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Greek Economic Crisis


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Greek Economic Crisis

  1. 1. Universite La Sagesse Greek Crisis 1 2015 1 Faculty of Business Administration & Finance Advanced Managerial Finance Dr.Charles Manih The Greek Economic Crisis Summer 2015 Prepared by: Nour Balhawan Lama Nassar Youssef El Zein
  2. 2. Universite La Sagesse Greek Crisis 2 2015 2 Table of Contents Page 1. Introduction……………………………………………………3 2. Start and initiation of the European Union……..4 3. Greece Joining the European Union………………..5 4. Greek Olympics of 2004…………………………………8 5. 2008 World Crisis…………………………………………13 6. Repercussions of Crisis on Europe and Greece..16 7. Beginning of Greek Crisis……………………………20 8. Austerity and Reforms……………………………….26. 9. Lucas Papademus…………………………………….30 10. Antonis Samaras…………………………….32 11. Alexis Tsipras………………………………….35 12. Public Sensus and recent updates…….38
  3. 3. Universite La Sagesse Greek Crisis 3 2015 3 Since the introduction of modern economics, trade unions have been known to increase and facilitate production and efficiency of nations. NAFTA, ASEAN, GCC, and the European Union are the world's most renowned trade unions to be working under the supervision and guidance of WTO for decades now. The concept of a trade union, a group of countries usually with geographic proximity, coordinating together for specialization of production, reduced taxes and custom duties, proved to be a success in most of the cases until this day. Nowadays, we are all hearing and reading about the Greek economic crisis and its implications on the world economy, and the European economy especially. Greece is the 1st developed economy to default on IMF loans, how did it get here? How did the crisis start and how is it going to end? Will it really have an impact on its region and surrounding countries? Will the European Union be able to survive this crisis and help Greece? We will discuss all those questions and further more in the following paper. First, let's remember a bit how the European Union started and when. What were its goals, and who were the main players that initiated it. Back in 1991, the European Economic Community, represented by the following states: Belgium, France, Germany, Italy, Luxembourg, and the Netherlands, convened in Maastricht, Netherland, and signed what is known as the Maastricht Treaty on December 10, 1991. As it came in force on November 1st 1993, it lead to the creation of the
  4. 4. Universite La Sagesse Greek Crisis 4 2015 4 European Union, and the adoption of a single currency, the Euro. This treaty was then amended by the treaties of Lisbon, Nice, and Amsterdam. Earlier agreements between those founding partners of the EU included Coal and Steel community in 1951, and the European Economic Community in 1957. This community was more ambitious on the economic level, rather than political, and aimed at establishing a single or common market where goods, services, capital, and people could move freely within those states. Completion of the single market in the late 1980s and early 1990s had a powerful magnetic effect on Austria, Finland, Norway, Sweden, and Switzerland, which applied to join the EU. Between 1973 and 2004 the EU grew from six to twenty-five member states. On January 1st 1994, European Economic area came into force, giving birth to European Free Trade Association (EFTA) and the Single European Market. The Schengen Agreement (signed in 1985) came into effect on 26 March 1995 between Belgium, France, Germany, Luxembourg, Netherlands, Portugal and Spain. Austria signed up on 28 April followed by Denmark, Finland and Sweden, alongside non-EU members Norway and Iceland, on 19 December 1996. On 22 July 1997, leaders of the Western European Union met and adopted a declaration in the city of Amsterdam that was signed by foreign ministers on 2 October. The treaty entered into force on 1 May 1999.It sought to create an "area of freedom, justice and security". There would also be institutional reforms to make the Union more democratic and adjust it to enlargement. Another main outcome of Amsterdam treaty is the European Central Bank.
  5. 5. Universite La Sagesse Greek Crisis 5 2015 5 Established in 1998, headquarters in Frankfurt, Germany. The owners and shareholders of the European Central Bank are the central banks of the 28 member states of the EU. The primary objective of the European Central Bank, as mandated in Article 2 of the Statute of the ECB, is to maintain price stability within the Eurozone. The basic tasks, as defined in Article 3 of the Statute, are to define and implement the monetary policy for the Eurozone, to conduct foreign exchange operations, to take care of the foreign reserves of the European System of Central Banks and operation of the financial market infrastructure. The ECB reserves the right to issue all Euro banknotes and coins under article 16 of its Statute. The ECB is governed by European law directly, but its set-up resembles that of a corporation in the sense that the ECB has shareholders and stock capital. Its capital is five billion euro held by the national central banks of the member states as shareholders. Regarding Greece, it was first introduced to the European Union in 1981. At first, they had their doubts into full integration in the EU and were skeptical about the goals and interests on the Union. On later stages, Greece started having pro- adoption policies as steps into full integration. Moreover, as of 1987 Greece projected as its main goal the accession of Cyprus to the European Community. For this purpose, Greece supported the Nicosia Government in their application for accession, submitted in June 1990. The third period of Greece's participation in the Community / Union commenced in 1996 and has been characterized by even further support for the idea and process of European integration and increasing
  6. 6. Universite La Sagesse Greek Crisis 6 2015 6 integration in every department, going in compliance with the suggested federal model. It is also characterized by an effort towards greater economic and social convergence with the fulfillment of the "convergence criteria". Greece's participation as a full member in the single currency (euro) and the Economic and Monetary Union (EMU) since January 1, 2002. Strategically located at the northeastern corner of the Mediterranean Sea, Greece forms the southern tip of the Balkan Peninsula in south-east Europe. Its territory includes several hundred islands in the Aegean, Ionian and Mediterranean seas, of which only 227 are inhabited. Eighty per cent of Greece is mountainous and Mount Olympus is the highest point in the country (2 917m). The most important sectors of Greece’s economy in 2014 were wholesale and retail trade, transport, accommodation and food services (26.3 %), public administration, defense, education, human health and social work activities (20.8 %) and real estate activities (18.5 %). Greece’s main export partners are Turkey, Italy and Germany while its main import partners are Russia, Germany and Iraq. Greece has 21 members of the European Parliament, out of 751. The European Parliament is a directly elected body every 5 years with legislative, supervisory, and budgetary responsibilities. The last elections were in May 2014. Another governing body in EU is the European Council. The Council of the EU doesn't have a permanent, single-person president. Instead, its work is led by the country holding the Council presidency, which rotates every 6
