European Economic Crisis Greek Government Term Paper

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European Economic Crisis -- Greek Government

This paper provides a deep insight into the European economic crisis and the events which eventually lead up to Greece debt crisis. It explains the causes which were responsible for the chaotic and poor financial situation currently prevalent in Europe. It also analyses the current tools used for stabilizing the situation in Greece and the shortcomings in them. It also highlights certain steps and measures which can be taken in improving the current scenario.

Occurrence of Greek Debt Crisis

Core Causes of Financial Crisis in Greece

Extensive Money Borrowing at Low Interest Rates

Misrepresentation of Public Records

Inappropriate Business Environment

Inefficiencies in the Public Sector

Greek Domestic Policy Responses to Debt Crisis

Austerity Measures

Structural Reforms

Financial Assistance from Eurozone Member States

Financial Assistance from IMF

5. Pros and Cons of the Greek Debt Crisis Issue 12

Prospective Solutions for Dealing with the Debt Crisis in Greece 14

6.1 Growing the Economy out of Debt 14

6.2 Monetizing of Debt 15

6.3 Restructuring or Defaulting of Debt 15

6.4 Detachment from Eurozone 16

6.5 Issuance of Eurobonds 16

6.6 Fighting off Corruption 16

6.7 Establishment of a Credible Tax Audit System 16

6.8 Establishment of a Credible National Agency 17

6.9 Policy Requirements 17

7. Bibliography 20

European Financial Crisis -- Greek Government

The debt crisis engulfing the European Union (EU) is immensely threatening to the economic and political conditions in Europe. The economic and financial crisis has shaken the foundations of European construction, more precisely; it's most visible and successful symbol -- the common currency, Euro. Debt crisis in EU attributes to the inability of some countries in gaining control over the growing debt, which has pressurized the stability and survival of the European currency, Euro (Todorivic and Bogdanovic 2012). The mounting debt and budget deficits of some countries of European Monetary Union caused the reaction of financial markets that punish countries with high debts by increasing prices of their additional borrowing. The inability of adjusting with exchange rates forces pressure in labour market and unemployment which further alleviates pressures with fiscal slippage (Adrain 2012). Minescu (2011) believed that the core reasons behind the current European financial crisis are low risk premiums, strong leveraging, elongated time periods of rapid growth of credit, abundant availability of liquidity and the soaring prices of assets. European banks lent billions to financially struggling nations and are now at the stake of facing huge losses, which could in turn cause the crisis to spread to more stable nations and the United States. All the EU countries thus adopted austerity measures for improving the fiscal strength and competitiveness. EU leaders adopted Euro Plus Act which included the commitment of each country to introduce a balanced budget amendment as a part of their national law. The debt crisis in European Union clarified the fact that an economic model based on the financing of consumption through borrowing would not bore fruit in the future (Todorivic and Bogdanovic 2012).

Occurrence of Debt Crisis in Greece

The economy of Greece has functioned as a relatively closed economy for decades bearing a characteristic large public sector. Tourism and ship building are the core sources of state revenue, yet the state faced a downfall in the industrial production. The reliability of Greek economic indicators has been questioned by the European Union and its position was quite curious even before the European crisis. Greece got an easy-access to longer-term borrowing due to the under-pricing of default risk. Statistics indicated that the general government revenue as a percentage of GDP has consistently remained lower than government expenditure in Greece (Taylor 2011). Greece was engulfed in the flames of large budget deficit, public debt, current account deficit and the decline in competitiveness. One of the fundamental reasons for the occurrence of crisis in Greece was the large amount of borrowing in international capital market for financing the current account deficit and the budget deficit. The delay in implementation of structural tax reforms and pension systems was also a contributing factor towards Greece's debt crisis. Poor collection of budget revenues, tax evasion and high government spending were the significant internal factors of the debt crisis. The accumulation of foreign debt mounted up drastically due to the external factors comprising of easy access to external capital markets at a lower rate after joining the EMU, and poor application of EU rules concerning public debt and budget deficits (Todorivic and Bogdanovic 2012). Greece faced the prospect of sovereign debt default due to the downgrading of Greece debt rating and non-zero economic growth. The European Union and the IMF worked out rescue loan plans to assist Greece. The loan bailouts may alleviate short-term liquidity problems, yet Greece is still at the stake of encountering the long-term debt obligations (Abboushi 2012). The following section will now cover a detailed analysis of the causes leading towards the financial crisis in Greece.

