Ali El Samad
San Diego State University
Dr Hicham Foad
Econ 592
12/07/16 – First Draft
Introduction
The Eurozone is facing very serious debt crisis. Most of the countries in this zone are potentially unsustainable such that they borrow public debt. Greece since November 2009, became one of the countries which is experiencing such debt crisis after borrowing money from the public. The debt crisis is increasing as years goes by because there is very strong political and economic rivalry which exist between Europe and the US. Comment by Hisham Foad: This is a pretty bold statement. You need to briefly explain what you mean here. In what way did a rivalry between Europe and the US contribute to the Greek debt crisis?
In the year 2002, Greece had plentiful access to get capital with ease from true capital markets thus increasing assurance of investors which immediately implemented the euro in 2002. Mistake was that during this period, Greece was not utilising capital inflows to increase competition in the Greece economy, however European Union designed regulations to minimise public debt accumulation. Comment by Hisham Foad: Why was capital market access easier? It was because they joined the Eurozone, but more importantly it was because it appeared that they had met the convergence criteria for adopting the euro. It later turned out that the macroeconomic indicators Greece had published were incorrect, which is what triggered the capital flight that caused the debt crisis. Comment by Hisham Foad: Citation needed
It was the year 2009, when the government of Greece changed and the impact of the financial situation became evident. In that year, there was a budget deficit and the Gross Domestic Product (GDP) was less than the public debt in that same year. Greece had no ability to pay the debt so International Monetary Fund together with the European Central Bank came in to assist Greece to avoid default so that Greece can get back on track (Lapavitsas, 2010). Bailout injected vast amount of money towards the economy of Greece with the aim to make Greece return to the international Capital market within a period of four year, at the end of 2012. By the end of the targeted year the debt was increasing instead of reducing, since it was reported debt to be 175% above the GDP (Dinan, 2011). Comment by Hisham Foad: Find out the value of debt as a share of GDP in 2009 or better yet, create a chart showing the evolution of public debt as a share of GDP from 2002-2015.
Greece was shut in financial markets from borrowing money, during spring 2010 Greece was turning toward bankruptcy threatening to set off a new financial crisis. The bail-outs came along with terms and very harsh conditions. Creditors executed strict austerity conditions thus requiring steep tax increases and deep budget cuts. In addition, Greece was required to overhaul its own economy by ending tax evasion, alien government so that Greece made better place for business environment (Dinan, 2011).
The Funds was supposed to make Greece have a stable economy and remove market doubts that countries who were members of Eurozone had. The objective of Stabilizing Greece was not achieved because the economy of Greece shrunk by 25% within five years and unemployment had increased at an alarming rate. This was because the bailout funds mainly were channelled towards paying off international loans to reduce debts taken by Greece, rather than making its economy stable. Comment by Hisham Foad: Why not show GDP growth rates and unemployment rates in Greece over time (before and after the crisis)?
The government of Greece now need to continue considering economic overhauls required by the bailout agreement Prime Minister and unwind capital controls put forward after political disruption provoked a run on Greek banks (Buti & Carnot 2012). Relationship of Greece with Europe is in a fragile state because its leaders are impatient and drags administration behind.
A literature review
Greece debt crisis is attributed to many factors which contribute greatly towards the current state of its economy. There are critical elements which plays a critical role in the economy of Greece namely; Eurozone, fiscal policy and currency Unions. Currency Unions refers to agreements among members who share common currency without any further explanation about the individual economic status or financial institution. The currency union are guided by foreign exchange policy and monetary policy. Full centralization of monetary authority in a single joint institution to control the financial system and allowing state member to borrow money. In Europe, the financial institution that is responsible for currency unions is the European Central Bank. Some European countries resist unions and use their own currencies instead of using euros. Membership of countries by currency unions have impacts to economies of the countries.
Euro and Eurozone was first adopted in 19995 but in 2002 euro was accepted to be the official currency of the European Union. With time, the euro replaced the European Currency Unit (ECU). Eurozone is comprised of 17 from the 27 EU member nations. The euro is the second biggest and second trading currency after the dollar. There are benefits accrued joining the Eurozone such as
When crossing the borders, there is no need to exchange currencies and the vitality of currencies is reduced. In addition, the integration of both financial and economics within members of the EU, ensures economic discipline as well as improved sharing revenue, less financial risk and greater political and economic importance (Buti & Carnot 2012).
European Central Bank (ECB) is the institution of the European Union which is responsible for the monetary system. It was introduced in 1998 and currently is home to 17 members of the European Union. ECB work with other national banks and perform tasks such as, conduct foreign exchange, hold currency reserves, formulate monetary policy and approve the issuance of bank notes and ensures smooth operation of the financial market infrastructure in European countries.
However, when the country runs bankrupt, it is forced to borrow money from big financial institutions to run its economy. After Greece faced the financial crisis it borrowed some funds from the International Monetary Fund which is a financial aid organisation and the European Central Bank so that it can run its economy smoothly.
Discussion
Impacts Of The Greek Debt Crisis on the Euro
For the past few years the euro has fallen significantly in comparison to the (US) dollar. Many countries which are currently members of the Eurozone have great fear that the euro may be at risk. Many nations are exposed to the Greek bond debt. Agencies like PIIGS downgrade credit ratings of banking institutions worldwide (Lapavitsas, 2010). Without a strategy put in place to stabilise the economy of Greece therefore the euro is going to fall even further. A research shows that the exchange rate of the euro declines annually since the debt crisis of Greece. Figures below shows the Euro to U.S. Dollar Foreign Exchange Rate Comment by Hisham Foad: PIIGS is just an acronym for Portugal, Ireland, Italy, Greece and Spain: Eurozone countries that are in the midst or on the verge of a debt crisis. The reason these countries are grouped together is that their debt threatens the value of the euro since a debt crisis in these countries is likely to lead to a capital flight out of euros, which could then spill over to more stable economies like Germany.