  7. 7. Universite La Sagesse Greek Crisis 7 2015 7 months. During which ministers from that country's government chair help and determine the agenda of Council meetings in each policy area, and facilitate dialogue with the other EU institutions. Greece held the presidency of European Council on the following dates: Jul-Dec 1983 , Jul-Dec 1988 , Jan-Jun 1994 , Jan-Jun 2003 , Jan-Jun 2014. In the Council of the EU, national ministers meet regularly to adopt EU laws and coordinate policies. Council meetings are regularly attended by representatives from the Greek government, depending on the policy area being addressed. Greece has 12 representatives on the Committee of the Regions, the EU's assembly of regional and local representatives. This advisory body is consulted on proposed laws, to ensure these laws take account of the perspective from each region of the EU. Greece also communicates with the EU institutions through its permanent representation in Brussels. As Greece's "embassy to the EU", its main task is to ensure that the country's interests and policies are pursued as effectively as possible in the EU. Member countries' financial contributions to the EU budget are shared fairly, according to means. The larger your country's economy, the more it pays – and vice versa. The EU budget doesn't aim to redistribute wealth, but rather to focus on the needs of all Europeans as a whole. Breakdown of Greece's finances with the EU in 2013:
  8. 8. Universite La Sagesse Greek Crisis 8 2015 8  Total EU spending in Greece – € 7.215 billion  Total EU spending as % of Greek GNI – 3.97 %  Total Greek contribution to the EU budget – € 1.794 billion  Greek contribution to the EU budget as % of its GNI – 0.99 % After this general overview of Greece and its participation in EU, we will start tackling how and when the economic crisis we are now witnessing has started, and what were the main reasons behind it. Back in 2004, Athens hosted the 2004 summer Olympics. The Helliniko Olympic Complex in Athens was supposed to be thriving long after the 2004 Summer Olympics had ended. There were big plans to turn much of the complex into the largest metropolitan park in Europe, but that never happened, largely because of the bureaucracy that hampers most development in Greece. Today, the complex sits amid overgrown weeds, virtually deserted. Hosting the Olympics certainly isn’t the main cause of the financial mess. Greece has a long history of systemic problems with labor productivity, public- sector debt and corruption at the core of its lack of growth. It came at a moment when the euro, which Greece adopted a few years before, had brought the country a remarkable degree of wealth in a short period of time. But in fact, the 2004 Olympics were a microcosm of Greek economic dysfunction: missed budget estimates, poor planning, and financial mismanagement.
  9. 9. Universite La Sagesse Greek Crisis 9 2015 9 It cost Greece about $11 billion, at least double what the Greek government had initially budgeted , that doesn’t include the money the country has spent trying to maintain its rarely used Olympic facilities over the past eight years. It was forced, mainly by the U.S. and the U.K., to spend $1.2 billion on security alone because of fears over terrorism, and in the months leading up to the opening ceremonies, Athens had to rush its schedule just to get construction projects completed on time. For years, studies have shown that holding the Olympics often has severe negative economic effects on host cities, despite the temporary burst of tourism and global attention. The competition between cities often causes governments to go financially overboard merely to win an Olympic bid. Once construction gets under way, governments often fail to budget properly. And after the Games are over, many cities are left with infrastructure that suddenly has no real use. Not everyone, however, accepts that rationale. Some argue, for instance, that hosting the Olympics brings cities much-needed infrastructure projects. “Because of the Games, we now have the metro, a new airport and new roads,” says Isidoros Kouvelos of the Hellenic Olympic Committee. On the other hand, others claim that no one wants to talk about the Olympics. “Many Greeks believe the 2004 Games was all built on a big lie", a lie that we had the money to pay for all these lavish centers and ceremonies. Perhaps, the huge increase in spending that year was the kick-starter of Greek debt. Those 11 billion most probably could
  10. 10. Universite La Sagesse Greek Crisis 10 2015 10 never had been spent, if the mother of Olympics, hadn’t chosen to host them again. And maybe this gap in spending and borrowing could never have been created. The timing of those games was also very critical, a couple years before the world crisis, nobody knew what the upcoming years were bringing to the world economy. And especially the European Union. The years that followed, the next Olympics ceremony to be precise in 2008, witnessed the world's worst economic depression since decades, and that will be discussed along with its effects on Greece in the following graphs and paragraphs:
  11. 11. Universite La Sagesse Greek Crisis 11 2015 11
  12. 12. Universite La Sagesse Greek Crisis 12 2015 12
  13. 13. Universite La Sagesse Greek Crisis 13 2015 13 The Financial Crisis of 2008 In 2008 the world economy faced its most dangerous crisis since the Great Depression of the 1930s. The contagion, which began in 2007 when sky-high home prices in the United States finally turned decisively downward, spread quickly, first to the entire U.S. financial sector and then to financial markets overseas. The casualties in the United States included the entire investment banking industry, the biggest insurance company, the two enterprises chartered by the government to facilitate mortgage lending, the largest mortgage lender, the largest savings and loan, and two of the largest commercial banks. The carnage was not limited to the financial sector, however, as companies that normally rely on credit suffered heavily. Still more ominously, banks, trusting no one to pay them back, simply stopped making the loans that most businesses need to regulate their cash flows and without which they cannot do business. Share prices plunged throughout the
