Greece’s current economic problems have been caused by a mix of domestic and international factors. Domestically, high government spending, structural rigidities, tax evasion, and corruption have all contributed to Greece’s accumulation of debt over the past decade. Internationally, the adoption of the euro and lax enforcement of EU rules aimed at limiting the accumulation of debt are also believed to have contributed to Greece’s current crisis.
High government spending and weak government revenues have strongly influenced the economic climate of this country. Between 2001 and 2007, Greece’s GDP grew at an average annual rate of 4.3%, compared to a Eurozone average of 3.1%.
High economic growth rates were driven primarily by increases in private consumption (largely fueled by easier access to credit) and public investment financed by the EU and the central government. Over the past six years, however, while the central government expenditures increased by 87%, revenues grew by only 31%, leading to budget deficits well above the EU’s agreed-upon 3% of GDP threshold. Observers identify a large and inefficient public administration in Greece, costly pension and healthcare systems, tax evasion, and a general “absence of the will to maintain fiscal discipline”ť as major factors behind Greece’s deficit.
Greek industry is suffering from declining international competitiveness. Economists cite high relative wages and low productivity as a primary factor. According to one study, wages in Greece have increased at a 5% annual rate since the country adopted the euro, about double the average rate in the Eurozone as a whole. 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. Some observers argue that for Greece to boost its international competitiveness and reduce its current account deficit, it needs to increase its productivity, significantly cut wages, and increase savings.
Greece’s government undertake attempts to fight the economic problems and one of its steps was a reduction of public sector wages and a number of actions in order to increase Greek exports through investment in areas where the country has a comparative advantage. In the past, tourism and the shipping industry have been the Greek economy’s strongest sectors.
In an effort to restore investor confidence in the Greek economy, the Papandreou government has pursued a series of wide-ranging fiscal austerity measures. However, the combination of spending cuts and tax increases do not appear to have appeased investors enough to enable Greece to raise the money it needs to cover its maturing debt payments. On April 23, 2010, Papandreou announced that Greece would draw on â‚¬45 billion ($60 billion) in emergency financial assistance from Eurozone members and the IMF in order to avoid defaulting on its debt obligations.
Although European leaders and the IMF have welcomed the austerity measures taken by the Greek government thus far, they are expected to request additional measures and further details on plans to meet budget deficit targets in exchange for financial assistance.
Some have suggested that, in addition to austerity and financial assistance from Eurozone member states and the IMF, Greece could finance its budget deficit and increase the competitiveness of its exports by exiting the Eurozone and adopting and devaluing a new national currency. However, most consider this an unlikely policy course as both Greek and European leaders appear committed to ensuring that Greece remain a Eurozone member and exiting the Eurozone could make future borrowing costs much higher for Greece. If the government is not able to satisfactorily reduce its budget deficit through fiscal austerity or financial assistance from a third party, it may be forced to restructure or default on its debt obligations.
Among the other Greek domestic policy responses, fiscal austerity can be named as well. Since taking office in October 2009, the Papandreou government has unveiled three separate packages of fiscal austerity measures aimed at bringing Greece’s government deficit down from an estimated 13.6% of GDP in 2009 to below 3% by 2012. The specific longer-term budget deficit targets established by the government are 8.7% of GDP in 2010; 5.6% of GDP in 2011; 2.8% of GDP in 2012; and 2% of GDP in 2013. Greece’s plan to achieve these targets is detailed in the country’s Stability and Growth Program, which approved by the EC on February 3, 2010.
Eurozone member states have welcomed the Papandreou government’s plans for fiscal consolidation and are expected to request additional measures be taken. Some observers express concern, however, that the mix of tax increases and sharp spending cuts could lead to higher unemployment and deepen an ongoing recession in the country. The policy solutions to two of the major economic issues facing the Greek government – cutting large government budget deficits (which requires contractionary fiscal policies to address) and stimulating the economy during cyclical economic downturn (which requires expansionary fiscal policies)””are at odds with each other.
Prime Minister Papandreou has repeatedly emphasized the need for longer-term structural reforms to the Greek economy. To this end, he has proposed wide-ranging reforms to the pension and health care systems and to Greece’s public administration. His government has also announced measures to boost Greek economic competitiveness by enhancing employment and economic growth, fostering increased private sector development, and supporting research, technology, and innovation.
On April 23, 2010, the Greek government formally requested the activation of a financial assistance mechanism that was formulated by Eurozone leaders during a series of meetings in
March 2010 and early April 2010. The package could reportedly provide some â‚¬30 billion(approximately $40 billion) in bilateral loans from Eurozone countries this year, at an interest rate of about 5%, supplemented by an additional â‚¬15 billion (approximately $20 billion) from the IMF. Overall, the parties are reportedly discussing a three year deal (2010-2012) worth some â‚¬90 billion (approximately $121 billion) in loans. In order to complete activation of the mechanism,
the European Commission and the European Central Bank must give a positive assessment of the Greek request and each Eurozone country would need to approve the agreement.
The situation with Greece’s economy is quite controversial from the point of view of regionalization. A level of financial assistance for this country from EU is a disputable issue, because there is little political appetite in the EU for providing it. Most EU countries are themselves experiencing financial hardship, and many are exasperated by the idea of rescuing a member state that, in their perspective, has not exercised budget discipline, has failed to modernize its economy, and allegedly has falsified past financial statistics. In addition, many strongly wish to avoid setting a precedent by “bailing out”ť a member state that has not managed its finances well.
Some observers have argued that allowing Greece to default is preferable to an EU rescue package. Germany, the European largest economy, has been among the most skeptical member states and large majority of Germans are strongly against providing financial assistance to Greece.
Has a regionalization failed in this case? In my opinion, the crisis in Greece is not a matter of regionalization and globalization issues but rather a question about effectiveness of country’s management in the first place. Besides it, I think that the reason of these economic problems is hidden in cultural and behavioral mindset of Greek people as well.
Holm, H.H. and Sorensen G., (1995)., Introduction: What Has Changed? in Holm, H.H., eds., Whose World Order? Uneven Globalization and the End of the Cold War (Boulder, CO: Westview), 1”“17.
Mittelman, J. H., (1996), “Rethinking the “New Regionalism”ť in the Context of Globalization,”ť Global Governance 2: 189”“213.
Mittelman, J. H., (1996), How Does Globalization Really Work?”ť in James H. Mittelman, ed., Globalization: Critical Reflections (Boulder, CO: Lynne Rienner), 229”“41.