The Greek Financial Crisis
Ever since the end of 2009, Greece has been involved in a financial and economic crisis that has been record breaking and shattered world records in terms of its severity and worldwide effects. The Greek government, since the beginning of the crisis, has attempted to take several governmental measures to try and “stop the bleeding,” including economy policy changes, dramatic government spending and budget cuts and the implementation of new taxes for citizens.
In addition to this, the government has tried to alter the perceptions of Greek government and economy by the rest of the world in an effort to appear both more liberal and more democratic. Greece has also been working to privatize many previous state-owned corporations in a desperate effort to stabilize the currency and the economy. This paper will address the various actions taken to date by the Greek government to pull the country out of this terrible crisis, and will explore the specific factors that were causation for this horrible financial crisis.
The Greek Financial Crisis Essay Example
It is important to note that certain policies and government actions and their success is merely subject to personal opinion, but financial data and statistics is absolute and cannot be disputed regardless of personal or political beliefs. In May of 2010, Greece was awarded a 110 billion euro bailout from both the European Union and the International Monetary Fund. This bailout was effective only in the sense that it prevented Greece from defaulting on country debts and loans, which would have had catastrophic ripple effects on not only the Greek and European markets, but on the global markets including the United States and Asian economies.
Soon after this bailout was executed, it became evidently clear to both the EU and the IMF that more money would be needed in order for Greece’s survival and for their long road to economic recovery. With that being said, a second bailout worth 109 billion Euro was given to Greece again by the EU and the IMF in late July of 2011. Of course, these bailouts have been the subject of a tremendous volume of worldwide media attention. These bailouts, along with the privatization of corporations, policy changes, capital injections and governmental changes have been implemented in hope that positive progress will be achieved.
The media has successfully painted these reforms as containment methods for this huge mess, and as means of ensuring that this infected economy does as little damage as possible to other economies in the world. Some country-specific economies that are particularly unstable and thus at risk of damage from the Greek crisis are Italy, Ireland, Portugal and Spain. Although the Greek economy has received, by far, the most media attention for economic difficulties, these other four nations are experiencing serious economic problems of their own.
It appears that this was a major motivating factor behind the two bailouts, that it is vitally important to contain the damage before it spreads to these other vulnerable nations, something that the European Union simply cannot afford to have happen. In the words of economic experts, “Greece is just the tip of the iceberg,” and that the economies of EU nations are more intertwined and interdependent than we would have hoped. Given that EU countries share the same currency, the Euro, continuously trade with one another, and hold massive debts for one another, this opens the EU as a whole up to tremendous vulnerability.
Essentially, if Greece or any other EU nation defaults on debts, this could send the entire EU into a recession and put the banking system as a whole at risk, much like what happened in the United States in 2008. The goal of these capital injections and bailouts is for Greece to remain financially liquid for enough time to pay their outstanding debts as much has possible to neighbor countries, thus reducing the amount of government debts owed and the interconnected pressure on the entire EU to continue to bail out Greece.
If Greece is able to pay back a significant enough portion of their debts, in the event that they do default on some of them, it may still be able to be contained and not infect the rest of Europe with a recession. As far as Greece’s role in creating this crisis in the first place, it can be said that Greece is at fault for a variety of reasons. The media has been focusing on the corrupt political system and infrastructure, the lack of competition in the private sector, the wastefulness and inefficiency of the public sector and a flawed tax system as causation for this mess.
When the public sector was expanded in the 1980’s, Andreas Papandreou was given various agricultural subsidies and grants to do with what he pleased. This enabled the funding of certain post-World War II groups to heal political wounds and fund unions and other special interest groups to aid his political capital and strength. The policies enacted in this decade allowed for the increase in power and funding of the middle class by creating a vast amount of inefficient public sector government jobs for citizens.
This resulted in an increase in the levels of inefficiency, bureaucracy, corruption and wasteful spending coupled with the increase in wages, pensions and benefits. This proceeded to drain through government money and resources, and did not breed a culture of highly motivated, efficient and effective government employees. A high amount of debts accumulated as the nation continued to proceed in this way, using state money to subsidize failing businesses and to finance the continued expansion of the public sector.
Papandreou is continuously criticized for the creation of such a wasteful and inefficient public sector, and this is a primary reason for the economic struggles that Greece is facing today. Debt continued to build, and inefficiency continued to increase rapidly. Another important factor to discuss is the massive amounts of de-industrialization that occurred in Greece during the 1980s. This means that labor was outsourced to different countries outside of the European Union where labor costs were significant cheaper, in an attempt to reduce expense margins.
Instead of investing in a strong public sector, Papandreou poured money into the private sector that was clearly diminishing in relation to other countries. As a result of this, the public sector continued to expand as a compensation method for the failing private sector. This resulted in the creation of a socialist culture in Greece, causing more and more debt to buildup to an alarming level. This wastefulness and inefficiency in the extremely large public was simply adding fuel to the fire that would come back to hurt the nation several years later, as we can see.