  14. 14. Universite La Sagesse Greek Crisis 14 2015 14 world—the Dow Jones Industrial Average in the U.S. lost 33.8% of its value in 2008—and by the end of the year, a deep recession had enveloped most of the globe. In December the National Bureau of Economic Research, the private group recognized as the official arbiter of such things, determined that a recession had begun in the United States in December 2007, which made this already the third longest recession in the U.S. since World War II. Each in its own way, economies abroad marched to the American drummer. By the end of the year, Germany, Japan, and China were locked in recession, as were many smaller countries. Many in Europe paid the price for having dabbled in American real estate securities. Japan and China largely avoided that pitfall, but their export-oriented manufacturers suffered as recessions in their major markets—the U.S. and Europe—cut deep into demand for their products. Less- developed countries likewise lost markets abroad, and their foreign investment, on which they had depended for growth capital, withered. With none of the biggest economies prospering, there was no obvious engine to pull the world out of its recession, and both government and private economists predicted a rough recovery. The Crisis unfolds The first major institution to go under was Countrywide Financial Corp., the largest American mortgage lender. Bank of America agreed in January 2008 to terms for completing its purchase of the California-based Countrywide. With large shares
  15. 15. Universite La Sagesse Greek Crisis 15 2015 15 of Countrywide’s mortgages delinquent, Bank of America was able to buy it for $4 billion on top of the $2 billion stake that it had acquired the previous August—a fraction of Countrywide’s recent market value. There were competing theories on how so many pillars of finance in the U.S. crumbled so quickly. One held the issuers of subprime mortgages ultimately responsible for the debacle. According to this view, when mortgage-backed securities were flying high, mortgage companies were eager to lend to anyone, regardless of the borrower’s financial condition. The firms that profited from this— from small mortgage companies to giant investment banks—deluded themselves that this could go on forever. Joseph E. Stiglitz of Columbia University, New York City, the chairman of the Council of Economic Advisers during former president Bill Clinton’s administration, summed up the situation this way: “There was a party going on, and no one wanted to be a party pooper.” As alarming as the blizzard of buyouts, bailouts, and collapses might have been, it was not the most ominous consequence of the financial crisis. That occurred in the credit markets, where hundreds of billions of dollars a day are lent for periods as short as overnight by those who have the capital to those who need it. The banks that did much of the lending concluded from the chaos taking place in September that no borrower could be trusted. As a result, lending all but froze. Without loans, businesses could not grow. Without loans, some businesses could not even pay for day-to-day operations.
  16. 16. Universite La Sagesse Greek Crisis 16 2015 16 The Bush administration did little with tax and spending policy to combat the recession. Sen. Barack Obama, who was elected in November to succeed President Bush as of Jan. 20, 2009, prepared a package of about $1 trillion in tax cuts and spending programs to stimulate economic activity. International Repercussions Although the financial crisis wore a distinct “Made in the U.S.A.” label, it did not stop at the water’s edge. The U.K. government provided $88 billion to buy banks completely or partially and promised to guarantee $438 billion in bank loans. The government began buying up to $64 billion worth of shares in the Royal Bank of Scotland and Lloyds TSB Group after brokering Lloyds’ purchase of the troubled HBOS bank group. The U.K. government’s hefty stake in the country’s banking system raised the specter of an active role in the boardrooms. Barclays, telling the government “thanks but no thanks,” instead accepted $11.7 billion from wealthy investors in Qatar and Abu Dhabi, U.A.E. Variations played out all through Europe. The governments of the three Benelux countries—Belgium, The Netherlands, and Luxembourg—initially bought a 49% share in Fortis NV within their respective countries for $16.6 billion, though Belgium later sold most of its shares and The Netherlands nationalized the bank’s Dutch holdings. Germany’s federal government rescued a series of state-owned banks and approved a $10.9 billion recapitalization of Commerzbank. In the banking centre of Switzerland, the government took a 9% ownership stake in UBS. Credit
  17. 17. Universite La Sagesse Greek Crisis 17 2015 17 Suisse declined an offer of government aid and, going the way of Barclays, raised funds instead from the government of Qatar and private investors. The most spectacular troubles broke out in the far corners of Europe. In Greece street riots in December reflected, among other things, anger with economic stagnation. Iceland found itself essentially bankrupt, with Hungary and Latvia moving in the same direction. Iceland’s three largest banks, privatized in the early 1990s, had grown too large for their own good, with assets worth 10 times the entire country’s annual economic output. When the global crisis reached Iceland in October, the three banks collapsed under their own weight. The national government managed to take over their domestic branches, but it could not afford their foreign ones. In an atmosphere that bordered on panic, governments throughout Europe adopted policies aimed at keeping the recession short and shallow. On monetary policy, the central banks of Europe coordinated their interest-rate reductions. On December 4 the European Central Bank, the steward of monetary policy for the euro zone, engineered simultaneous rate cuts with the Bank of England and Sweden’s Riksbank. A week later the Swiss National Bank cut its benchmark rate to a range of 0–1%. On fiscal policy, European governments for the most part scrambled to approve public-spending programs designed to pump money into the economy. The EU drew up a list of $258 billion worth of public spending that it hoped would be adopted by its 27 member countries. The French government said that it would
  18. 18. Universite La Sagesse Greek Crisis 18 2015 18 spend $33 billion over the next two years. Most other countries followed suit, though Germany hung back as Chancellor Angela Merkel argued for fiscal restraint. By year’s end, all of the world’s major economies were in recession or struggling to stay out of one. In the final four months of 2008, the U.S. lost nearly two million jobs. Forecast after forecast showed lethargic global economic growth for at least 2009. “Virtually no country, developing or industrial, has escaped the impact of the widening crisis,” the World Bank reported in a typical year-end assessment. It forecast an increase in global economic output of just 0.9% in 2009, the most tepid growth rate since records became available in 1970. Measured by its impact on global economic output, the recession that had engulfed the world by the end of 2008 figured to be sharper than any other since the Great Depression. The two periods of hard times had little else in common, however; the Depression started in the manufacturing sector, while the current crisis had its origins in the financial sector. Perhaps a more apt comparison could be found in the Panic of 1873. Then, as in 2008, a real estate boom (in Paris, Berlin, and Vienna, rather than in the U.S.) went sour, loosing a cascade of misfortune. The ensuing collapse lasted four years.
