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Author Topic: Greece  (Read 855 times)

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Offline consortium11Topic starter

« on: February 11, 2010, 12:55:56 PM »
A very interesting situation occurring in Europe right now.

A brief overview:

Greece has been living beyond its means in recent years, and its rising level of debt has placed a huge strain on the country's economy.

Joining the euro in 2001 allowed it access to international markets, but its current woes are threatening to destabilise the whole eurozone economic bloc.

Investors and other European nations are angry that Greece kept the true size of its deficit hidden with doctored figures.

Its debt is about 300bn euros ($419bn; £259bn).

By spring Greece must refinance a large chunk of that debt or risk defaulting on its loans, which would be a huge blow to the whole credibility of the eurozone economy.

Meanwhile markets, and the European Union, have been anxiously scrutinising the measures Greece has been taking to balance its books.

So just how bad is the situation?

Joining the euro gave the Greek government a foothold in financial markets.

The Greek government borrowed and went on something of a spending spree during the past decade, and the economy initially boomed.

Public spending soared and public sector wages practically doubled during that time.

However, as the money flowed out of the government's coffers, tax income was also hit due to widespread tax evasion.

When the global financial downturn hit, Greece was ill-prepared to cope.

Greece's deficit is, at 12.7%, more than four times higher than eurozone rules allow.

EU rules state that no nation in the euro bloc should have an annual budget deficit which is higher than 3% of its gross domestic product.

What is happening in Greece right now?

Its long-term deficit cutting plan aims to drastically reduce the budget shortfall, currently standing at 12.7% of GDP, to less than 3% by 2012.

In order to do that, the government is planning a package of austerity measures. It wants to freeze public sector workers' pay and raise taxes, and it has also announced a rise in petrol prices.

It also intends to raise the average retirement age in an attempt to save the cash-strapped pensions system.

How has this been received in Greece?

Not at all well with some members of the workforce.

About 30,000 Greek taxi drivers are staging a 24-hour strike to protest against the government's financial reforms.

On Wednesday, public sector workers in Greece held a nationwide strike.

They believe that the crisis has been engineered by external forces, such as international speculators and European central bankers.

What happens next?

European Union leaders are discussing the Greek economy at a summit in Brussels.

EU President Herman Van Rompuy said a deal to help Greece had been agreed, but said further details would not be released until later on Thursday.

Previously, news that the president of the European Central Bank, Jean-Claude Trichet, would be present at the summit had caused the markets to react positively.

His appearance has been interpreted in some quarters that some sort of aid package is being prepared.

How does Greece's situation compare with other countries?

Looking at the chart below, it shows that Greece is not the only nation breaking the eurozone rule which says that the budget deficit in each of the 16 member states must not exceed 3% of GDP. The UK, whose figure of 13% is well beyond the 3% figure, is not a member of the eurozone.
European debt and deficit figures

What has been the impact on the euro?

Concerns about high deficits in Greece, Spain and Portugal have pushed the euro sharply lower in the past month.

Last week alone, before a mini revival, the euro dropped by 1.3% against the dollar.

This week, it strengthened against both the pound and the dollar.

However, that rally was short lived and the euro turned lower against the dollar ahead of the Thursday's meeting of eurozone ministers.

Will Greece have to leave the euro?

Currency traders have feared that some countries with large budget deficits - such as Greece, Spain and Portugal - might be tempted to leave the euro.

A country which left the euro could allow its currency to fall in value, and thus improve its competitiveness.

However, the chances are that all 16 governments in the eurozone will make an effort to keep it together, with Greece still in the euro area.

What about other countries - is Greece the only country in trouble?

There are fears that Greece's troubles in the international financial markets will trigger a domino effect, toppling other weak members of the eurozone such as Ireland, Portugal, Spain and Italy who also face challenges rebalancing their books.

And Greece's woes mean there are fresh fears about whether Portugal and Spain can repay their debts.

That's because they could face higher borrowing costs, as lenders look to protect themselves against the possibility of the countries defaulting on their loans.

It's a really important issue due the huge number of issues it touches upon.

A lot of the right in the US have been pointing to it as an example of the failures of European style socialism and there is undoubtedly some aspect of that to it. The Greek state expanded at a huge rate and simply couldn't afford it. Now they need to make cuts they're struggling against their traditionally strong Union and Student movements which are poised to prevent any attempts to cut the defecit through reducing the number of public servants. France faced a similar threat a few years back... attempts to liberalise the employment laws to give opportunities to their large immigrant communities were block by students and unionists which led to riots from both sides.

Then there's the Euro issue. If they'd kept their own currency the Greeks could have devalued it, giving them breathing room. It isn't a solution, but it's a bandage over the wound which would have given Greece the time to try to correct their flaws. With the Euro rules that couldn't happen. Tension within the Eurozone between the so called "Latin Block" (the PIGS) and the traditionalist about the fixed value of the Euro... especially as France and Germany effectively dictate Eurozone policy.

