A strategy for Greece out of the current economic, financial & sovereign debt crisis

Hausarbeit, 2014

34 Seiten


Table of Content

1. Abstract

2. Origin of the Crisis
2.1 Inefficient State Administration
2.1.1 Debt Structure
2.1.2 Corruption & Tax Evasion
2.1.3 Creative Accounting
2.2 Financial and Economic Challenges
2.2.1 Imbalance of Trade
2.2.2 Introduction of the Euro

3. Current Situation - Expectations versus Reality
3.1 Unemployment
3.2 Public Finances
3.3 Growth
3.4 Society

4. Implemented Strategies and Measures
4.1 First economic adjustment programme
4.2 Second economic adjustment programme
4.3 Special Facilities for Greece

5. Crucial Pillars for Greece
5.1 Growth of Greece Economy
5.1.1 Education
5.1.2 Sectorial Optimization Tourism Energy Manufacturing
5.1.3 Privatization
5.2 Efficient Governance
5.3 Financial Opportunities
5.3.1 Debt Cut
5.3.2 Third bailout

6. Questions

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Figure 1 | www.printart24.de

1. Abstract

Once famous for their beauty, friendliness and culture, Greece

- the land of gods - was climbing up the Olymp quickly. But the successes of “Rehakles” and the Olympic Games in 2004 have blurred the reality. Greece has nowadays a new profile: Excessive national debts, Recession, a suffering society and for most people a missing perspective. The current situation is the result after decades of bad economic decision-making and wrong governmental leading. Tina Gries and Dominik Ganswohl examined the Greek Crisis, analysed previously initiated measures and shaped strategies for Greece to get out of the current economic, financial and sovereign debt crisis - back to their old face.

2. Origin of the Crisis

2.1 Inefficient State administration

2.1.1 Debt Structure

After the Greek military Junta from 1967 to 1974 a sovereign and democratic political system was established. The development of that system within 29 years is remarkably low. The enormous apparatus of state, an inefficient administration and the waste of public funds over decades leaded to a harmful stagnation in the Greek Development. In 2008 over 1.022 million Greek worked in the public sector. This figure represents 22.3% of total employment in Greece. In 2012 Greece’s debt-toGDP ratio was the third highest in the world, after Japan and Zimbabwe. (www.sant.ox.ac.uk | www.cia.gov)

Andreas Papandreou, Prime Minister from 1981-1989 and 1993-1996 as well as founder of the important centre-left party PA.SO.K., nationalized insolvent companies, increased pensions and salaries of government employees. Within almost seven years the public debt rose from 34.5% of the nation’s GDP up to almost 70% between 1981 and 1989. (www.handelsblatt.com)

The Greece debt level inclined over decades. The development in the last years was the final straw. In 2009, governmental budget deficit reached a maximum of -15.6% of GDP. One Year later the total central government debt accounted for 147.8% of the nation’s Gross Domestic Product (GDP= US$ 271.112 billion). (www.oecd-ilibrary.org | stats.oecd.org | www.gfmag.com)

Ireland - a country that is also beneficiary of the ESM (European Stability Mechanism) had an almost identical debt rose in the past ten years, even if not on the same level.

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Figure 2 | www.imf.org | shows the debt-to-GDP ratio annually

Compared to Greece, after the injections of the trojka (European Commission, International Monetary Fund and the European Central Bank) the Irish economy did not decline any longer. In the last four years the Greek’s GDP was sinking 4.6% on an average. Ireland had a drastic shrink in 2009 with around 7%, but in the last two years their economy recovered and thus they could raise their real GDP up to 0.5%. Greece has a massive problem within their economy. The GDP per capita was decreasing in the last few years. In 2012 it dropped to $22,083. In the same year Ireland could show a per capita GDP of $45,836. (www.imf.org | www.oecd-ilibary.org)

2.1.2 Corruption &Tax Evasion

Greece has had to deal with a widespread corruption issue. At this the public sector has been mostly affected and still remains at the top of the petty corruption list. Hospitals, tax offices and construction-licencing bodies face the problem, even if Transparency International analysed in the 2012 National Survey that the level felt significantly in both Greece public and private sector. As an example the number of corruption incidents reported by Greek households dropped by 1.6% to 8.6%. This happened as a consequence of the financial crisis. Beside the corruption problem the government misses millions of taxes caused by the ongoing shadow economy, which is hard to stem because of the overall SME (small and medium-sized enterprises) structure in Greece. Here paying in cash provides an easy alternative to avoid paying tax. (www.transparency.org)