  19. 19. Universite La Sagesse Greek Crisis 19 2015 19 The Greek Debt Crisis: Origins and Implications The financial crisis that unfolded in mid-2008 led to a dramatic increase of public debt in many advanced economies. During the recent months, we have seen the transformation of the 2007 US subprime mortgage loan market crisis into a sovereign debt crisis in the Eurozone. This overwhelming increase in the public debt has been to some extent the outcome of the effort by the governments to reduce the private debt that was accumulated during the years preceding the recent financial turmoil (De Grauwe, 2010). Based on the ECB Quarterly Euro Area accounts for the years 1999 – 2010, a number of observations can be made. First, there are periods during which private debt increased substantially in the eurozone whereas there are other periods that private debt has been reduced with a great speed. Second, during periods of economic booms, private debt has risen by an accelerating rate. Third, for the whole period the increase in private debt was substantially greater than the percentage increase of public debt. The Greek debt crisis that began in late 2009 was followed by respective fiscal and banking crisis in Ireland, Portugal, Spain and recently Italy. The entry of Greece in the euro area and the adoption of euro in 2001 gave to the economy a reduction in interest rates never experienced before. Following the announcement of the Greek government in 1994 that it intended to take the necessary steps to fulfill the Maastricht criteria in order to bring Greece in the euro area by 2001 the nominal interest rate on 10-year Greek government bonds declined from about 20
  20. 20. Universite La Sagesse Greek Crisis 20 2015 20 per cent to 3 and a half percent in 2005. As the Greek financial crisis erupted in late 2009, interest rates began to rise substantially with the 10-year government bond yield increasing to almost 27 per cent at the beginning of November 2011 (see Hardouvelis, 2011a, b). The adoption of the euro gave several benefits to all its members, particularly to countries like Greece with historical high levels of inflation and lack of economic policy credibility. Thus, the introduction of the euro supported by the monetary policy of the ECB led to a reduction of inflation and inflation expectations in countries with high inflation experience and thus reducing the uncertainty resulted by inflation distortion. In addition, the adoption of the euro led to the reduction of exchange-rate uncertainty and finally the reduction in the nominal interest rates and risk premia led to the reduction of the costs of servicing the public-sector debt and facilitating fiscal adjustment leading to resource allocation to other uses. During the period prior to the entry of Greece in the EMU the interest-rate spreads between 10-year Greek and German government bonds were reduced drastically from 1,100 basis points in early 1998 to about 100 basis points one year before the entry. Following the entry in the eurozone the spreads fell to 50 basis points whereas during the period 2002 until the end of 2007 the spreads fell even further ranging from 10 to 30 base points (see Gibson et al., 2012; Hardouvelis, 2011a, b).
  21. 21. Universite La Sagesse Greek Crisis 21 2015 21 Unfortunately, the Greek governments of the period 2001-2009 did not take advantage of the low inflation environment and they ran fiscal deficits of 6 per cent of GDP on the average while they also increased the share of the government spending in the economy (Antzoulatos, 2011). Thus, when the negative effects of the 2007-2009 financial turmoil reached the eurozone and worries over the fiscal problems of Greece and other European countries started to emerged then it was made clear that two hidden problems of the Greek economy remained unaddressed were brought to the surface emphatically once again. The tranquil years of 2001- 2009 have led the markets to ignore these two fundamental problems of the Greek economy. As Gibson et al. (2012) argue the markets partially made the successive Greek governments to believe that the low interest-rate environment would be a permanent feature of the Greek economy. Their econometric evidence shows that the drastic reduction in interest-rate spreads occurred over the 2001-2009 period were not justified by the country’s fundamentals. In contrast, they detect an overshooting of the spreads relative to fundamentals when the Greek financial crisis broke up. Gibson et al. (2012) argue that such a bias effect could be subject to a “peso problem”. Unsustainable Fiscal and External Imbalances The financial crisis brought to the surface the two long time existing macroeconomic imbalances and structural weakness of the Greek economy. During the last three decades the Greek government has run excessive budget deficits.
