Seminar Paper, 2011
17 Pages, Grade: A
Joining the Eurozone
Budget Deficit and Debt
Direct Eurozone Reasons
In the last two years the severe debt crisis of Greece has posed a large challenge to the member states of the Eurozone. It is threatening the stability of the European Monetary Union (EMU). After having piled up over 300 Billion Euros of debt, in 2010 the market mistrust in Greece dramatically increased, especially as the newly elected government revealed the incorrectness of the financial statistics of previous years.1 Finally, on the 23rd of April 2010, Greece was threatened by national bankruptcy and requested help of the other Eurozone members and the International Monetary Fund.2 Although Greece is one of the smaller economies of the Eurozone3, its daring default has great effects on the whole community.
The current debt crisis of Greece suggests that the pre-crisis structure of the EMU bore weak points. To prevent such a debt crisis in future, it is necessary to explore the reasons which led to it and their connection with the EMU structure. This paper analyzes the main reasons and outlines possible improvements by detailed exploration of the Greek crisis.
First Greece’s entrance to the Eurozone will be investigated. After that, the major domestic problems which led to an ongoing deficit will be pointed out and the linkage to insufficient fiscal control will be established. Also the reasons attributed by the Eurozone such as the weak enforcement of the Stability and Growth Pact will be explored. Briefly, the Greek and international approach towards the crisis will be introduced. Before drawing a conclusion a brief summary of the consequences and their effects on the other Eurozone members is held.
When joining the Eurozone in 2001 Greece had already provided incorrect statistical data. Furthermore, Greece didn’t fulfill the Euro convergence criteria of the Maastricht Treaty4, which are a requirement to join the monetary union. To fulfill these criteria the deficit in relation to GDP should have been less than 3% and debt less than 60%.5 Therefore, Greece should not have rationally become a member of the Eurozone. This could even be judged as a fraud.6 7
Table 1: Comparison of original and verified Deficit Data rel. to GDP
illustration not visible in this excerpt
Table 1 provides a brief overview of the wide spread between the incorrect original and the corrected data provided by Eurostat.8 The minimum discrepancy can be observed in year 1999. It still equals 1.6% which is equivalent to a difference of 1.8 Billion Euro.
Already in this stage a major problem of the Eurozone’s present structure becomes evident: the Euro Group focused too much on quantity of member states instead of quality. The faulty data should have been uncovered before Greece’s entrance. This case demonstrates that precise examination was refrained from in favor of fast and superficially successful accession of the Eurozone.
That lax attitude of the Euro Group was further emphasized when after the discovery and correction of this fake data no consequences were drawn.
It also gives one a first hint that the Euro Group had and still has insufficient control over its member states.
Additionally, by joining the Eurozone Greece gave away its power over the monetary system.9 This hinders Greece to tackle its financial problems itself by depreciation, which could make the Greek economy capable of competing in the current stagnancy and could spur export-led growth.
Now, as Greece is a member of the Eurozone this popular tool cannot be utilized.
A monetary union of countries which have a heterogenic economic situation will naturally force the weaker ones into serious financial problems, as they can’t counter these by independent monetary measures such as depreciation.
Therefore it was quite likely that a country such as Greece would collapse after joining as it could not keep up.
The crisis consists of two domestic parts which are linked with each other. Firstly Greece had and still has a serious deficit problem. That means that the fiscal income is lower than the expenses. Secondly, because this deficit problem was not tackled early enough, it led into a serious debt problem.
Each year the Greek government has to finance its deficit with new debt. And the interest rate on the debt increases the deficit.
In many areas Greece has excessive spending. Especially the very inefficient public sector is prominent example.10 11 Afonso et al. analyzed the public sectors of various countries.12 Interestingly the countries which are currently facing problems in the Eurozone (Greece, Portugal, Spain, Ireland and Italy) have a significant under-average public sector performance in this benchmark. A correlation is very probable.
Another weak point is the expenditure structure of Greece. A high portion is spent for general public services, whereas Eurozone average is far lower.13
Also a further factor of emerging importance is the Greek public pension’s entitlement. As OECD has explored, this is one of the most generous among all of the OECD member countries.14 On one hand the retirement age is underneath average: 62.4 for men and 60.9 for women. On the other hand the average pension (relative to previous earnings) is 96% whereas OECD averages at about 52%. These factors are amplified by demographic change, meaning that a greater part of the population will shift to pensioners whereas the working part of the population will continuously shrink.15
Additionally, in the last years, also the opaquely and resulting corruption was often criticized.16 As Spiegel reported, for example in 2009 a per person average of 1355 € of bribes were paid.17
Last but not least, Greece also held a significantly high amount of public assets. As many economists argue, privatization is necessary to haul competition and efficiency.18 Reverse, this means that by mismanagement of these assets the Greek state also generates a lot of unnecessary inefficiency and expenditures.
