Europe and Greek Economic Crises

International Relations
Report



Presented to:
Miss Zenab Ali




Group members:

Moeen Qureshi
Hajra Sheikh
M. Fahad Khurram
Imran Rabbani
Abbas Raza
Ali Ammar Zaidi


Causes of Greek Economic crises

In January 2010 the Greek Ministry of Finance highlighted in their Stability and Growth
Program 2010 these five main causes for the significantly deteriorated economic results recorded
in 2009 :

GDP growth rates: After 2008, GDP growth rates were lower than the Greek national
statistical agency had anticipated. In the official report, the Greek ministry of finance
reports the need for implementing economic reforms to improve competitiveness, among
others by reducing salaries and bureaucracy, and the need to redirect much of its current
governmental spending from non-growth sectors (e.g. military) into growth stimulating
sectors.

Government deficit: Huge fiscal imbalances developed during the past six years from
2004 to 2009, where "the output increased in nominal terms by 40%, while central
government primary expenditures increased by 87% against an increase of only 31% in
tax revenues."

Government debt-level: Since it had not been reduced during the good years with strong
economic growth, there was no room for the government to continue running large
deficits in 2010, neither for the years ahead. Therefore, it was not enough for the
government just to implement the needed long term economic reforms, as the debt then
rapidly would develop into an unsustainable size, before the results of such reforms were
achieved. The report highlights the urgency to implement both permanent and temporary
austerity measures that - in combination with an expected return of positive GDP growth
rates in 2011 - would result in the baseline deficit decreasing from 30.6 billion in 2009
to only 5.7 billion in 2013, finally making it possible to stabilize the debt-level relative
to GDP at 120% in 2010 and 2011, followed by a downward trend in 2012 and 2013.


Budget compliance: Budget compliance was acknowledged to be in strong need of
future improvement, and for 2009 it was even found to be "A lot worse than normal, due
to economic control being more lax in a year with political elections.

Statistical credibility: Problems with unreliable data had existed ever since Greece
applied for membership of the Euro in 1999. In the five years from 2005
2009, Eurostat each year noted a reservation about the fiscal statistical numbers for
Greece, and too often previously reported figures got revised to a somewhat worse figure,
after a couple of years. In regards of 2009 the flawed statistics made it impossible to
predict accurate numbers for GDP growth, budget deficit and the public debt; which by
the end of the year all turned out to be worse than originally anticipated. Problems with
statistical credibility were also evident in several other countries, however, in the case of
Greece, the magnitude of the 2009 revisions and its connection to the crisis added
pressure to the need for immediate improvement.

Causes of the Eurozone Economic Crises

The Eurozone crises resulted from the combination of complex factors including the
globalization of finance, the financial crises of 2007-08 international trade imbalances
The crises subsequently spread to Ireland and Portugal while raising concern about Italy Spain
and European banking system
The current Eurozone crises has been unfolding since 2009 when a new Greek Government
revealed that previous Greek Government had been under reporting the Budget Deficit.
The fact that Greek debt exceeded $400billion and France owned 10%of that debt struck terror
into investor.
Violation To EU Rules
The very beginning of the story is actually coming back to earlier stages at the time European
nations were eager to form a monetary union that took several steps ending with the inception of
the euro in 1999 as many participants violated the conditions needed under the Maastricht Treaty
in 1992.
Banking Sector Problem
The European banking sector appeared to be vulnerable as it has showed a dramatic collapse
since it got involved in the global financial chain that was dragged down in the 2007 financial
crisis, which was buoyed by the burst of the mortgage bubble in the United States

Rating Agencies
It is clear that rating agencies have played a principle in letting the crisis reach what it has
reached so far as they continued, since the beginning of the crisis, to downgrade troubled euro
area nations due to the risks stemming from the debt crisis, causing further rise in bond yields
and tensions in bond market as well as creating difficulty in raising money by governments due
to the low trust Creditors had after the downgrade in their ability to repay at maturity.
Political Conflict

As is well known, politics and economics are two sides of one coin and the role of politics in the
debt dilemma cannot be ignored as the different political perspectives between parties having
different ideologies have created a kind of conflict between European decision makers as
Germany and other rich nations were on one hand refusing to let taxpayers pay for the crisis and
have refused any decisive methods including violation to their sovereignty while the other camp,
which is so-called peripheral nations, have been asking for more flexibility.