There's the issues between the Eurozone and the EU as a whole. Technically this should be merely a Eurozone issue... but as is the way with such things it's looking more and more likely that the EU will take a fairly major role in any bailout or proposed solution. The Eurosceptics are decrying this, asking why countries that avoided the (as they see it mistake of the) Euro now have to pay for it's problems and in some ways it's hard to argue against them. Their point is strengthened when it becomes apparent that using the Lisbon treaty/EU constitution the EU has taken on several key economic (so not just monetary) powers from Greece.

Then there's the tension within any rescue effort; it appears the EU and Eurozone are pretty resistant to the IMF riding in to save the day. Part of that is symbolic, the IMF being seen as a group who saves developing countries, not one at the heart of the EU and part is political; President Sarkozy of France doesn't want to give a chance for IMF Managing Director, Dominique Strauss-Kahn (a likely future rival who already wins in polls against the incumbent) to appear to save the Euro. Then there's the fact that none of the major groups (Eurozone, EU, IMF, EIB etc) seem to want to take the first move. Then there's the fact that with a new EU President Herman van Rompuy should seemingly be taking somewhat of a role on this, but has been remarkably silent.

Then there's the issue that supposedly this was never meant to happen because of first the EU and then the Eurozone. Strict rules on debt and deficits supposedly prevented Greece from ever reaching this stage, but as is the way with the EU it never worked. France and Germany almost immediately breached the rules and went unpunished (not that they'd ever ben punished by the EU or Eurozone) and even the punishments that were handed out were slaps on the wrist. Many countries didn't even reach the entrance conditions when they joined... and the EU has suffered from the same failings.

It's a really complex issue that touches a lot of bases... and threatens to run and run and run...

Offline Vekseid

Re: Greece
« Reply #1 on: February 11, 2010, 01:21:57 PM »
A lot of people end up with a fundamental misunderstanding of what money is. It is a token of trust that when you receive a unit of it, you can expect to exchange that unit in the future for something of relatively equivalent value. In this sense the very idea of a deficit - versus printing money - is somewhat artificial. If you can get people to build something of actual value, then that value is genuinely created. To prevent runaway inflation, you find means to remove money from the economy - tariffs, taxes, fines and fees. As long as trust remains in the currency, it will work, even if some inflation remains (generally desirable since you want to encourage spending).

But that in turn assumes that the party creating the currency is also the one responsible for it. I've been rather skeptical of the Euro for that reason, though I don't think Greece on its own would be enough to destabilize it - and if they can't just print the money, any disruption is a single event anyway.

Offline consortium11Topic starter

Re: Greece
« Reply #2 on: February 11, 2010, 03:04:30 PM »
But that in turn assumes that the party creating the currency is also the one responsible for it. I've been rather skeptical of the Euro for that reason, though I don't think Greece on its own would be enough to destabilize it - and if they can't just print the money, any disruption is a single event anyway.

I think the "destabilise" the Euro comments refer less to the currency itself and more to the Eurozone. The countries that made it up have always fallen into two distinct camps; those who needed it devalued and those who needed it strengthened and the tension between the two has always bubbled under the surface and been a reoccurring topic on euro-politics based blogs and business pages. This crisis just brings that debate into greater focus. If Greece does fall then the pressure ramps up on the rest of the PIGS (Or PIIS with Greece gone) and their demands for more flexibility within the Euro will get louder. Considering both France and Germany are unlikely to back off it raises the prospect of one of the nations in trouble leaving the Euro.

Offline Trieste

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Re: Greece
« Reply #3 on: February 11, 2010, 04:13:34 PM »
I'm told that a substantial amount of Europe believed that the US was like a flailing giant as its economy plunged, flailing around and causing all sorts of collateral damage around the world. Our Wall Street dragged everyone with into the cesspool, I guess. I really don't know how true it is - I had a hard time believing it, honestly. I mean, we didn't get a whole summit on the state of our economy. :P

All the talk of the Eurozone coming down on Greece very much gives me an "Uh-oh, Daddy's home" sort of feel. In fact, the whole article seems to have that feel to it.

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Re: Greece
« Reply #4 on: February 11, 2010, 04:49:19 PM »
I have spent a total of less than a month in Greece over the last three years, so don't expect current insights into the other side. Still, the flavour of this article, and the British media in general, have consistently been a mixture of relief and gloating: 'Oh, look, we could have been the ones at the bottom! Good thing we clung to our pound!' Quite biased, and equally ridiculous.

What those media fail to grasp is the unique situations that Greece has had to deal with. The problem of illegal immigration alone is a financial haemorrage. The country is at the crossroads of three continents and has a coastline of 13.676km, mostly scattered in hundreds of islands. Patrolling them all is practically impossible, and we're not likely to turn refugees in washtubs back or leave them to drown. Cue in the usual problems, only magnified to fit such a tiny country.