  22. 22. Universite La Sagesse Greek Crisis 22 2015 22 Focusing on the period 2001-2009 (i.e. after the adoption of the euro) the data on fiscal deficits as well as on the government expenditures we conclude that they have been rising as percentages of the GDP whereas the government revenues as percentage of GDP decline continuously during this period. Two features regarding fiscal policy are worth noting: First, despite the robust growth rate that the Greek economy experienced and the favourable macroeconomic environment, the Greek governments were not successful in reducing the budget deficits below 3% of GDP in line with the requirements of the Stability and Growth Pact. As a result of such fiscal easiness Greece was under fiscal control by EU since 2004 with a short break in 2007. However, given that when joining the eurozone Greece gave up the conduct of monetary and exchange rate we would expect that fiscal policy would be counter- cyclical in nature in order to act as automatic stabilizer in the presence of country- specific shock. Therefore, the pro-cyclicality of the fiscal policy could be considered as a major source of shocks (Antzoulatos, 2011; Gibson et al., 2012; Hardouvelis, 2011a,b). The lack of competitiveness of the Greek economy is an even more acute problem. This is a chronic problem that dates back to the 1970s. The loss in competitiveness is reflected in the huge current account deficit. During the period 2001 to 2009 both inflation and wages increases, adjusted for productivity changes exceeded the average increases in the rest of the euro area. During this period
  23. 23. Universite La Sagesse Greek Crisis 23 2015 23 competitiveness, as measured by consumer prices, declined by 20% while when measured by unit labour costs, it declined by 25%. A more striking stylized fact was the during this period wages appreciated in real terms by 5.5% in the tradeables sector and by a huge 16.5% in the non-tradeables. Finally, the external debt of Greece rose from 94% in 2003 to approximately 200% at the end of 2010 which implies that the substantial interest payments to foreign holders of Greek financial assets have led to a deterioration of the income account deficit and thus the deficit of current account. (Bank of Greece reports, 2010, 2011a, 2011b; Bank of Greece’s Governor Speech, 2010) The Greek economy’s imbalances are the most profound in the Eurozone several other euro area countries, namely Ireland, Portugal, Spain and currently Italy have experienced similar problems which are also based on fiscal laxity and loss of international competitiveness and in some cases as well as on problematic financial sectors. An examination of the twin deficits relation for the eurozone reveals that the fiscal imbalance is more important for the majority of the countries- members. Greece and Portugal they have the largest government deficits and current account deficits, but Ireland does not suffer from either problem and Spain mainly suffers from loss in competitiveness, (Hardouvelis, 2011a,b). Public sector inefficiencies and low entrepreneurship motives There are several other features of the Greek economy that need to be
  24. 24. Universite La Sagesse Greek Crisis 24 2015 24 discussed as they are related to the low productivity of the Greek economy and the distortions that exist in the private sector which over the last three decades led to a dramatic decline of the output production of the manufacturing and industrial sector of the economy. As we mentioned above, the real appreciation of wages in the non-treadable sector (i.e. public sector, construction etc.) coupled with a dramatic increase of public sector employees not only in the General government but also in municipalities and public welfare companies (which until very recently the Greek state held at least 51% of the shares). Such a combination led to a reallocation of capital and labour away from the private sector and especially from export oriented sectors leading to the loss in competitiveness and the increase in the current account deficit. The private sector was in most cases tied closely with the public sector as most of business contracts were in fact given by the government. This deteriorated the competitiveness of the Greek economy since the private sector learnt to depend mainly on government projects of any kind and less on its efforts for research and development, innovationof products and export oriented production. Furthermore, as Katsaitis and Doulos (2009) show that the large amounts of funds transferred from EU to Greece had also adverse effects on private investment. They argue that the impact of EU structural funds on a country’s FDI depends crucially on the institutional quality of the receiving countries: High quality institutions have a positive effect whereas low quality institutions have a negative
  25. 25. Universite La Sagesse Greek Crisis 25 2015 25 impact. Thus, crowding out of private investment was observed in Greece from EU funds. This outcome is supported by the evidence on the level of institutional quality in the EU-16 countries provided by Jurdin and Cuckovic (2009). Greece was ranked 15th with only Italy being worse in institutional quality with an index value 80 well below the EU-16 average of 100. It is also interesting to note that the index of institutional quality deteriorated steadily since 2006. Two additional facts for the Greek economy are crucial in understanding the need for structural changes that must be imposed if a sustainable growth must be achieved and the debt repayment becomes sustainable as well. First, the crucial issue of tax evasion as a result of the huge shadow economy. The tax system as well as the overall attitude of certain professional groups of the Greek society who systematically avoid declaring their true income is one of the main sources of the fiscal deficits. Further evidence based on the World Bank indices show that a high degree of difficulty for entrepreneurs to start up their business due to bureaucratic obstacles that further inflate corruption (Greece is ranked 109th among all countries). However, as we already explained the private sector has its share of blame in this negative situation. Tepe (2009) provides evidence for the EU-16 on public spending and employment in the public evidence and Greece is by far the country that during the 1995-2005 period experienced the highest growth increase in public spending
  26. 26. Universite La Sagesse Greek Crisis 26 2015 26 and public administration employment which resulted to a gigantic public sector. Based on this competitiveness index the choice for the Greek economy to regain competitiveness is either an internal devaluation or a long-run growth based on FDI and in general increase in fixed capital through an increase of investment. What is reform? The case of Greek and Europe Why creditors’ demands would only prolong Greece’s crisis The word, reform, has now become central to the tug of war between Greece and its creditors. New debt relief might be possible – but only if the Greeks agree to “reforms.” But what reforms and to what end? The press has generally tossed around the word, reform, in the Greek context, as if there were broad agreement on its meaning. The specific reforms demanded by Greece’s creditors today are a peculiar blend. They aim to reduce the state; in this sense they are “market-oriented”. Yet they are the furthest thing from promoting decentralization and diversity. On the contrary they work to destroy local institutions and to impose a single policy model across Europe, with Greece not at the trailing edge but actually in the vanguard. In this other sense the proposals are totalitarian – though the philosophical father is Friedrich von Hayek the political forebear, to put a crude point on it, is Stalin.
