Greek Crisis

1. The difficult situation Greece has been facing was caused by a number of factors that were primarily predetermined by the attempts of the country to join the European Union and further incompetence as well as deceit of its government. Firstly, the democracy of Greece was quite young and problematic as it “lacked a culture of civic society” (Roscini et al. 2011, p.3). In such a way, with the population that was not accustomed to follow the rules, bribery and tax evasion was prospering. In many cases, the system of the tax collectors was characterised as “4-4-2” (Roscini et al. 2011, p.3). Consequently, Transparency International reported that 18% of Greeks had paid bribes during the year (Roscini et al. 2011, p.3). By 1981, when Greece became the member of the EU, Olympic Airways and Commercial Bank had been nationalised, much money had been spent for defence, but the public investment had been reduced. Due to the fiscal deficit, less than 3 % of GDP and 2-3% of the unemployment rate, Greece was “too far to catch up” with the European Union demands (Roscini et al. 2011, p.4). Consequently, with the new policies implemented by Papandreou, the expenditures for public sector grew from 29 to 48% of GDP, and the fiscal deficit was estimated as 10% (Roscini et al. 2011, p.4). At the same time, public debt tripled to 89% in 1990, and the interest payments on this debt were worsening the deficits considerably (Roscini et al. 2011, p.4). Unemployment stayed under the average indexes of the EU. By 1990, the criteria for the countries of the EU had comprised the national debt less than 60% GDP, budget deficit less than 3%, inflation no more than 1,5% while the common currency could have been accepted according to the decision of the members of the Commission (Roscini et al. 2011, p.4). Obviously, Greece has not met the criteria. However, in January 2001, Greece joined the Euro area with the figures 1,6% for the fiscal deficit and 2% for the inflation (Roscini et al. 2011, p.5). The monetary policies, including the tax base broadening, giving independence to the Bank of Greece, regular audition of the large firms and some false data on the economic and financial situation in the country became the main measures taken by the government to meet the above-mentioned goal. Such event has presented Greece as a country that had made an enormous economic progress. However, due to the level of life that was twice above the euro-area average, the country has met great troubles in the public sector. Mainly the preceding monetary policies caused the problems in the area of the employees’ compensations and pensions. Additionally, tax evasion continued. Although national income was announced as €20,000 per person, two third of the actually employed workers got €12,000 or less (Roscini et al. 2011, p.6). In 2009, the fiscal deficit grew due to the tax relaxation at the period of the elections. However, with the doubts about the date generated in 2004, the deficits appeared to be greater than claimed. Additionally, the governmental debt in the private sector that made up 92% of GDP was another problem (Roscini et al. 2011, p.7). Finally, the global crisis of 2008 together with reduction in tourism and world trade decline has contributed to the difficult situation of Greece.

2. The EU as well as its currency euro cannot prosper with the crisis in Greece for its contribution to the life in all of the member countries is inevitable for the tight bonds that exist due to the arrangements and mutual interests. Since the control over the deficit of the Greek budget has been lost, the crisis in the country became the issue of concern not only for Greece itself, but also for the whole European Union. Mainly the credibility of the European project has become under the risk for the probable “spillover to the other countries” (Roscini et al. 2011, p.13). The debt of Greece was considerably higher than those of the other members of the union. IMF contribution of Greece quota appeared to be 3200% while the same tolerated quota for the other countries was defined as 200% annually and 600% accumulatively (Roscini et al. 2011, p.13). The difference is obviously huge and causes numerous complications for the other members. Therefore, one of the main issues is that the situation in Greece is being stabilised at the cost of the other countries. At the same time, the further support of Greece has become a difficult and disputable issue among the European countries. Financial support that lets Greece avoid the default is a threat to the national obligations of the country. Therefore, as a member of the EU it causes decrease the euro exchange rate, which is obviously disadvantageous for the entire European Union. The loans provided by the EU were divided in tranches and obliged Greece to repay the debt till 2018 (Roscini et al. 2011, p.13). However, later it got the longer terms for its loans repayment. With the agreement of the countries’ parliaments, “markets were not placated” and the euro decreased against the dollar (Roscini et al. 2011, p.13). This was a good example showing how the Greek issue raised the financial panic among the countries. Dysfunctional markets obviously form highly undesirable conditions for the entire union as well as for the euro rate on the foreign exchange market. Furthermore, such events would mean ECB dependence on the political pressures, which is a contribution to the negative impression of the fiscal union and further decline of its sovereignty. The default of Greece would be palpable not only for the country itself, but for the EU members, whose “risk premia and interest rates …could soar” as well as for the French and German banks that would definitely “face losses” (Roscini et al. 2011, p.15). The reduction of the credit rating for the entire Eurozone would become considerable. Even though the Greek crisis does not destroy the Eurozone completely, it brings a great number of serious financial and economic problems to each country.

