Economic Crisis in Greece 2/23/14 Nkrumah1

LANCASTER UNIVERSITY GHANA

Economic Crisis in Greece
A look back into the future

Princess Fathia Nkrumah
2/23/2014





What you will find in the essay.
Contents
Introduction ................................................................................................................................ 3
History........................................................................................................................................ 3
Current ....................................................................................................................................... 5
Trends ........................................................................................................................................ 6
Future ......................................................................................................................................... 9
Conclusion ............................................................................................................................... 11
WORKS CITED ................................................................................................................... 12
References ............................................................................................................................ 13






Economic Crisis in Greece
A look back into the future


Introduction

In the words of Eugene ONeill (famed 20
th
century playwright), There is no present or
future, only the past, happening over and over again, now. The concepts that framed the
major economic crises of the past namely the Great American depression of the 1930s and
the casualties of the Weimer republic are seemingly echoed in the current economic crisis of
Greece. Regrettably unlike literal echoes, these seem to have an amplified effect.
This essay seeks to analyze the current economic crisis in Greece through an examination of
past economic conditioning leading up to the crisis as well as put forth possible predictions of
future economic status and provide possible solutions. However, the only way this can be
achieved is to look back into the future.
History
In the last three decades, various elements (often concerning its economic policies) that have
governed the state of Greece have brought it close to an impending bankruptcy. In order to
entirely observe the ongoing economic crisis, one must first examine the origins of Greeks
sovereign debt crisis.
The years following World War II, and the civil war that only ended in 1949, saw Greeces
macroeconomic performance as among the most impressive not only in Europe, but also in
the rest of the world. And so it was until the early 1970s when Greece had fallen victim to its
first oil shock. Amid the 1990s, Greece rose as one of the most promising and fastest growing
economies in the European Union (EU), even recording strong GDP growths that overtook
EU averages at the time. This growth can be credited to the low interest rates and
liberalization of Greeces financial sector which led to consumer credit and demand
expansion as well as large scale investments Economic growth recovered gradually during
the 1990s, inflation was gradually contained and public debt was stabilized relative to GDP.
The period of Euro participation between 2001 and 2008 was a golden era for the Greek
economy. Growth rates increased further, inflation remained subdued, although slightly
higher than the Euro area average, and unemployment fell. The public debt to GDP ratio was
stabilized and solvency was not a problem. Nevertheless, deficits quickly increased due to
poor organization and planning of public sector policies, government budgets tax evasions
and poor competitiveness of Greeces economy. This has since burdened Greece with low
international competitiveness and high public debt. Irwin Stelzer, a journalist for the Weekly
Standards explains one of the causes for their excessively high public debt stating, Greece
was eager to trade its drachma more the euro so that it could borrow at the lower interest rates
that membership made available, and then went on a borrowing spree (Stelzer 2010).

The chart below shows debt as a proportion of GDP (1999-2012) for Greece and a few other
Eurozone countries, which is the total amount a country's government (including local
government) owes divided by the total amount produced by its economy in the year. Greece
has been near the top of the debt league for some time. Portugal has also moved up the table
for the past few years with Estonia remaining at the bottom of the chart with very little public
debt.


Figure 0-1 (Government consolidated gross debt as a percentage of GDP)
Source: Eurostat


Current
In 2008 the world economy entered its most severe crisis since the Great Depression of the
1930s. The crisis rapidly spread to the real economy in the US, the European Union and the
rest of the world. Unfortunately, Greece felt what may be the hardest blow from the Global
economic crisis. In October 2009, the incoming government claimed that the previous
administration had concealed the extent of the deterioration of public finances in fiscal 2009.
However, the new government did not appear willing or ready to proceed with fiscal
adjustment. It has been noted that Greeces government tends to over regulate.

0.0
20.0
40.0
60.0
80.0
100.0
120.0
140.0
160.0
180.0
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Public debt as a percentage of GDP
Belgium Estonia Greece France Portugal
(Manolopoulos, 2011) states, Hundreds of bureaucratic procedures tie business people in
knots causing frustrating and pointless delays and additional costs. Currently, there is
virtually no global industrial competition, Greece is stuck in the past years and is unable to
compete with the modern world. Financial markets had come to treat the sovereign debt of all
EMU members as identical by the end of the 1990s, but after the Greek shocks, financial
markets stopped viewing Italian, Greek, Irish, Portuguese and Spanish debt as close
substitutes for German bonds, and they started hiking interest rates in the fall of 2008 to
compensate for the heightened risk of default. By January 2012, Greek debt had increased by
3,300 basis points. (See Figure 2.).