  27. 27. Universite La Sagesse Greek Crisis 27 2015 27 Modern Europe’s version of market Stalinism, so far as it affects Greece, has three main prongs. The first concerns pensions, the second labor markets, and the third privatizations. Then there is an overarching question of taxes, austerity and debt sustainability, to which we can come back later. With respect to pensions, the creditors demand that about one percent of GDP be cut this year from pension payments, in a country where almost half of pensions deliver sums below the poverty line. The specific demand would cut about 120 euros from pensions at the level of 350 euros or less per month. The government replies that while the pension system requires reform – the present early retirement age is unsustainable – that reform can only be done gradually and alongside the introduction of an effective unemployment insurance scheme. On labor markets, the creditors have already imposed the near-complete elimination of collective bargaining and reduction of minimum wages. The government points out that the effect is to informalize the labor market, so that labor is not registered and pension contributions are not paid, which in turn undermines the pension system. The Greek proposal is to design a new collective bargaining system that meets the standards of the International Labor Organization (ILO). Turning to taxes, the creditors have demanded a hefty increase in the value- added tax (VAT) – which already has a top rate of 23 percent. Among other things, the burden would fall on medicines (and therefore on the elderly) and on the special
  28. 28. Universite La Sagesse Greek Crisis 28 2015 28 rates enjoyed by the Greek islands (about 10 percent of the country by population), where tourism is centered and where costs are higher in any event. The government points out that tax increases on tourism hurt competitiveness, and that the overall effect of the increased tax burden will be to reduce activity, worsening the debt problem. What is needed, instead, is tax enforcement; reducing VAT evasion could, quite readily, permit rates to be lowered. What is missing from the creditors’ demands is, well, reform. Cuts in pensions and VAT increases are not reform; they add nothing to economic activity or to competitiveness. Fire-sale privatization can lead to predatory private monopolies as anyone living in Latin America or Texas knows. Labor market deregulation is in the nature of an unethical experiment, the imposition of pain as therapy, something the internal records of the IMF as far back as 2010 confirm. No one can suggest that wage cuts can bring Greece into effective competition for jobs in traded goods with either Germany or Asia. Instead, what will happen is that anyone with competitive skills will leave. The plain object of the creditors’ program is therefore not reform. It is the doubling-down on debt collection in the face of disaster. Pension cuts, wage cuts, tax increases and fire sales are offered up on the magical thought that the economy will recover despite the burden of higher taxes, lower purchasing power, and external repatriation of profits from privatization. The magic has already been tested for five years, with no success in the Greek case. That is why, instead of recovering as
  29. 29. Universite La Sagesse Greek Crisis 29 2015 29 predicted after the bailout of 2010, Greece has suffered a loss of over 25 percent of its income with no end in sight. That is why the debt burden has gone from about 100 percent of GDP to 180 percent, when measured in terms of face values. But to admit this failure, in the case of Greece, would be to undermine the entire European policy project and the authority of those who run it. So the Greek talks remain at a stalemate. Actually, it is not quite a stalemate, since the Greeks are under extreme pressure. Either they concede to the creditors’ positions, or they may find their banks closed and themselves forced out of the euro, with highly disruptive consequences at least in the short run. The creditors know this. So they keep backing the Greeks toward a wall – never changing their own position while complaining that the Greek side isn’t working hard enough. And as the Greeks yield ground, inch by inch, the creditors simply press for more. It is the ugly dynamic of negotiation under duress, between a strong party and a weak one, in this case complicated by the fact that the creditor side has no unified leadership, and hence no one – unless Angela Merkel finally steps forward to take up the role – who can make reasonable concessions and force through an acceptable deal. So the choices narrow. Either the Greek government will concede too much, lose its support and collapse, in which case whether the end result is another receivership or Golden Dawn, democracy is dead in Europe. Or, in the end, the Greeks will be forced to take their fate – at enormous risk and cost – into their own hands, and to hope for help from wherever it might come.
  30. 30. Universite La Sagesse Greek Crisis 30 2015 30 In what follows, we will discuss what the last three governments did to reform the Greek economy, and what were the side effects of those reforms. The Greek Economy suffered from contraction from the 2008 crisis until the end of 2011, then after the recovery, some decline was measured again around 2 years after that. We will see later here how the prime ministers conceded in the past 5 years reacted to the ups and downs of the Greek economy and what were the achievements of each. Lucas Demetrios Papademos Lucas is a Greek economist who was the Prime Minister of Greece from 2011 to 2012, leading a provisional government in the wake of the Greek debt crisis Papademos was first suggested as a potential caretaker Prime Minister of Greece in early November 2011, after Prime Minister George Papandreou offered to quit and allow a temporary to deal with the major political confusion caused by the country's debt crisis. Two conditions were set by Lucas Papademos upon which he would take the offer of being Prime Minister of this temporary government. The first was that the new government would not have a very limited life span as New Democracy had required, and the second was that political figures from both New Democracy and the Panhellenic Socialist Movement (PASOK) would take part in the government. Both of these were primarily banned by New Democracy, but after numerous days of negotiations they surrendered and accepted Papademos' demands. This allowed
  31. 31. Universite La Sagesse Greek Crisis 31 2015 31 Papademos to form a government made up of PASOK and New Democracy, with the support of the far-right Popular Orthodox Rally. As Papademos stated, the government's main task would be to facilitate the financial bailout from the European Union, and to lead the country until elections could be held. He also specified that his only importance as Prime Minister would be to try and keep Greece within the Eurozone. In January 2012, Papademos notified that workforces would have to accept considerable cuts in their income to avoid the default. As well he told business and union leaders that the "troika" — the European Union, the International Monetary Fund and the ECB — was looking for Greece to take steps to open up so-called closed professions, as well as modifications to the minimum wage, elimination of Christmas and summer vacation bonuses and automatic wage increases. In January, He also stated that his provisional government would last until at least April, instead of February as was first planned, so that further austerity measures could be applied before an election. Papademos had proposed to stand down presently after the election of May 2012, but it caused in a suspended parliament. Subsequently New Democracy, PASOK, and the anti-austerity SYRIZA - which had jumped into second place - tried to form a government, but all were unsuccessful. The Negotiations in the aftermath of the election failed to form a government and Greece will be forced to have a snap general election, which took place on 17 June