3. There are many reasons that let Greece dictate its own rules regarding the tranches and not be afraid to be bailed out. The first issue related to the fact that Maastricht treaty forbade bailing out member countries “through others’ assuming their debts” (Roscini et al. 2011, p.9). Furthermore, such decision should be approved by the Council of /Ministers and 17 nations. Regardless of the misstatement and failures of Greece, they were interested in the participation of the country’s rescue. In contrast to Britain, Germany was against providing aid. Moreover, the EU was oriented on the support of Greece due to sustaining “the euro and  the  European  ideal” (Roscini et al. 2011, p.10). At that period, euro accounted for 37% of the exchange transactions on the global foreign market, and had to become “an alternative to the U.S. dollar as a reserve currency” (Roscini et al. 2011, p.10). Another issue implied that the exclusion of one small country from the fiscal union would lead to worries on the part of the investors that some other big countries carrying the debts burden, such as Spain and Italy, would follow its example and ruin the union. As soon as the fears of default spread to such members of EU as Portugal, Ireland, Spain, and Italy, the above-mentioned issue became even of a greater concern for the debts that they also had in varying degrees (Roscini et al. 2011, p.10). Rejection of their refinancing would definitely lead the entire euro area into an irreversible crisis. The euro rate fell from $1.50 to the value of $1.20 by June 2010 (Roscini et al. 2011, p.10). In addition to the changeable moods within the EU, the Greek issue has got a negative impact on the potential development and extension of the Eurozone. Due to the ambiguous events assessment, some Baltic states that were planning to adopt the euro currency got less enthusiastic about the idea. The actions of the EU towards Greece should have become important to change their attitude and extend the euro distribution. Some other reasons to support Greece instead of bailing it out were based on the euro-area banks issues. The banks of France and Germany held approximately €60 to €120 billion of Greek government bonds (Roscini et al. 2011, p.10). The banks of the United Kingdom and Switzerland accounted for holding €25 to €50 billion of the bonds (Roscini et al. 2011, p.10). In such a way, Greek default could cause a great financial panic in the banking system and become a threat to the global financial crisis. Rescues of the banks of the EU members “cost more than a loan to Greece” (Roscini et al. 2011, p.10). In such a way, aid to Greece is to a great extend the security and stability guarantee for the EU members. In addition, it is one of the key pathways for the European projects of the gas pipelines from the Middle Asia.

4. Germany is one of the leading EU forces. However, it cannot be blamed as the country that is responsible for the crisis in Europe. Firstly, it is important to focus on the attempts of Merkel to rescue Europe by being “fanatically against providing aid” (Roscini et al. 2011, p.9). In fact, Greece became primarily the origin of the European crisis. “Calling Greece “lazy” or suggesting it leaving the European Union” should be considered as attempts to show the mistakes of the government that could be avoided or fixed (Roscini et al. 2011, p.9). The tough structural reforms were necessary for the countries with the weaker economy as not the exterior influences, but the domestic problems were those that made them exhaust the supportive euro area. The appearance of euro is not the real reason of the crisis. However, it is interrelated with the complicated structure of the monetary union. The issue that deserves attention is that the common currency does not imply the appearance of the common fiscal policies. Consequently, the problems with the control and regulation of the national financial organisations appeared. Notwithstanding the euro currency implementation caused many complications to the Greek economy, the reasons for the crisis were deeper in the previous policies of the government and social system that has let the bribery in the country prosper as well as the budget got under negative impacts. At the same time, the influence of Germany was not the reason of the crisis despite the position of this country was not very tolerable for Greece. With all of the possible ideas to blame Germany for the crisis in Europe or in any separate countries, it is important to remember many of the facts that deny its fault. Firstly, many of the countries-members had considerable debts prior to the crisis. Among them Greece was not the only one, which became a special case, but also Ireland, Portugal, Spain and Italy (Roscini et al. 2011, p.15). With regard to the banks’ position, it is essential to emphasise that their contribution to the crisis development was mostly based on the focus on their own profits rather than the increase in government debt. Therefore, they could have paid more attention to the situation. However, the crisis cannot be regarded neither as caused by Germany or euro since it was predetermined by a number of complex factors and wrong decisions of different representatives.