On the other hand Greece has experienced only a small income. This can be traced back to various reasons. One obvious reason is the low tax rate on income. Also the underground economy is relatively large and resulting tax evasion gigantic.19 Until the beginning of the debt crisis the state only taxed about one third of all declared income with an average rate of about 30%.20 Both these effects are supported by a strong recession which begun striking Greece in 2010.21
One can observe that although the Greek state has many obvious and tremendous weaknesses, these were ignored for a long time. Why is this so?
First of all, although the members of the Eurozone have the same currency, the fiscal power is still in hands of local government. This is also the reason for insufficient insight into the member states’ balance.
Furthermore it is impossible for the Euro Group to control the local financial administrations and thus the economic situation.
This is a great contradiction for Eurozone itself, as the fiscal behavior of a single state has great effects on the rest of the Eurozone. Therefore it would be logical that fiscal control also would be Eurostat. Migration and Migrant Population Statistics. October 2010. http://epp.eurostat.ec.europa.eu/statistics_explained/index.php/Migration_and_migrant_population_sta tistics (accessed October 26, 2011). in the hand of the Euro Group. This would ensure that one member cannot affect the monetary union negatively.
After having decided to not abandon Greece out of the Eurozone although it never had met the convergence criteria, also the weak and insufficient sanctions for violations of the Stability and Growth Pact could not force Greece to more stability. The SGP sanctions are the only measure of the Euro Group to anticipate dangerous fiscal behavior of the member states. Nevertheless, in the past it has shown itself quite worthless, as it only can trigger a sanction proposal to the Council of the European Union which then decides by voting.22 Although more than 30 cases of violation of the SGP were filed, none has ever ended in sanctioning of the accused member state.
Figure 1: Debt and Deficit of Eurozone Members rel. to GDP
illustration not visible in this excerpt
1 Eurostat. "Provision of deficit and debt data for 2010."Eurostat News Release - Euro Indicators, April 26, 2010: 5.
2 Kitsantonis, Niki, and Matthew Saltmarsh. Greece, Out of Ideas, Requests Global Aid. April 23, 2010. http://www.nytimes.com/2010/04/24/business/global/24drachma.html (accessed October 15, 2011).
3 2010 Greek GDP was 230 Billion Euro compared to e.g. German GDP of 2,498 Billion Euro
4 Afterwards the Criteria of the Stability & Growth Pact which basically is the implementation of the Maastricht Criteria were violated too
5 European Union. Introducing the Euro: convergence criteria. July 12, 2006. http://europa.eu/legislation_summaries/other/l25014_en.htm (accessed October 26, 2011).
6 EurActiv, Reuters &. EU to take legal steps against fake Greek data. January 13, 2010. http://www.euractiv.com/euro/eu-take-legal-steps-fake-greek-data/article-188813 (accessed October 26, 2011).
7 Wienberg, Christian. Greece ‘ Cheated ’ to Join Euro. May 27, 2011. http://www.bloomberg.com/news/2011-05-26/greece-cheated-to-join-euro-sanctions-since-were-too- soft-issing-says.html (accessed October 26, 2011).
8 Eurostat. "Revision of the Greek Government Deficit and Debt Figures." 2004: 4.
9 Ravenhill, John. Global Political Economy. Oxford: Oxford University Press, 2008: 227-229.
10 Rhoads, Christopher. The Submarine Deals That Helped Sink Greece . July 10, 2010. http://online.wsj.com/article/SB10001424052748703636404575352991108208712.html?mod=WSJE UROPE_hpp_LEFTTopStories (accessed October 26, 2011).
11 BBC. Why Greeks venerate their 'inefficient' public sector. June 30, 2011. http://news.bbc.co.uk/2/hi/programmes/from_our_own_correspondent/9526090.stm (accessed October 26, 2011).
12 Afonso, Antonio, Ludger Schuknecht, and Vito Tanzi. "Public Sector Efficiency; An International Comparison."European Central Bank - Working Papers, July 2003.
13 OECD. "Government at a Glance: Greece." 2009.
14 OECD. "Greece at a Glance - Policies for a Sustainable Recovery." 2010.
16 Katsios, Stavros. "The Shadow Economy and Corruption in Greece."South-Eastern Europe Journal of Economics 1, 2006: 61-80.
17 Spiegel. Greek Corruption Booming, Says Transparency International. February 03, 2010. http://www.spiegel.de/international/europe/0,1518,681184,00.html (accessed October 26, 2011).
18 Starr, Paul. "The Meaning of Privatization."Yale Law and Policy Review 6, 1988: 6-41.
19 Katsios. "The Shadow Economy and Corruption in Greece.": 61-80.
20 Eurostat. "Taxation Trends in the European Union." 2007.
21 See GDP development.
22 European Union. Excessive deficit procedure. n.d.http://ec.europa.eu/economy_finance/economic_governance/sgp/deficit/index_en.htm (accessed October 16, 2011).
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