Figure 2 (Long term interest rate)
Source: DG II/Statistical Office European Communities/ Haver.
Trends


0
5
10
15
20
25
30
2008 2009 2010 2011 2012
Greece
Long term interest rate Rolling 12-Month Average
As a result of the Interrelations of world economies and policies, as aforementioned, 2008
global recession spread to Europe significantly damaging the Greek economy. Thus, the
European Union offered financial support to these EU member-states "to block the run on the
sovereign debt" (Haidar 8). However, since 2010 tensions within the EU about the ongoing
debt crisis have been amplified and reached a new high when the crisis' problem child,
Greece, first requested a bailout package (Spiegel par. 6). To this day, Greece has received
over 240 billion in financial aid, but its current economic situation is not stable (Spiegel
par. 6). To default Greece's bankruptcy, the EU announced that the 2010-founded European
Financial Stability Facility will be replaced with a new European Stability Mechanism in
2013 (Fouskas and Dimoulas 3).
A recurring trend in Grecian politics is the corruption that has become structural due to
frequent scandals over the years. Nevertheless, the framework of the political system makes it
nearly impossible to hold politicians accountable. The Greek constitution, specifically article
62 grants immunity for all government members. In other words, politicians are not subject to
arrests or imprisonment (Manolopoulos, 2011). Matthaios Tsimitakis in writing for May Day
International States:

Since the 1990s, there hasnt been a single government that hasnt been justifiably
accused of corruption and of favoring the interests of big domestic or foreign capital.
But its even worse. Although in most cases sufficient evidence has been presented,
not a single politician of the two ruling parties which have dominated politics for 35
years has ever been held accountable for his/her actions. (Tsimitakis 2001)


Austerity measures and fear of return to a weaker currency have also caused a gradual
withdrawal of funds from wealthy savers and investors from Greek banks. This is in order to
place their investments in stronger foreign currencies abroad. In mid-2012 there is still talk of
the Greek banking sys-tem collapsing. Financial reporting today refers to the Greek crisis
as Europes Lehmans moment (Gilbert and McCormick 2011), in reference to the parallel
with events in the United States in 2008 that triggered the worldwide cri-sis. There is
reference to Armageddon scenarios across Europe should the Greek government
negotiating austerities and bailouts fall in favor of seeking to default on its loans.
In addition, the tourism sector has naturally taken quite the beating due to the ongoing
economic crisis. Economic downturn and recession, fluctuating exchange rates, loss of
market confidence and withdrawal of investment funds mentioned above are classic causes of
a tourism crisis. The travel and tourism industry is susceptible to a wide range of internal and
external forces and is impacted heavily by crisis events resulting in negative tourist
perceptions (Pforr & Hosie, 2009). Greece is also undergoing a serious political crisis. The
combination of the economic and political crisis creates an explosive mixture and the
legitimacy of the political system is seriously questioned, as a significant part of the
population identifies a democratic deficit in the management of the crisis and is confronted
with a worrying image for the future (Lyrintzis, 2011). The collection of the above have
caused an immense damage to human resources an impact of falling GDP, rising
unemployment (see figure 3), cuts in wages and pensions, increases in taxes and cuts in
public services.
In these circumstances it is advisable to adjust with extreme caution the health expenditures,
especially those related to human resources. It is necessary to keep a lower rhythm of
reduction of expenditures in this sector to keep a level still "optimistic" in this area higher
than in other areas.
11.2
10.7
10.3
9.8
10.5
9.9
8.9
8.3
7.7
9.5
12.6
17.7
0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
16.0
18.0
20.0
Unemployment rates from 2000-2011
Series1