5. The position of Germany as one of the leading countries of the European Zone was opposing the majority from the very beginning. Germany feared that Greek aid “would bear the brunt of the cost” (Roscini et al. 2011, p.9). In addition, suggesting Greece leaving the European Union present the attitude of Germany as not supportive. Even the poll of the German voters showed that 71% opposed helping (Roscini et al. 2011, p.9). Among the reasons for such position, one can see that a failure to meet the goals would cost German government majority of difficulties. Merkel’s fanatical opposition to provide aid was also caused by the moral hazard of being deceived and meeting not just a complicated issue, but the one that demands considerable efforts from Greece that could be hardly ensured. Affordance to buy Porsches or Mercedes by the Greek population was not regarded as an achievement, but another contribution to the budget deficit that already needed reduction by all possible means. “Wrong incentives” and burdening “countries with more solid public finances” was the definition for the actions of the Greek actions and the future consequence for the EU members (Roscini et al. 2011, p.10). The problem of Greece and, consequently, its investors is the necessity to restructure the debts. The same demands should be referred to Spain. Finally, Germany is the country that can lose its credit rating with regard to numerous complications and global crisis. Even if Germany is the guarantee of stability in the euro area, numerous exterior factors, including Greece default threat, can have a crucial negative impact on the entire economy of the EU. The lower interest rates for Greek borrowings can be defined as not wise decision for several reasons. Firstly, it encouraged Greece to borrow more money instead of concentrating on the debts that already existed. Therefore, it has finally contributed to the growth of the budget deficit and national debt. However, such ability could be regarded as a positive perspective if the figures presented by Greece with its entrance to the union were not increased. The wrong distribution of the resources was another feature that one may consider as the decision to provide cheap rates as unwise. Mainly the confrontation between the national debt that was the highest among the members and the amount of money spent for the pensions that “weighed heavily on public finances” can show the spheres, which could definitely get the expenditures and borrowings reduced (Roscini et al. 2011, p.6). The Greek pension system was defined as “complex, inequitable, inefficient and ripe for fraud” (Roscini et al. 2011, p.6). The disadvantage of the above-mentioned borrowings was that it allowed development of this system as well as of some social welfare programs that actually caused the share of  the  deficit  grow “from  €3  billion  in  2000  to  €19 billion in 2009” (Roscini et al. 2011, p.6). Finally, the additional expenditures demanding borrowings were military spending that were too high and reached 3.7% of GDP versus1,7% in the euro area (Roscini et al. 2011, p.6). To sum it up, one can see that the ability to borrow on cheaper rates caused disadvantages for the Greek economy, mainly for the unwise resources distribution and structuring chosen by the government.

6. Due to the decision of the commission to provide aid to Greece, the reaction of the financial market was mostly negative, but quite changeable. Although the countries of the Eurozone were interested to support Greece, the position of this country and its previous financial history became an issue of dispute. The budget of Greece had a high level of deficit. This deficit had a weak structure and failed to fulfil the revenue part. To cover the deficit, the new debt obligations were taken, and the national debt of the country grew regularly. Consequently, the credit rating of the country has decreased, which led to the loss of possibility to get the cheap free financial resources on the market. The same issue caused the further increase of the budget deficit and created the vicious circle. Due to the absence of the indigenous national value, Greece could not defuse the situation by the increase of inflation. Hence, at the end of 2009, with considerable growth of Greek national debt, the investors became fearful regarding the abilities of Greece to accomplish their debt obligations. Consequently, the country was characterised by the crisis of confidence that reflected in the increased costs of the insurance against risks. Each Eurozone country needed parliamentary approval. The same happened with Greece and its aid that was demanded to avoid the default. However, paying attention to the dispositions against the initial package from the investors, one can find various commentaries. The most widely spread ones were related to the position of Greece towards the changes in the structural system. The second one was based on the fact that providing the aid to this county would finally cause the spread of the “global financial crisis” and even “unravel the European monetary union” (Roscini et al. 2011, p.15). From the very beginning, “a looming repayment deadline” instead of the definite plan of the restructuration was the basis for the request of Greece regarding the rescue package activation (Roscini et al. 2011, p.12). In addition, the downgraded Greek bonds were likely to provide 30% to 50% of their principal to the bondholders, which led to the loss of access to the capital market by Greece. Moreover, it was clear that €45 billion package was not enough solve the deeply established financial needs of the country, which initially implied the further investments into the Greek economy (Roscini et al. 2011, p.12). The agreement of Greece with the EU and IMF implied that the fiscal surplus of GDP should be 6%, future interest rates – 5% to 6% (Roscini et al. 2011, p.15). However, the risks were considerable for the banks as well as the credit rating did not provide the guarantees of the arrangement maintenance. The primary questions, raised with the above-mentioned issues and caused numerous doubts among financial market representatives, became the ability of Greece to “stabilise its debt-to-GDP ratio” that would mean “raising taxes on the rich”, the deflation that would be necessary to “push down export costs” and the possible outcome of worsening the deficit and debt that would raise to 160%GDP in 2013 (Roscini et al. 2011, p.15). In addition, the support of the demanded reforms for at least several years was obviously necessary, but doubtful.