The Greek DilemmaA macroeconomic reviewof the Greek debt crisis Abhaysing Bainade Bangyu Liu Jummai Arome Olubunmi Makanjuola Yuri Shogenov
Outline• A brief history of the Greek debt crisis• Key drivers for the debt crisis• The Greek dilemma • Scenario 1. Staying in Eurozone • Scenario 2. Withdrawing from Eurozone• The adjustment programme• Assumptions• Macroeconomic assessment & recommendations• Conclusion
Key drivers for the debtcrisis standard and weak economic competitiveness.High livingHigh Government Spending and Weak Government Revenues
Key drivers of the debt crisisHigh living standard and weak economic competitiveness.High Government Spending and Weak Government RevenuesSovereign debt soaring out it’s bear ability. Fitch Moodys Standard & Poors CCC Ca CC
The Greek Dilemma Austerity measures v sovereign defaultStructural reforms v withdrawal from Eurozone • 60% of Greeks are opposed to the bailout & austerity measures deal • 70% of Greeks want to stay in Eurozone (RBS European Economics, 2011)
Scenario 1. Greece Staying inEurozone• The Euro will lend more credibility to Greece’s economy and increase both investors’ and creditors’ confidence about Greece’s ability to service its debts.• Greece can curb its high inflation rate because it will have the support of other members of the Euro zone especially access to competitive loan rates and also to low rates of the Eurobond market.• Greece continue to undertake the austerity measures which included the much needed reforms that will make the country a more manageable state and give it a more
Scenario 2. Greece leavesEurozoneIf Greece leaves the euro zone, good economic reasons will be that by devaluing its currency, exports can rise therefore cash will come in.Disadvantage is that being the 1st country to leave the euro, it could lead to a massive bank run.A debt default and decision to abandon the Euro would affect the reputation of the economy.Greater pressure on other Eurozone economies
Scenario 2. Greece leavesEurozoneNo funds will be made available from Europe or IMF except they accept austerity measuresThey will lose EU regional aid and farm subsidies worth over 9billion euros every year.Greece’s banking system would collapse, inflation would explode and contagion would even kill the entire euro edifice.
The adjustment programme Implement structural reforms to achieve the recovery of the economy, Its sustainability and promote growthWhat reforms? • Fiscal reforms • Labour market reforms • Product market reforms
Assumptions§ Greece is going to stay in economic monetary union (EMU)§ Greece will implement fiscal and structural reforms fully§ EU will NOT create barriers in implementation of fiscal and structuralreforms§ Structural reforms that are underway won’t be taken into account§ Access to the capital markets at reasonable cost§ The basic interest rates on Greek bonds will NOT go up significantly
Structural fiscal reforms • Formulate sustainable fiscal framework and monitoring mechanisms • Top-down approach to budgetary preparation • Set government expenditure ceiling • Limitations on borrowing capacity for the various public entities. • The requirement to seek parliamentary approval if expenditures exceed budget. • The requirement to publish regular data on budget execution. • Cracking down Government corruption.
Structural fiscal reformsImproving the tax system and tax collection. • Greece tax compared with other OECD countries, it has stand at high level. So improve tax rate is not wise choice. • Simple and transparent tax system, and broaden tax base • Enhance tax collection by using audits, improving punish of tax evasion, cracking down bribery.
Efficiency, Productivity• Relative to the simple average of the highest OECD Countries in terms of GDP per Capita,based on 2008 PPPs. The sum of percentage gap in labour resource utilization and labourproductivity do not add up exactly to the GDP per capita since decomposition ismultiplicative• Labour resources utilization is measured as total number of hours worked per capita• Labour productivity is measured as GDP per hour worked
Way towards Sustainability….Efforts should be made to boost growth and getting people back to work is importantReforms to improve labour market outcomes should be implemented rigorouslyReforming product markets is imperative for sustainable jobs, greater competition and more investmentProgress in improving the business environment should continue
Getting people back to work andboosting longer term growth Recently, non-subsidized sub-minimum wages for youth was introduced to boost jobs. Training should be provided to enhance their skills Firm-level wage agreements were introduced and to promote it, the administrative extension of the sectoral agreements to firms that were not party to the negotiations should be eliminated. The use of fixed-term contracts should be promoted through a reduction in the early termination costs. This will ease further employment protection for temporary work. Remove employment protection legislation distinctions
Reforming product markets Be business friendly Implement export strategy with vigor and reduce bureaucratic barriers to exports Privatization of railway services and the liberalization of the sector. Like other OECD countries, adopt a system for Regulatory Impact assessment. Develop a “competition culture”
Reforming product markets Set clear and adequate rules for planning private investment and frequently monitor land use plans. Remove identified regulatory restrictions to entry in tourism, retail and wholesale sectors.
ConclusionGreece should stay in European Union and economic monetary§unionRecovery, sustainability and growth of the Greece economy can be§achieved through strict implementation of the structural reforms§ Government’s ability to respond to unanticipated shocks is crucialfor persuading markets that the programme of the reforms is credible