Future
The question here is not what the future holds for Greece but whether there would be a future
to speak of at all. The current state of despair in Athens is not surprising. Although a social
explosion (or even a revolution) may not be seen as very likely, it should not be ruled out. .
There remains support for staying in the euro and in the EU, despite a vocal anti-European
minority, but also anxiety about the path the EU is on. This could change if the economic
decline continues with no hope or glimmers of recovery visible for the next few years. Loans
are almost impossible to come by, Restoring liquidity to the banking system is urgent if
Greece expects to see any change in the near future. The European Unions decision to
extend Greeces time allotment for budget cuts is proving effective. The decision, which was
made roughly two months ago, calls for Greeces debt to reduce by 120 percent of GDP by
the year 2022. Olli Rehn, the E.U. commissioner for The Economic and Monetary Union,
claims, It is time to debunk the perception that no progress has been made. This perception
is damaging, it is unfair, and it is simply wrong. (EUROPA. N.p). A temporary fix to the
economy may be to grant Greece more time to settle its budget and debt problems. Though
Figure 3 (Unemployment rates from 2000-2011)
-7.1
-6.4
-3.5
-0.4
1.8
-1.3
1.4
2.3
-8.0
-6.0
-4.0
-2.0
0.0
2.0
4.0
2013 2014 2015
2011 2012 2013 2014 2015 Fourth quarter
REAL GDP percentage change from
previous year
Greece
this proposed solution wouldnt resolve the entire crisis, it would definitely point Greece in
the right direction towards improvement. Walking down countless streets in Athens or
Thessaloniki reveals a shocking display of stores and small businesses closed due to the poor
economic environment. Restoring these jobs would mean unprecedented improvement within
the economy, and the confidence of both consumers and workers would be reinstated. I know
that these resolutions are not the answers Greece is looking for due to the complexity of such
economic troubles.













Figure 4 (GDP percentage change predictions)

Conclusion
Although I agree with words of Eugene ONeill that, There is no present or future, only the
past, happening over and over again, now. It is not to say that society must sit back and
allow the failings of the past to be repeated. Instead the past must be used as a tool to
strengthen the present and the future. Only then can we avoid modern tragedies such as the
Greek crisis.
Greece is currently in a slippery slope down a downwards spiral with its deteriorating
economy and devastating social and political systems. The changes to be seen in Greeces
politics, whether it rebounds, its social directive, is critical in the years to come and will
depend on a variety of factors, it must be observed however that in the end, the political fate
of the nation of Greece is in its own hands.


WORKS CITED

"Time to Admit Defeat: Greece Can No Longer Delay Euro Zone Exit." Why Greece
Needs to Leave the Euro Zone. SPIEGEL ONLINE 2012, 14 May 2012. Web. 19 Feb
2014. http://www.spiegel.de/international/europe/why-greece-needs-to-leave-the-
euro-zone-a- 832968.html
Vice-President Rehns Remarks at the Eurogroup Press Conference. EUROPA.
N.p., n.d. Web. 26 Feb. 2013.
Ashgate, UK
Fouskas, Vassilis K., and Constantine Dimoulas. "The Greek Workshop of Debt and
the Failure of the European Project." Journal of Balkan & Near Eastern
Studies Mar. 2012: 1+. Academic Search Premier. Web. 21 Feb. 2014. <
http://www.tandfonline.com.proxy-
ub.rug.nl/doi/abs/10.1080/19448953.2012.656929>
Gilbert, Mark, and Liz Capo McCormick. 2011. Europes Lehman moment looms
as Greek debt unravels markets: Euro credit. Bloomberg, 16 June.
Greece. (n.d.). Central Intelligence Agency. Retrieved February 15, 2014, from
https://www.cia.gov/library/publications/the-world-factbook/geos/gr.html
Haidar, Jamal Ibrahim. "Sovereign Credit Risk in the Eurozone." (April 14, 2011)
World Economics 13.1 (2012): 1-15. Print.
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1811789
Kollintzas, T., & Bosworth, B. (2001). Economic growth in Greece: past performance and
future prospects. IMOP DP, 11.
Lyrintzis, C. (2011).Greek Politics in the Era of Economic Crisis:
Reassessing Causes and Effects. GreeSE Paper No 45, March 2011.
Pforr, C. & Hosie, P. (2009).Crisis Management in the Tourism Industry (Eds.).
Stelzer, Irwin. 2010. Greeces Financial Crisis: Tragedy or Farce? The Weekly
Standard, March 8 Retrieved February 15, 2014
(http://www.weeklystandard.com/articles/greece%E2%80%99s-financial-crisis).














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