We're loud and strident in our protests, so they attract attention, and the reason we keep protesting is because the tightening of the belts is not part of the current recession, but has been going on for the most part of 30 years, and people are frankly fed up with it. Deprivation and bingeing cycles, anyone? Still, Greece entered the EU in 1981 and the eurozone in 2001. There had been plenty of time for 'those upstairs' to figure out if the economy could support the transition or not. At the time of the conversion, 1 euro = 340 drachmas. How much more devaluation could that take?

Offline consortium11Topic starter

Re: Greece
« Reply #5 on: February 11, 2010, 07:03:39 PM »
The media have it right actually...

Or, as is the way with the media, they've got that aspect of it right without really mentioning the others.

The reason Greece is facing the humiliation of having to be bailed out and the UK is still (just about) tottering along is that the UK's control of its currency allowed monetary policy to do what monetary policy is meant to do in these situations: act as a shock absorber. The pound was devalued by 25%, but this took the pressure off. In comparison Greece had no control of its monetary policy with set values and interest rates that meant it couldn't do anything monetarily to avoid the current situation.

Keeping the pound prevented the UK from slipping into the same situation.

The comparison is actually pretty fair as the UK and Greece have some pretty similar stats going on; our own deficit is only just under Greece's and several other key economic indicators don't show a huge amount of difference. The pound is the reason we're doing (slightly) better. Of course, that doesn't address the root problem... devaluation is a temporary measure that should be followed by getting your finances in order. None of the major UK parties seem to be coming close to doing that.

Greece does have some unique features compared to other countries; tax evasion over there is far higher than nearly any other western country and they seem to have a government uniquely able to ignore the facts. They made up their revenue and spending figures, they doubled the number of parliamentary administrative staff and in 2009 of all years they hired 29000 public servants to replace 14000 who retired... and figures like that have been coming in year after year after year. Greece lived far far far above its means for many many years (as many countries including the UK did) and it has been the first to really suffer because of that (Iceland's situation was rather different) a fact amplified by its lack of monetary control to manage the descent. There's a decent chance it will been followed by any of the other PIGS countries within the next year or two (although Ireland at least seems to taking the right steps and to have a public who accept that if the country is going deeper into the red every day then they themselves will have to face some of that burden).

Although it does raise the question, if someone does step in to "save" Greece, what's to stop governments in the other countries near the brink continue to run their states into the financial ground with expensive populist policies, knowing that someone will ride in on a white horse to save them?

Offline Asuras

Re: Greece
« Reply #6 on: February 11, 2010, 10:49:54 PM »
Greek and Britain have about the same GDP per capita ($33,000K-ish)

But the GNI per capita is quite different, less than $30K for Greece and more than $45K for the UK. The reason for the difference is that a lot of profits from what Greece makes are sent abroad to foreign investors; those profits count toward the GNI of the owner (UK), but toward the GDP of the producing country (Greece) even though the producer can't necessarily tax those profits.

(Those are mainly French, British, and German investors which is probably why they're interested in preventing Greece from defaulting...)

Even though deficits this year are similar in Greece and Britain, Greece owes more than 100% of GDP while Britain owes around 70%. Relative to GNI (I don't know why they report it as a fraction of GDP honestly) the difference is starker, something like 100% vs 50%, and the deficit / GDP falls too.

There are other reasons; governments and private sectors may own substantial assets which - if a crunch came - they could sell. These may not count significantly toward GNI if these assets earn little interest, which is often the case with government-held reserves. This is why Japan, which has a debt-to-GDP ratio of almost 200%, is nevertheless solvent - they've spent the last twenty years buying American bonds which if anyone ever asked "Can you guys pay up?" they could sell, so no one ever goes to Tokyo asking that.

Finally, when a country threatens to become insolvent, its interest rates get a lot higher. From 50 to 100% (very roughly), people don't seriously consider that the country will default, so interest rates are low. When they get higher (as in Greece's case) interest rates get way higher way faster, and this creates a vicious cycle since the higher interest rates go, the harder it is for Greece to pay its debts, which makes interest rates go higher again.

The common currency does create perverse incentives, since indeed right now Greece and other heavily indebted EU countries are expecting bailouts whereas in the past they would have been forced to bite the bullet and default, devalue, or never get into this situation in the first place, and creditors in northern Europe would have been less impacted. But now they're tied together.

I do not think that Greece or any eurozone countries will default, but it will cost the euro significant credibility and stir serious questions in creditworthy countries like Germany and France, especially if they bailout countries other than Greece.

It is probably a lot easier to balance a budget if you don't run a welfare state, but in general I don't think that this is really about socialism vs. whatever.

Offline Jude

Re: Greece
« Reply #7 on: February 14, 2010, 04:30:47 AM »
I don't think the moral of this story is that socialism is bad anymore than the moral of the recent American story is that capitalism is bad.  What I took from this is that the private sector and the public sector can both cause economic turmoil if they mishandle their financial clout.  i.e. socialism and capitalism can both lead to recession/depression.