Greek debt crisis, Europe politics, the role of IMF and public opinion

Different countries have different standings in order fight against recession e.g.
Italy was looking towards Germany for bail out this crisis but Germany dont
want to bail out through debt financing as it creates political instability.
IMF plays an important role as they give bailout plan of 110 billion dollars to
Greece whose conditions are as follow:
Implementation of austerity measures, to restore the fiscal balance.
Privatization of government assets worth 50bn by the end of 2015, to keep the
debt pile sustainable.
Implementation of outlined structural reforms, to improve competitiveness and
growth prospects.

Despite of benefiting Greece it seems it doing further harm as it raises the cost of
capital , cost of doing business in economy and restricted active role of fiscal
policy which played an important role in boosted economy
Despite of several rescue plans from government and the IMF economy still is in
recession and not able to generate among people to fulfill their regular needs.
Public sentiments are really not going in favor of politicizes as new policies
advocating the increase in both tax rate and base which making turning middle
class families into poorer ones. Few major tax reforms are given below:
Solidarity Tax
Professional Tax
Consumer Tax
Enfia Tax

Analysis of Restructuring

The reality is that private creditors got the very best end of the deal while most actual and
future losses have been transferred to the official creditors [i.e. taxpayers]
Most of the gains in good times were privatized while most of the losses have been now
socialized.
Taxpayers of Greece's official creditors, not private bondholders, will end up paying for
most of the losses deriving from Greece's past, current and future insolvency
Taxpayers are now liable for more than 80% of Greece's debt
Only 15bn of 410bn total 'aid' to Greece" actually went into the country's economy, the
rest having been handed over to its creditors.
The second bailout was not geared to the requirements of the people of Greece but to the
needs of the international financial markets, meaning the banks.
It explains the fact that around a quarter of the package didnt even arrive in Athens but
went directly to the country's international creditors.
Massively reducing the liabilities of German and French banks with regards to Greece
thus also serves to protect US banks
The euro zone crisis management has been disastrous from its very beginning in 2009
2010.
Instead of tackling the problem head-on the EU has been dragging the problem more by
refusing to consider the problem as a European instead of a national one out of fear for
"moral hazard
The EU should have re-profiled the distressed Greek debt into jointly guaranteed
European debt and securitized part of it under EU guarantee, would have ended in one
fell swoop speculative movements and the debt crisis before even its outburst.



Ramifications

One of the major reasons for Greeces Economic crisis was the Understated Budget
deficit by the previous government, Such scenarios should be looked upon while Fiscal
budgets at the end of the year by EU
The Use of same currency, yet different tax rate in every country was one of the reasons
for deficit In euro throughout the economic crisis. Countries i.e. Greece should pull out
from such default treaties for time being and introduce their own currency for economic
betterment
Introduce a new procedure for macroeconomic surveillance, the Macroeconomic
Imbalance Procedure for future concerns.
The Task Force for Greece (TFGR) was launched by President Barroso in July 2011 to
provide technical assistance to the Greek authorities. Such Organizations should be made
for more vital reforms.
Deduction in Borrowing and investment on Greeces major Industries, Shipping and
Tourism should be made for Betterment of deficit
Assess the Foreign and Domestic Monetary policies.
Create more Deals to Release Foreign Rescue Funds
Attract more Foreign Investors for Euro to regain its strength in Exchange.
cuts to public sector salaries and pensions as well as tax increases
Creation of more employment and encouraging investors to rebuild strength economically and
improving GDP.