Greece experienced strong economic growth after adopting the Euro due to easy credit availability, but faced high budget and current account deficits. The government overspent on pensions and healthcare while tax evasion reduced revenue collection. This, combined with decreasing competitiveness and sensitivity to investor confidence, led Greece into a recession. Greece was forced to accept international bailouts with austerity conditions. Structural reforms like privatization, education investment, and trade/foreign investment promotion will be needed for long-term recovery.

1. Greece-an Economic Impasse?
EC3102 Assignment
Ankit Kanoria A0074661A
Naman Shah A0074727X
4/2/2012
Submitted in partial fulfillment of module requirement.

2. ‘Greece- An Economic Impasse?’
The start of the new millennium saw a historic event which revolutionized the world
economy; Euro-a formalized common currency for 12 European nations went into circulation
in 2002. Adoption of the Euro by Greece made easy credit available for the country at low
interest rates (refer to figure1). This primarily steered the economy which grew at an average
rate of 4.3% from 2001-2008 with an increase in private consumption. The government was
also able to finance the high current (9% average) and budget (5% average) deficits through
borrowing in international capital markets due to easy availability of credit (IMF, World
Economic Outlook , 2009).
During this period, the Greek government faced such high deficits as it indulged in high
government expenditures especially in pension benefits and health benefits (11.6 % and 5.7%
of GDP on average over 2001-2007) (OECD Factbook Statistics., 2012). Economists around
the world feel that tax evasion and Greece‟s informal economy which is estimated to be 25-
30% of GDP (Country Report: Greece, March 2010) has lead to weak revenue collection only
leading to higher debt borrowings which was 119% of GDP in 2009 and 144.9% in 2010
(Eurostat, Updated: 29.03.2012)
On the other hand, wages grew at an average of 5% during 2001-2008 which was double the
average rate in the Eurozone (“Is Greece Headed for Default?”, January 29, 2010.). Over the
same period, Greek exports to its major trading partners grew at 3.8% per year, only half the
rate of those countries‟ imports from other trading partners. This, coupled up with low
productivity spiraled Greece into declining international competitiveness.
It was all too long before the investors realized that Greece might not be in a position to repay
its debt obligations evident from the increase in interest spread for the Greek bond to 400
basis points when in October 2009, Prime Minister Papandreou revised the government
budget deficit estimate from 6.7% to 12.7% of GDP. This is when the "Greece crisis" seems
to have set in motion.
Thus, some economists in Eurozone regard Greek's "fiscal irresponsibility" while some
outside regard the introduction of Euro and a common monetary policy as the primary reason
behind the crisis. It was however, a culmination of weak and inefficient fiscal policies and
other domestic factors such as decreasing competitiveness and also the extreme sensitivity of
Greece to international investor confidence that unfolded into what seemed an economic
impasse as not only did the economy's GDP shrink , but also inflation rose from below 1% to

3. around 2.5% at the end of 2009(refer to figure 3) unemployment rate increased coupled up
with the high debt levels and fiscal deficits(refer to figure 2).
Hence, Greece had to deal with the debt obligations and also the recessionary trends. It
therefore, had the option of leaving Euro by defaulting on its debt obligations and
reintroducing drachma as its currency. However, „Drachmatisation‟ would leave the country
into a state of bank run, and a limit on withdrawals would further exacerbate the liquidity
crunch and vulnerability in the investment scenario
Greece therefore had to resort to external assistance to recover from this 'sovereign debt
crisis'. This came in the form of Troika (European Central Bank, European Commission and
IMF) and other Eurozone members as they came forward with various bailout packages.
However, austerity measures were as a precondition to receive the bailout. These included
implementation of contractionary fiscal measures including pension and defence cuts;
privatization ; labour reforms- reducing wage rates and structural reforms -opening different
professions to competition among others .These bailout packages, however, came at the cost
of social unrest and protests. Therefore, the road ahead for Greece is tumultuous and would
require a strong reforms package.
A major policy change would be to promote foreign investment and trade. The austerity
measures have left the country with reduced consumption and government expenditure
leading to the shrinking of GDP. The growth path can become reality by promoting
investment from neighbouring countries like Turkey. Turkish Deputy Ali Babacan feels
Greece has “reached improved levels of well being when it is closer to Turkey”. In 2011
Turkey imported more than $2.5 billion worth of goods from Greece, more than double the
level in 2009. The negative balance of trade needs to be corrected by increasing exports
rather than reducing imports. There could be a shift in ownership with Greek's privatisation in
energy, infrastructure, tourism and real estate sectors being brought over foreign investors.
As the graph shows exports have not increased but imports have decreased
to correct the trade deficit.

4. The recovery calls for education and competitiveness enhancing reforms. Greece had spent
42.4% of GDP on social protection in 2006 compared to only 5.5% on education in the same
year (refer to figure 4). This calls for reducing expenditure on social protection and shifting
resources to education. An increase in human capital accumulation and education will
eventually lead to higher economic growth rate. Although in 2010, the “New School” policy
for primary and secondary education introduced flexible curricula and streamlined teaching
modules (Economic Policy Reforms 2012,OECD- Country Notes), Greece should also
improve the education levels through better teaching quality and collaboration with the
premier universities.
These measures will solve the issue of unemployment, reduced growth rates and thus, will
steer the economy out of recession. However, to fuel resources towards education at such a
volatile juncture might not be very welcome by the EU foreign ministers. Also, trade and
investment from Turkey might not be sustainable in the long run as Turkey itself faces a
staggering 10% current account deficit.
On the other hand, to meet its debt issues-Greece was successful in reaching an agreement
with the private sector lenders on a "voluntarily debt swap" which reduced the government's
debt burden by 100 billion euros by investors accepting losses in net present terms of 74 %.
This gave the green signal for Greece to receive its second bailout package of 130 billion
euros .
Thus, Greece might be able to solve its temporary economic hurdle by being the recipient of
these bailouts. However, to survive in the long run - it must adopt structural reforms to
increase competitiveness, focus on trade and foreign investment and education in order to
meets its target of 2.5%-3% growth in 2013 and 2014and grow sustainably thereafter.
(WORDS 999 (excluding in text sources))

5. APPENDIX
The following graphs and table support the point made in the article.

7. Figure 4
Bibliography
1. IMF World Economic Outlook,2009
2. Oxford Economics
3. Export figures: Greece‟s Debt Crisis: Overview, Policy Responses and Implications,
Congressional Research Service, May 2010
4. OECD Statistics and Reports.
5. Eurostat
6. Wall Street Journal (Mar,2012)
7. The Economist ( Various articles were read to garner a clear opinion)
8. ELSTAT
9. European Central Bank Reports