Core Causes of the Financial Crisis in Greece

The worsening economic conditions in Greece made it the victim of a tremendous debt crisis. A number of factors are responsible for the fiscal crisis experienced by Greece since 2008. Some of these factors are endogenous, and are linked with the internal structure of Greek economy. The prolonged macroeconomics imbalances encountered by the Greek economy and the credibility issues of the macroeconomic policies are core contributing factors towards the Greek debt crisis. On the other hand some factors are exogenous and are linked with the financial turmoil encountered by entire Europe (Kouretas, Georgios, and Vlamis 2010). This section closely focusses on the domestic factors leading towards the Greece debt crisis.

Extensive Money Borrowing at Low Interest Rates

The high growth rate of real GDP during the period of 2001-2008 was the result of growth of personal consumption and public investments financed from public funds and funds from the European Union. The public debt of Greece increased drastically due to the extensive borrowing from international capital markets for financing the Greek's government deficit (Gibson, Hall and Tavlas 2012). The reliance on external borrowing to cover budget deficit and current balance of the country's economy led to a situation of high sensitivity of the capital markets (Todorivic and Bogdanovic 2012). The extensive borrowing was aimed at inducing the income of average household in Greece. This borrowing was completely streamlined to higher consumption levels in an effort to raise the standard of living of households. This process was also fuelled by the incoming capital flows from the EU which were accumulated in the form of agricultural subsidies. Moreover, the financing of infrastructure within the broader framework of the convergence and cohesion policies of the EU were also a source of capital inflows (Kouretas, Georgios and Vlamis 2010). The Greek economy lacked a will to maintain fiscal discipline, and possessed a wasteful and inefficient state administration. Immensely expensive pension and welfare system and tax evasion further aggravated the situation of public debt in Greece. Poor collection of tax revenues generated drastically high budget deficits.

The industrial structure of Greece and low competitiveness further contributed towards the debt crisis. Low productivity and relatively high earnings played a major role in affecting the declining competitiveness of Greek products abroad, which ultimately affected the decrease in exports and current account deficits.

Misrepresentation of Public Records

Greece encountered another massive hurdle in covering up its existing debts when it was discovered that the government misrepresented and falsified the data it disclosed about its public finances. This was done by the Greek government to make an attempt to stay within the monetary guidelines of the Eurozone. Abboushi (2012) declares the fact that Greece has had particularly precarious debt dynamics and was the only member state that cheated with its statistics for a long period of time. The statistics indicate that the Greek government revised its deficit for 2008 from 5.0% to 7.7% of GDP and revised the 2009 deficit from 3.7% to 12.5%, which was further more revised to 13.6%. Thus Greece not only reported incorrect data, yet it also committed acts of non-transparency, improper documented bookkeeping, and lacked a sense of responsibility of the statistics agency. The disclosure of these facts and figures spooked the bond markets and the credit rating agencies. These decided in considering that Greece was not trustworthy and not credit worthy. Bond yield spread rapidly like a fire and Greek government credit rating dropped severely. Greece eventually encountered the prospect of not being able to raise new debt to pay off existing debt.

Inappropriate Business Environment

Another factor inhibiting Greek economic success was the fact that Greece has not been a particularly business-friendly country and seems to hinder entrepreneurship and capital investment. The World Bank surveys countries all over the world by evaluating them in terms of their business environment. The countries are then ranked accordingly. The dimensions evaluated by them comprise of "starting a business," "employing workers," "protecting investors," and "registering property." The unfriendly business environment scares away foreign entrepreneurship and reduces foreign direct investments, which tend to…

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