Things are not looking good in Greece.
Many of you will have heard from the
news about Greece's massive debt crisis. In 2011, the debt has accumulated to
356 billion euros, which is equivalent to 165.1% of it's total GDP, and
is forecasted to be around 181.2% of its GDP by the end of 2012. The
economic situation in Greece is made worse by the global financial crisis in
2008, which resulted in Greece facing negative economic growth for three years
in a row, going into its fourth year.
Source:
IMF World Economic Outlook
As economists it
is important we ask ourselves this question: why is Greece in its
position right now?
Over the years, Greece had a serious issue of overspending and "was living beyond its means" (BBC). When Greece decided to join the eurozone in 2002 and started to use the euro as its official currency, it made borrowing much more easier and public spending went to a new all time high. This was the start of its "debt funded spending spree", when the government spent excessively with money they don't have.
A good example of this is
the 2004 Olympic games in Athens. It is hard to deny that it was a truly
spectacular event and I remember myself staying at home watching live coverages
all day long. However, little did I know about the overspending and the
negative impact it had on Greece's economy back then. The initial budget for
the whole event was 4.5 billion euros, but in the end they spent a total of 9
billion euros - double of what they had expected to spend in the first place!
Here is a graph showing the
level of Greece's public debt, as a percentage of total GDP, from 2004 to 2010:
Source:
http://www.indexmundi.com/g/g.aspx?v=143&c=gr&l=en
The percentage debt
actually decreased from 2004 to 2007, but do remember that it is still very
high (around 100% of GDP). The economy started to do badly in 2007, and as a
consequence the government received less tax revenue from the
working population. Tax evasions were also very common. In the end the
government cannot cover the budget deficit and it "spiraled out of
control".
This made Greece impossible
to defend themselves from the global financial crisis in 2008, which widened
the deficit even more. As a result, the debt levels continue to rise to a level
that Greece was incapable of paying off its debt and ultimately had
to ask the EU for financial assistance. Now after the second bailout (130
billion euros) there are yet no signs of recovery, and Greece still faces a
couple of tough decisions ahead.
The Eurozone is in an out of control debt crisis. For the likes of Germany, Austria and the other blonde Germanic countries, your spending solution is a feasible option. This is because their debt is not at crisis levels yet and their government's financial management is superior to those of the problematic ones, notably Greece. The countries of Greece, Spain, Italy, Ireland, Portugal, and increasingly France, are in no position to be able to borrow more to invest in these infrastructure developments. This is because these of their poor credit ratings, making their international borrowing rates higher than the Northern countries (except Ireland of course). If this far-fetched (in my opinion) dream of a Europe united by one country is to be achieved, these countries have absolutely no choice but to face years of austerity and simply let Germany and Austria carry out the Eurozone's fiscal spending. A much more feasible option, which is seen by many as completely off the table, is for countries like Greece and co. to leave the Euro and return to their respective pre-Euro currencies. This would cause a sharp fall in their real GDP, as their currency rate will fall like a stone. However, this short-term sharp pain will be soon relieved as the country's exports will suddenly start to boom with its new found competitiveness over the Eurozone. This will enable the government to collect in tax revenues and start repaying the debt. With continuous repayment, over years, the government will be able to increase fiscal spending on social services to further increase AD, as the interest rates they pay every year becomes less and less.
ReplyDeleteThe option to stay in the Eurozone is a very poor choice, as it means continuous pain for both the Mediterranean countries and the likes of Germany and Austria, as they will have to continue bailing out these countries. A great example was explained by UK politician and Eurosceptic Nigel Farage, who revealed just how feeble the solutions were. When the Spanish banking crisis took place, he explained that countries like Italy and France were expected to provide 20% of the bail-out money to Spain each, by lending to Spain at the generous of 3%. However, in order to get that money, they were forced to borrow on the international markets at 7%, which makes the loan completely useless. It is simply moving the eggs around in the same basket, but getting more interest bills in the process.
Therefore, in my opinion, the failing Eurozone economies should leave the Euro, for their sakes as well as the sakes of Germany, so that instead of suffering continuous pain, which in turn hurts the whole world due to globalisation, the countries should leave, suffer one short period of pain, and slowly but surely get back on their feet.