As the level of national debt and borrowing was increasing, it can be said that the bubble began to burst in the early 2000s when the Euro was adopted in Greece. This provided Greece with an opportunity to capitalize on very low interest rates, declining from roughly 20% in the early 1990s to roughly 3. 2% in 2005. This fueled the fire in the sense of the borrowing culture that had already been in place in the Greek government for decades, as they continued to accrue an alarming amount of national debt, a terrible liability for any nation to carry.
These billions of euros of debt continued to rise, and can be considered a very important factor in the current economic crisis that is occurring as a result of decades of wasteful spending and ineffective currency control by the government. Another important factor to consider when analyzing the specific reasons for Greek’s current financial crisis is the highly corrupt political system that exists in the country. Corruption and bribery play a role in Greece’s outstanding level of national debt. According to statistics, the Greek government has lost roughly 8% of GDP each year as a direct result to these unethical practices.
According to the Brookings Institute, “if Greece had better control of their government corruption, it would have had a smaller budget deficit by 4% of GDP. ” This fascinating data shows that the practices of this corrupt government actually contributed to Greek’s staggering amount of debt coupled with their incremental declines in GDP levels. On the topic of governmental corruption, there are two key scandals worthy of mention that clearly have contributed to the current economic turmoil Greece is currently facing.
The first scandal is the Koskotas Affair, and occurred during the Papandreou administration. Mr. Koskotas was the owner of the Bank of Crete. In this scandal, he was convicted and charged with the embezzlement of $200 million dollars. In the following coverage of the scandal, it was revealed that Papandreou’s’ administration had asked for large deposits to be transferred from other banks into the Bank of Crete at a lower-than-legal interest rate. The profits from these transfers were given to the government and political parties.
Although Papandreou was indicted for involvement, he was acquitted and justice was never served. This hurt both the economy and the morale of Greek citizens. The second scandal worthy of mention is the Siemens case. The executive team of Siemens paid out several million Euros in the form of bribes to several Greek politicians from the late 1990s to the early 2000s. These bribes were paid in return for the securing of government contracts in wide variety industries. The politicians involved into offshore accounts laundered the money.
The two major political parties in Greece were both involved, and Siemens was fined over $1 billion dollars by the US government for its involvement in these crimes. These two massive scandals successfully illustrate the level of corruption in the Greek government, and the unethical practices that were adopted by both parties in order to remain in power. Unfortunately, in Greece it is very difficult to prosecute and charge corrupt political figures. Many politicians simply get away with the crimes they commit because their peers are not interested in prosecuting them given the immunity they are given as per the Greek Constitution.
According to statistical data, no Greek minister has gone to jail since the 1970s showing Greece’s unwillingness to sentence and prosecute corrupt politicians. Obviously, this poses problems related to national accountability and furthers the distrust of the Greek government by both the citizens of Greece and by other nations in the EU and worldwide. The culture and nature of the Greek government seems to be very conducive to the acceptance of bribes, and the funding of certain special interest groups that are likely to benefit the government in some questionable way.
It has been said that Andreas Papandreou created certain government jobs for the sole purpose of his own personal gains. Politicians who are running for office make all sorts of outlandish promises to different groups in order to receive support, with no intentions of actually carrying out the promises. Also, the immunity from prosecution clauses in Greek law has increased politician’s levels of recklessness. This immunity prevents politicians and executive-level government officials from prosecution for any crimes committed.
This is an extremely dangerous provision in the law, because there are virtually no accountability standards and has shown to lead to aggressive and self-serving policy decisions that have had drastically negative impacts on the country and the economy. To reflect on the government style and roots of Greece, the country has been described as having “one foot in the West, and another in the East. ” The country has been a synthesizing point for democracy, but ironically does not seem to display the necessary integrity and self-correction methods that are essential for the functionality of a democracy.
In the words of Manolopoulous, the country “has never had a Western-style reformation, nor the development of a large middle class, nor the emergence of conservative and liberal philanthropy that developed in Western and Northern Europe and also North America. ” This goes to show that while Greece has been perceived and thought of by others as a Westernized nation, it is not that simple. The inefficiency of the public sector is a recurring problem in this discussion because of its severity and enormous impact on the financial crisis that Greece is currently facing.
The public sector has been characterized and defined as being “statist. ” This essentially describes an environment in the country where public sector jobs are preferred as opposed to private or other types of jobs. This belief that is held by a majority of Greek citizens has been a key contributor to the inefficient and unproductive bureaucracy of government jobs and positions. This mindset also prevents Greece’s private sector from reaching its potential, and does nothing to reduce unemployment.
This mindset is held partly because public sector jobs offer the things that private sector jobs cannot, including a generous pension, a pre-determined retirement age and incremental pay increases as time goes by. This creates a sense of job security, which is desired by all as part of human nature. Job security is not a bad thing, but problems clearly arise when an entire country has become dependent on the continued influx of meaningless government jobs. Individuals who work in the public sector statistically make more, on average, than those who work in the private sector.