‘The shadow economy includes the production of goods and services, legal or illegal (e.g. drug trafficking), which escapes detection, and consequently is not calculated in the official Gross Domestic Product’ (Smith 1994, p. 18)

The same survey stated that ‘buildings built illegally can be approved later, accounts can be validated without being seen by a tax inspector, and, most worryingly given the role of budget opacity in the debt crisis, many Ministries have ‘special accounts’ to which normal rules of budgetary transparency do not apply’. People take advantage of the lack of auditing that should be done by the public entities, thus a Washington-based Brookings Institution estimated that corruption and tax evasion costs the government about 8% of the GDP annually. (media.transparency.org | Panagiotis Liargovas, 2013)

2.1.3 Creative Accounting

Konstantinos Simitis (Premier from 1996-2004) made Greece to a Member of the European Monetary Union (EMU). He made it possible that the Greek budget deficit shrank significantly, thus Greece had the opportunity to enter the Eurozone. Actually Simitis and his Government were masking national accounts and sent wrong figures to Brussels, so that they meet the divergence of the Maastricht Treaty. His successor Kostas Karamanlis made the real figures public and confessed that Simitis was publishing wrong figures in order to meet the 3% Convergence Criteria. (www.europa.eu)

After Karamanlis continued to falsify public figures, Giorgos

Papandreou (prime minister from 2009 to 2011) opened new figures. He admitted that the Budget deficit in 2009 was even higher than 10 per cent. Due to the European Financial Crisis and the instable economy, help of the European Union was necessary. (www.spiegel.de)

2.2 Financial and Economic Challenges

2.2.1 Imbalance of Trade

Regarding the nation’s current account it is obvious, that over years imports were considerably higher than the export of goods and services. In 2001 Greece had a deficit in their current account balance of € -10.6 million. Seven years later Greece reached a maximum deficit of € -34.8 million. The nation could diminish the deficit to € -21.1 Million in 2011.

On the contrary Ireland had a balanced current account, except in 2007 and 2008, where they recorded a deficit of more than € -10 million. In 2010 they achieved a positive current account.

Greece most important trading partners are Germany and Italy. This counts for imports as well as exports. Greece imports about 35% of its GDP. Cars, machines, groceries, chemicals and plastic, oil products, textile industry products, clothes, and metals are the most imported products. (epp.eurostat.ec.eu)

2.2.2 Introduction of the Euro

This Chapter deals with the development of labour unit costs, productivity and the problem of inflation after the introduction of the Euro.

Following the introduction of the euro in 1999 many countries found the origin of the euro area crisis in the credit boom. Those countries could easily lend money, which led to a strong growth in a wide range of sectors, notably housing, as well as higher levels of public spending. Inflation in these critical economies was higher than the euro area as a whole. This graph illustrates the costs of each unit of output produced. Those unit labour costs rose much faster than average over the past decade in credit boom countries like Greece. One Reason for the rising wages was the massive pressure of the Labour Unions. (www.bbc.co.uk | www.oecd.org)

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Figure 3 | www.oecd.org

Rising unit labour costs are the result of lower productivity or higher wages. After wages inclined dramatically in the last decade (in the public sector and the private sector), with the implementation of the austerity programmes wages felt drastically between 2010 and 2012. The citizen had to compensate the fact that they had to live with less money whereas paying the same prices.

3. Current Situation - Expectations versus Realization

Greeks government asked for assistance from the International Monetary Fund (IMF) and the European Union (EU). The organisations develop a program based on competitiveness and fiscal rebalancing to reduce the massive financial imbalance of the government. Fiscal restructuring was considered essential to bring back trust in public finances and restore the rebalancing among the external and domestic demand. The objective was to develop a structural reform package that resets competitiveness in medium term.

Expected was following:

- The peak of unemployment would be reached in 2012 with 14.8 per cent
- Economy started to grow in 2012
- Debt restructuring would not be needed
- The peak of debt ratio would be reached in 2013 with 149 % of GDP

(www.levyinstitute.org I www.bruegel.org)

Expectations versus reality

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Table 1 | Source: www.bruegel.org

EU-IMF assistance to euro-area countries: an early assessment


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A strategy for Greece out of the current economic, financial & sovereign debt crisis
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Dominik Ganswohl (Autor), 2014, A strategy for Greece out of the current economic, financial & sovereign debt crisis, München, GRIN Verlag, https://www.grin.com/document/266994


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