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The euro exchange rate per the graph above has been declining since 2002, when the exchange rate was very high. In 2008 the exchange rate was at an all-time low and since then the euro has been experiencing fluctuations depending on the economic condition of the Eurozone members. After the introduction of Bailout to stabilise the economy of Greece things wer. Since 2011, Greece’s possibility to default debt became more realistic and the euro continued to fall. The major negative effects attributed to the exchange rate of the euro is directly attributed to the Greece debt crisis. Comment by Hisham Foad: ? Comment by Hisham Foad: What are the negative effects of a depreciation of the euro against the dollar? Who would be hurt by this? Is there any reason to believe that a weaker euro is exactly what is needed to stimulate output across Europe? Of course a problem here is that not every member of the Eurozone would prefer a weaker euro. Countries experiencing sluggish growth would benefit, since this boosts export competitiveness. However, countries that are trying to combat inflation will see a rise in living costs as the euro gets weaker.
Attempted Solutions
Austerity and bailouts were two distinctive measures taken by the ECB, IMF and the other sectors involved in addressing the Greek debt crisis. Bailout packages given out to Greece on 2010 had no impact on Greece economy since it moved closer to default despite substantial financial aid given out. Austerity measures are actions taken by the Greek government, during a time of an economic crisis so that the government reduces budget deficit using a strategy combined of both raising tax and cutting spending (Mitsopoulos & Pelagidis, 2010). European leaders fear that Eurozone members will either exit or default from the Eurozone.
Greece is experiencing a weakening relationship with private and public financial institutions which lent Greece money since austerity had an element of debt forgiveness. Also, the continuous necessity of the Greek government for bailout referendums has increased uncertainty about whether Greece can deal with its debts or not (Mitsopoulos & Pelagidis, 2010).
Comparison between Greece and Spain financial conditions
Greece has a deeper financial crisis compared to Spain’s and this is well evidenced by the fall of GDP. In Greece, it was found that it’s GDP had fallen by 25% while in Spain it GDP was reported to have fallen by 7% meaning that the Greek was in a crisis almost four times worse than that of Spain’s. Greece was given a bailout by the European Central Bank and the IMF using force unlike Spain (Arghyrou & Kontonikas, 2012). When it comes to unemployment rates, similarity was traced between both countries. Spain generated about 553,400 jobs (representing 14.5%) as compared to Greece which created 107,000 (representing 9.2%). The figure below shows unemployment rates in Spain and Greece.
![Figure 1. Unemployment rates in Greece and Spain, 2006-14 (%)]()
In Greece, the gross debt is very high compared to the Spain gross debt. Greece’s debt load was reported to be 175% while Spain’s debt load is reported to be only 60%. Generally current account surplus in GDP terms is roughly 1.5% for Greece as compared to Spain with 0.2%. Comment by Hisham Foad: If you only look at the most recent year for which we have data, both countries do have a current account surplus. However, this is driven by the sharp economic downturns in both countries (when income falls, people buy fewer imported goods.) If you were to look at current account balances over the past 6 years, you would see that both countries used to have current account deficits. While going from a deficit to a surplus implies that you are not accumulating new foreign debt, it does not necessarily mean that the economic situation in these countries is improving
Summary and Conclusions
This research finds that the corrective measures which were taken by the EU to fight the debt crisis and help retain stability of the Eurozone are not sufficient to solve the financial crisis. Therefore, policies should be put into place to ensure that the funds given out are used in a manner that will be sure to succeed. Financial institutions which assisted Greece with bailouts should also help Greece with financial advice on ways to get out their debt crisis. Greece’s financial crisis is a lot deeper than that of Spain’s evidenced by the fall of GDP. Finally, Spain’s economy creates five times more jobs than Greece’s economy.
A good start, but you don’t say too much about the causes of the debt crises in Greece and Spain. You should compare the causes and see to what extent these causes are similar and to what extent they differ. For example, the Greek debt crisis was primarily triggered by the announcement in 2009 that Greece had been understating its budget deficits for years. In the midst of the global financial crisis, this triggered a capital flight out of Greece. In Spain, the key driver was an unsustainable housing bubble. Both countries had debt crises that were magnified by inefficiencies in labor markets.
REFERENCES
Arghyrou, M. G., & Kontonikas, A. (2012). The EMU sovereign-debt crisis: Fundamentals, expectations and contagion. Journal of International Financial Markets, Institutions and Money, 22(4), 658-677.
Buti, M., & Carnot, N. (2012). The EMU debt crisis: early lessons and reforms. JCMS: Journal of Common Market Studies, 50(6), 899-911.
Dinan, D. (2011). Governance and institutions: Implementing the Lisbon Treaty in the shadow of the Euro crisis. JCMS: Journal of Common Market Studies, 103-121.
Lapavitsas, C. (2010). The Greek Crisis—Politics, Economics, Ethics: A Debate held at the Birkbeck Institute for the Humanities, Birkbeck College, University of London, 5 May 2010. Journal of Modern Greek Studies, 28(2), 293-310.
Mitsopoulos, M., & Pelagidis, T. (2010). Greek appeals courts’ quality analysis and performance. European Journal of Law and Economics, 30(1), 17-39.
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greece_case_on_debt.docx
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