There is currently no statistical data that supports a link between worker productivity, job satisfaction and overall motivation to pay grade. This lack of an incentivized program that encourages employees to work hard is perhaps one of the biggest roots of the problem. The increases in public sector wages and pensions reached almost 9% in 2008. Even as the country’s economy continues to sink farther and farther into historic territory, jobs are not being cut and employees are continuing to receive excellent pay and benefits for their relatively meaningless low-end government positions.
Another problem with Greek’s public sector is the early retirement age of 58. When an employee retires at this age, they are given a full pension and in most cases, continuing benefits for a generous period of time. To put this in perspective, the average retirement rate in the rest of the European Union is 63. This over-generous system is a major drainer of government funds. According to statistics, the pensions given to an average public-sector employee can reach up to 98% of their original salary right before retirement. The final point presented is the nearly complete level of job security within the public sector.
Due to a high amount of policies and regulations about termination, it is extremely difficult for one to lose their job unless a major mistake has been made. That being said, it seems as if an overly comfortable work force has been created. There must be some degree of threat of job loss in order to motivate employees to put forth their best effort each and every day. According to Manolopoulos, there are numerous sources that display the extremely low competitiveness of the Greek economy. This is the next factor that can be discussed to illustrate the problems responsible for the current economic meltdown.
According to this data, “the burden of administration in Greece is abnormally high, the degree of regulation is excessive, and the amount of competition is severely limited due to tremendous government intervention. ” Also, it is shown that Greece rarely is a center of foreign investment, in relation to other nations in the European Union. It does not take an expert to determine that the Greek government and economic environment is not desirable enough for foreign nations to engage with. Since 2009, there have been more than 1,400 companies formerly with headquarters in Greece who have relocated to other nations.
Currently, 20% of Greece businesses are failing or will fail at some point in the coming months. These staggering statistics go to show that these philosophies are more than conceptual, and there are actual statistics to illustrate the severity of the problems. With regard to taxation, the Greek tax system is highly progressive. A progressive tax system is a system where the smallest proportion of the population, the wealthiest individuals, pays the highest taxes. In Greece, this is the case, and in fact the average and below-average households pay virtually no taxes at all.
Although this progressive system can be effective, as seen in other countries, the problem is that there are so few high earners that very little tax revenue is actually being raised. The line for which a household can declare themselves exempt is higher than most families earn, leaving very few candidates who are qualified to pay these high amounts of taxes. This threshold is 12,000 Euro per year, and has created a culture where many Greeks are understating their income in order to remain under this threshold and avoid paying taxes.
The disinterest in paying taxes is inevitable in all countries, but in this situation, citizens are actually able to get away with tax evasion, adding to the problem. This goes back to the corruption of Greek politicians, and the culture deeply rooted in cheating and dishonest practices. Politicians are wise enough to know that if they crack down on tax evasions among Greek citizens, they will not be re-elected and will lose their political power, influence and immunity.
For this reason, most politicians look the other way on massive amounts of tax evasions, and citizens are not forced to pay their taxes, adding to the already discussed lack of accountability. This is why the threshold for tax-exempt families is currently at such an alarming level. In the words of Manolopoulos, “the authorities proceed to hound the honest few, and let the thousands of dishonest high income individuals escape with impunity. Tax avoidance is a national pastime in Greece. It has become a cultural trait.
The Greek people never learned to pay their taxes, because no one is punished. ” This mindset described by Manolopoulos is at the heart of the problem, and clearly shows the unwillingness of typical Greek citizens to do their part and contribute to the overall welfare of the country. As far as reforms to try and aid the recovery of this failing economy, little has been done. The Economic Adjustment Program is essentially a program that has planned out 5-year economy strategy for the country, called the Medium-Term Fiscal Strategy.
This was created in 2011 and sought to increase the efficiency of public spending, eliminate wasteful spending that drains government resources, reduce the size of the public sector, broaden the base of tax payers, and eliminate the amount of individuals who are evading taxes by imposing meaningful penalties and consequences. The plan for this strategy is to increase efficiency, and further incentivize the labor force to increase how hard people work and their inclinations to give back for the greater good.
This seeks to decrease the tax-free threshold from 12,000 to 8,000 euro per year. A luxury tax will be imposed on very wealthy individuals to bring in further revenue. 200 new companies have been created to bring business back to Greece. There will be an increase in the amount of audits and increased sentences for tax evaders. Although this does not fully address the power imbalance issues that are a central issue in the crisis, many are hopeful that this plan, over time will increase the output of the economy and reduce the massive deficit the country currently faces.
In conclusion, these structural measures being taken have not been overly successful, but the country will benefit in the long run from them. The only reason this failing countries economy is still relatively in tact is because of the continuous capital injections from the EU and the IMF. In an effort to keep the economy relatively liquid, Greece has remained above water. It seems that the true problem at the root of this crisis is the imbalance of power, which must be addressed if full recovery is ever to be achieved. In other words, there is a long way to go for this former superpower.