CITATION Ann12 l 1033 (Tubadji, 2012)The youth unemployment situation has also aggravated political turmoil in Greece. In January 2015, Greece elected the populist far-left SYRIZA party which fought along anti-bailout, anti-austerity lines. This saw the electoral collapse of multiple establishment parties and the rise of both populist right and populist left forces as a youth attempt to change the economic landscape of Greece through politics. The unemployment situation happened created significant social tension as youths took to the streets to show-up their anger specifically in the 2008 Greek Riots as well as the anti-Austerity protests. The youth unemployment situation has also caused a mass exodus of youth from the country mostly to other EU member states with lower unemployment levels. Due to its economic woes, a lot of engineers, doctors, and technicians choose to leave Greece.CITATION Jes19 l 1033 (Bateman, 2019)

Effects on Other Countries’ Economies

For debt crisis, global markets shuddered after Greece shut its banks amid fears that the nation was headed toward default. Stocks slumped on Wall Street once markets in Europe were smitten by worries that the Greek debt crisis would prove contagious and Chinese investors preserved through another upside-down session. Bonds of the most uncovered European governments, including Italy and Spain, fell sharply, while their yields or interest rates, which move the other way of prices rose. The prices of bonds sold all rose although the countries sold the bonds which are considered safe investments, like Britain, Germany and the United States, all rose. The yield on the 10-year Treasury note tumbled to 2.33%. European markets fell considerably more. In Europe, Germany’s DAX lost 3.6% whereas France’s CAC-40 lost 3.7%. The People’s Bank of China, the nation’s central bank, decreased one-year loaning and deposit rates by a quarter rate point, effective on that weekend during the crisis, and reduced the reserves that a few banks are required to hold, enabling the citizens to loan more money. CITATION Jol15 l 1033 (Jolly & Bradsher, 2015)

Due to inflation, goods and services in Greece are much expensive than those in Germany. After Greece gives up independent monetary policy, they lost the ability to devalue its currency relative to that of Germany’s. This makes Greece’s trade balance become worse and increasing its current account deficit. While the German economy gets benefits from increased exports to Greece, lots of banks including German ones also get benefits from Greek borrowing to finance the importation of these cheap German goods and services. However, if borrowing costs remained low and cheap, and the Greek economy was still growing, such issues continued to be ignored. While Eurozone membership helped the Greek government to borrow cheaply to help Greece financing its operations when there is an absence of enough tax revenues. The use of a single currency shows a structural difference between Greece and other member countries, especially Germany, and aggravate the government’s fiscal problems. Compared to Greece, Germany had a much higher rate of productivity, making Greek goods and services are far less competitive. CITATION Mat19 l 1033 (Johnston, 2019)A greater increase in unemployment rates among migrants than natives during the economic crisis was observed which means that not only Greek but also many other developed countries that entered recession at about the same time. In most of these countries, as in Greece, the reason that has a larger increase of unemployment among migrants is because of the different sectoral distribution of their employment, given that migrant employment was heavily concentrated in certain sectors was hit hard by the crisis. Before the crisis happened in Greek, there are more than half of migrant men were employed in construction, while a large proportion of women were employed in private households. The truth is Greece in the year 2008 exhibited the highest values of all OECD countries on the dissimilarity index of occupational distributions of migrants and natives, for both men (42%) and women (44%). After the crisis, initially the unemployment of migrant women increased less than male migrants while their employment rate increased, which mean there is an increase in female labour force participation, probably is to counteract the loss of employment by men. CITATION Cav18 l 1033 (Cavounidis, 2018)

Conclusion

How is the Greek economy now? The existing economy in Greece is not so good. The GDP in recent years is very far larger than other crisis-hit eurozone countries. In 2019, the GDP is still 20% smaller than 12 years before. Besides, Greece has faced a huge fiscal adjustment. Outside power is rejected to give debt for Greece. This is because much of the money borrowed to Greece is to allow private borrowers to escape, on the excuse that this was a “systemic” crisis. Therefore, the Greek fall in global competitiveness due to its lower performance to other Europe countries. Other than fiscal adjustment, Greece also faces high unemployment rates. Besides, the government in Greek also decrease the tax revenues because the budget income is lower.CITATION Mar19 l 1033 (Wolf, 2019)

How the Greek recover their economy?

Although Greece’s economy faced a recession problem among these years, Greece has made a lot of improvements to enhance its economy. Greece tries to recover its economy by improving positive developments to the assessment of future performance. For example, Greece expects growth from around 2% in 2018 to expedite to almost 2.5% this year. Greece becomes the upper tier in the eurozone growth table. It will make the probability of unemployment become lower, but it cannot be accepted by teenagers. Besides, the government also use their ambitious fiscal targets and meeting with European member states, though not without some cost to growth. Therefore, two successful government bond issuances have been established the market access this year. Furthermore, Greece has improved the labour market flexibility and boost the efficiency of production. Greece needs to seek solutions to assist workers on how to preserve customers through managing the rigidities in labour markets, but also help reduce unnecessary costs for firms. Besides, Greece can do more to assist in the growth of improving fiscal policy. For example, the tax rates can be reduced by Greece and still can raise the revenues to increase investment and targeted social spending. Lastly, Greece’s government should always fix the banks. This will help the business to borrow interest rates is reasonable. These policies can also stimulate more growth and strengthen the resilience of the Greek economy to future shocks. CITATION Gre19 l 1033 (Greece: Economy Improves, Key Reforms Still Needed, 2019)

References

BIBLIOGRAPHY

  • Amadeo, K. (25 June, 2019). Greek Debt Crisis Explained. Retrieved from
  • Apergis, N. (January, 2011). Characteristics of inflation in Greece: Mean Spillover Effects among CPI Components. Retrieved from
  • Bateman, J. (1 July, 2019). Greek election: Why frustrated young voters are turning conservative. Retrieved from
  • Cavounidis, J. (21 November, 2018). The migration experience of Greece and the impact of the economic crisis on its migrant and native populations. Retrieved from
  • Foundation, T. H. (2019). 2019 Index of Economic Freedom. Retrieved from
  • Greece: Economy Improves, Key Reforms Still Needed. (12 March, 2019). Retrieved from
  • Johnston, M. (25 June, 2019). Understanding the Downfall of Greece’s Economy. Retrieved from
  • Jolly, D., & Bradsher, K. (29 June, 2015). Greece’s Debt Crisis Sends Stocks Falling Around the Globe. Retrieved from
  • Ozturk, A., & Sozdemir, A. (31 October, 2014). Effects of Global Financial Crisis on Greece Economy. Retrieved from
  • Tubadji, A. (November, 2012). Youth Unemployment in Greece: Economic and Political Perspectives. Retrieved from
  • Wolf, M. (20 May, 2019). Greek economy shows promising signs of growth. Retrieved from

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Economy of Greece: Characteristics and Debt Crisis. (2019, Dec 19). Retrieved from https://studymoose.com/economy-of-greece-characteristics-and-debt-crisis-essay

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