  32. 32. Universite La Sagesse Greek Crisis 32 2015 32 2012. Papademos stepped down in the wake of the statement of the election while proposing Panagiotis Pikrammenos - a judge and the President of the Council of State - to substitute him as caretaker Prime Minister until a permanent government can be formed. Antonis Samaras Samaras is a Greek politician who served as Prime Minister of Greece from 2012 to 2015. He is also leader of New Democracy. Samaras previously served as Minister of Finance in 1989, as Minister of Foreign Affairs from 1989 to 1992, and as Minister of Culture and Sport in 2009. Following the May 2012 governmental election, Samaras was requested by Greek President Karolos Papoulias to try to procedure a government. Yet, after a day of firm discussions with the other parties in Parliament, Samaras has officially announced he was giving up the order to form a government. The task delivered to Alexis Tsipras, leader of the SYRIZA (the second largest party) who was also unable to form a government. After PASOK also failed to negotiate a positive agreement to produce a government, emergency discussions with the President completed with a new election being called while the outgoing chairman of the Council of State Panagiotis Pikrammenos was appointed as Prime Minister in a caretaker government composed of independent technocrats. Under Samaras, Greece reached a principal government budget surplus in 2013. In April 2014, Greece returned to the global bond market as it successfully sold €3
  33. 33. Universite La Sagesse Greek Crisis 33 2015 33 billion worth of five-year government bonds at a yield of 4.95%. Greece returned to growth after six years of economic decline in the second quarter of 2014, and was the eurozone's fastest-growing economy in the third quarter. On 9 December 2014, the candidacy of New Democracy politician Stavros Dimas was announced by Samaras for the position of President of Greece. Stavros Dimas was unsuccessful to secure the requested majority of MPs of the Hellenic Parliament in the first three circles of voting. According to the requirements of the Greek Constitution, snap elections were held on 25 January 2015, which were won by SYRIZA. Samaras’ call for December vote may bring pro-default party to power for the first time in the Eurozone’s debt crisis Greece and the Eurozone are set for a hair-raising Christmas after a huge bet by Prime Minister Antonis Samaras that could usher into power a party that says it would rather default than repay hundreds of billions of euros in bailout loans. The decision of Samaras was after Greece’s Eurozone creditors approved to keep bankrolling it for another two months after the end of this year, when its €240 billion ($297 billion) emergency support program was due to end. It takes to head political risks that have been simmering for the last couple of years since Greece’s second bail-out, which despite forcing massive losses on private bondholders failed to cut the country’s debts to a manageable level.
  34. 34. Universite La Sagesse Greek Crisis 34 2015 34 His coalition of the center-right New Democracy party and PASOK is under big pressure from the more essential left-wing party Syriza, headed by Alexis Tsipras. Samaras desired to leave the bailout program the soonest to avoid making any additional expenditure cuts or other actions stated by the totally unpopular “Troika” of the European Commission, the European Central Bank and the International Monetary Fund. However, the creditors had not accept to pay out the last installment of the emergency loans due to Athens’ failure to implement agreed cutbacks and reforms, and had said they wanted to extend the program by six months. At a meeting in Brussels Monday night, Greece and the rest of the Eurozone compromised by agreeing a two-month extension. That deal created the political space for Samaras’ gamble. The review, which started in September, remains stalled, as the country’s creditors raise doubts about the projections of next year’s budget and ask Greece to adopt more budget savings to ensure that it meets its targets. Samaras “knows he has to establish political clarity,” Michael Fuchs, the deputy chairman of German Chancellor Angela Merkel’s party, said in an interview in Cologne.
  35. 35. Universite La Sagesse Greek Crisis 35 2015 35 It’s “a calculated risk taken by Samaras that’s actually a smart move,” said Fuchs, who said he spoke with Samaras yesterday by phone. “Its chances of paying off are more than fair. He knows what he’s doing.” Alexis Tsipras He is a Greek politician, Prime Minister of Greece since 26 January 2015 and leader of Syriza since 2009. He was first elected to the Greek Parliament in 2009, and was the Party of the European Left nominee for President of the European Commission in the 2014 European Parliament election. On 25 January 2015, Tsipras led radical left SYRIZA to victory in a snap general election, receiving 36% of the vote and 149 out of the 300 seats in the Parliament and went on to become the 186th Prime Minister of Greece. In 2015 he was voted by TIME magazine as one of the100 most influential people globally. Tsipras led Syriza to victory in the general election held on 25 January 2015, falling short of an outright majority in Parliament by just two seats. The following morning, Tsipras reached an agreement with the right-wing populist Independent Greeks party to form a coalition. On the same day he was sworn in by then-President Karolos Papoulias as the youngest Prime Minister in Greek history since 1865. Using the words "I declare in my name, honour and conscience to uphold the Constitution and its laws." Tsipras was also the first prime minister to take a civil rather than a religious oath of office, marking a rupture with Greek orthodox ceremonial culture. While reaffirming the good relations between his party and the Church, he generated further religious
  36. 36. Universite La Sagesse Greek Crisis 36 2015 36 controversy during a meeting with Archbishop Ieronymos. Tsiparis explained that as an atheist who neither married in a religious ceremony nor baptised his children, he would not take a religious oath of office. The first act after being sworn in, Tsipras visited the Resistance Memorial in Kaisariani, laying down red roses to commemorate the 200 members of the Greek Resistance executed by the German Wehrmacht on 1 May 1944. During the first meeting of the new cabinet, Tsipras declared the priorities of his government to be the fight against the "humanitarian crisis" in Greece, negotiations with the EU and the International Monetary Fund on restructuring the Greek debt, and the implementation of promises made by SYRIZA such as the abolition of the previous government's privatization policies.[19] On 3 February 2015, Tsipras made his first official trip, meeting with his Italian counterpart, Matteo Renzi in Rome. They held a joint press conference expressing concerns about austerity measures imposed by the Juncker Commission and stated that economic growth is the only way to exit from the crisis. After the press conference, Renzi presented Tsipras with an Italian tie as a gift. Tsipras, who was notable for refusing to ever wear a tie, thanked Renzi and said that he would wear the gift in celebration when Greece had successfully renegotiated the austerity measures. On 20 February, the Eurogroup came to an agreement with Greece to extend the Greek bailout for four months. Tsipras had also announced a trip to Moscow on 8 April, in a bid to secure Russian support.
  37. 37. Universite La Sagesse Greek Crisis 37 2015 37 On 31 May, Tspiras laid out his complaints and outlined his plan in a recap of events since his election. He concluded that there were at least two competing visions for the integration of Europe, both of which he seemed to reject, and that certain unnamed institutional actors had "an obsession" with their own technocratic programme. On 22 June, Tsipras presented a new Greek proposal, which included raising the retirement age gradually to 67 and curbing early retirement. It also offered to reform the value-added-tax system to set the main rate at 23 percent. On 29 June Greek banks stayed shut and Tsipras said they are to remain so to impose capital control. Trading in Greek stocks and bonds halted as well. Tsipras announced referendum to decide whether or not Greece is to accept the bailout conditions proposed jointly by the Juncker Commission, the International Monetary Fundand the European Central Bank. Tsipras recommended a "No" vote. On 3 July, during an address to at least 25,000 people gathered in the capital's Syntagma square in front of parliament, he rejected some leaders' warnings that a "No" result in Sunday's plebiscite could see Greece forced to leave the eurozone. He declared "On Sunday, we are not simply deciding to remain in Europe -- we are deciding to live with dignity in Europe". Alexis Tsipras talks so much about democracy that one might think the Greek prime minister is a paragon of virtue when it comes to dealing with the voters. This is not the case. For a start, Tsipras has made a series of wild promises that he cannot
  38. 38. Universite La Sagesse Greek Crisis 38 2015 38 deliver. Before January’s election, he pledged that he would tear up the country’s bailout program while staying in the euro. The two are almost certainly incompatible goals, as the Greek people are now discovering at huge cost. In advance of Sunday’s referendum, he has given further assurances. One is that savers’ bank deposits are safe. He also said he will have a deal with Greece’s creditors within 48 hours of the plebiscite, if they vote no to the bailout plan. In fact, deposits are at risk and the chance of a deal in two days is virtually nil. A good democrat only promises what he or she can deliver. Tsipras is a demagogue. International standards recommend that a referendum is held with at least two weeks’ notice. Now look at Sunday’s referendum. The people have been given eight days to take a decision that will have repercussions for a generation. What’s more, the question is convoluted. The people are officially being asked whether to accept or reject an offer made by Greece’s creditors on 25 June. They are then referred to two complex documents, which have been translated into Greek from English. One of these was mistranslated to say that the country’s debt was unsustainable under all three scenarios considered, whereas it actually said it was unsustainable under only one of the three. The ballot paper also puts “No”, Tsipras’s favoured option, above “Yes”. It is doubtful whether the referendum is legal. In Greece, plebiscites are not
  39. 39. Universite La Sagesse Greek Crisis 39 2015 39 supposed to be held on fiscal matters. The country’s top administrative court was due to rule on Friday whether the vote was constitutional. Even worse, it’s not at all clear what the two options mean. Yes cannot mean accepting the 25 June offer because it is no longer on the table. In practice, those who vote yes will think they are voting for Europe. And what does no mean? Tsipras says it means giving him stronger negotiating power with the creditors. In fact, it is likely to mean that Greece quits the euro – something he denies. The Council of Europe, Europe’s top human rights institution, told Associated Press this week that the referendum. Its secretary general, Thorbjørn Jagland, said international standards recommend that a referendum is held with at least two weeks’ notice to allow sufficient time for discussion, with a clear question put to the people and with international observers monitoring the vote. If, despite all this, Tsipras loses the referendum and resigns, there will undoubtedly be a narrative presented that Europe undermined a democratic government because it didn’t like the fact that it was so leftwing. The real explanation will be that Tsipras undermined himself with his undeliverable promises, confrontational approach towards creditors, inexperience and inability to read the situation properly. Knowing now that the people voted as were mentored by the government,
  40. 40. Universite La Sagesse Greek Crisis 40 2015 40 "No" to intervention of ECB and its reforms, or "Oxi" as they call it in Greece. Some claim that Tsipras has lead the country into the unknown. Others see that this was a statement of right and justice from the land of democracy. With the minister of finance "Varoufakis" resigning on the same day of the results, Tsipras was left alone to deal with the creditors. First, all banks and monetary institutions were closed for a week. Greeks are only allowed to withdraw cash from ATMs with a 60 Euro limit per day. The huge effects of that decision reached the NYSE and the Chinese stock exchange, alongside the Euro rate hitting a year low at 1.089 and decrease in oil barrel prices around the globe. A basket of reform and demands are what is sought now from Tsipras, a "Grexit", or Greece quitting the Eurozone, if that was an option. Will lead to similar demand from suffering countries such as Spain and Italy. The same goes for any loans that will be written-off whether by ECB or IMF. The "PIGS" are struggling for survival of their monetary sectors, any help they can get now is very well needed. Recovery is nowhere to be seen in the near horizon, thus whatever happens in the following days or hours, is of utmost importance and significance to the history of the EU, and the economic and monetary welfare of the world. Last but not least, it is amazing what a small country (2% of EU income) can do to the whole economy and markets of the world!