Download Outlining the Impact of the Financial Crisis on Greece and the way out

Outlining the Impact of the Financial Crisis on Greece and
the way out
Katerina K. Sarri
Associate Professor
Univ. of Macedonia
[email protected], Greece
Introduction
If 2008, 2009, 2010 and 2011 will be remembered for anything, it will be the words
'global economic crisis' and 'austerity measures' reflective of the situation that we all
seem to have found ourselves in. The World Bank refers to the “triple F” crisis:
Financial Fuel and Food and at the moment the prospect of Greece leaving the Euro
is the only thing anyone is talking about in the markets. It has even its own
nickname “GrExit” while Spain is referred to as SPanic Eurover. According to a
communication report by the European Commission (COM(2012) 183 final) a crisis
of such a magnitude calls for radical changes in Greece so that a new dynamic,
competitive economy can emerge , capable to generate sustainable growth, create
jobs, support social cohesion and deliver on the expectations of the Greek citizens.
The underlying causes of the crisis have been building up for several years and
reversing these negative trends will take time. This presentation is an attempt to
introduce interested individuals, mainly non-economists to the current financial
situation in Greece and its effect on society and outline the causes of the Greek crisis, as
well as the key reforms that are needed to get Greece out of the crisis and make it
prosperous.1 Special reference is made to the role of Small Medium Enterprises (SMEs)
and micro-businesses.
The financial crisis in Greece: a mapping of the recent economic history and
its effects on the society
In the decade before the crisis (2000-2008) Greece enjoyed a masked prosperity
built on real wage increases out of step with productivity, strong consumer demand,
boosted by excessive credit growth, low real interest rates, loose fiscal policy and
1
This presentation is heavily based on the work of Costas Meghir, Dimitri Vayanos and
Nikos Vettas, “The economic crisis in Greece: A time of reform and opportunity”, May 2010,
available at www.greekeconomistsforreform.com and the work of Manos Matsaganis, “The
welfare state and the crisis: the case of Greece”, December 2011, available at
http://esp.sagepub.com/content/21/5/501 with their granted permission
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experiencing a fast growth averaging 4 per cent when average growth in the E.U. for
the same period varied around 2 per cent. In October 2009, the incoming
government announced that earlier fiscal data has been misreported, leading to the
apocalypses of an uncompetitive economy, signified by chronic fiscal and external
deficits and a large public debt. Thus the “Greek case” assumed unanticipated
dimensions. Its dependence on heavy borrowing proved fatal since markets reacted
by increasing spreads and by lowering credit ratings. The first package of austerity
measures aiming at fiscal consolidation that were announced by the government on
March 3, 2010 failed to soothe the markets and the country lost access to
international financing. A sovereign debt crisis threatened to develop into a
solvency crisis. Two months later, a 110 billion euro rescue package was agreed
with the E.C., the European Central Bank and the International Monetary Fund, to
cover borrowing requirements for the following three years, signing in return a
Memorandum of Economic and Financial Policies. This agreement committed the
Greek government to drastic spending cuts and severe tax increases. Shortly after
that, a second austerity measure package was announced to support government
trustworthiness, which impressed international markets but caused strong
domestic reactions and discontent. Two years later and after more austerity
measures put in effect Athens has to reduce its budget deficit to below 3 per cent of
GDP by 2014 and find a further €11.5 bn in public spending cuts by 2014. In a new
agreement the government is likely to ask for that deadline to be extended by two
years. But spiralling economic woes have already driven Greece off course.
However, experts warned Greece will need another cash injection if the terms are
relaxed. Joerg Asmussen, executive board member of the European Central Bank,
said: "If one is pressing to shift fiscal targets, one should be so honest to also say that
as long as a country is running a primary deficit, extending the fiscal targets will
automatically mean that there will be an additional external financing need."
In the meantime, unemployment, suicides, prostitution, drug abuse, depression,
homelessness and hopelessness are skyrocketing. Greece’s jobless rate hit a new
record in February. Data from Greece’s statistics service on Thursday (17 May,
2012) showed unemployment hit 21.7 per cent in February. In the 15-24 age group
it rose to 54 per cent. The data showed nearly 1.1 million people were jobless, 42
per cent more than in the same month a year ago, reflecting the huge scale of the
human damage. However, the true scale of unemployment and underemployment is
higher. The New York Times reported in April that in Greece, the suicide rate among
men increased more than 24 per cent from 2007 to 2009. The suicide rate increased
by 40 per cent in the first half of 2011. Greece’s financial crisis has also made some
families so desperate they are giving up the most precious thing of all – their
children – as they can’t take care of them any longer. There are estimates that up to
20,000 people are homeless in Athens. Society is approaching a critical point. The
imposed conditions of the second bailout is still to be enforced including tens of
thousands of job losses and further pay cuts. Those fortunate to still have a job are
of course extremely worried about their futures. On the day the agreement was
reached in February this year Former French President Nicolas Sarkozy said:
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“Today the problem is solved”. No wonder, National governments across Europe
have experienced a 51% decline in trust over the past 2 years, with the biggest
losses felt in Portugal (-84%), Greece (-78%) and Spain (-77%). These implications
of the crisis in the economy, the social fabric and the political system will take years
to unravel.
Causes of the Greek Crisis
The accumulation of Public Debt caused a decrease in Productive Investment and an
increase in Consumption. This means that the Greek people were spending beyond
their actual revenues with money their government borrowed mainly from abroad
and when possible, by selling bonds to Greek citizens who wanted to invest their
savings. This increased Public Deficit; Borrowing was increased meaning that Debt
was also increased.
A country’s External Debt (borrowing from abroad) may stem from government
borrowing as well as from the borrowing of the country’s private sector (as in the
case of Spain where much of the external borrowing was done by Spanish banks). In
the case of Greece the government did almost all of the external borrowing (89% of
GDP in 2009, or 79% of total public debt in Table 2). For Greece, its external debt
essentially coincides with its external public debt.
Public Deficit occurs when Public Expenditure is higher than the Public Revenue. In
this case the government needs to borrow and thus debt is generated.
(Public Deficitexpenditure > revenue)
Expenditures in the current year include interest payments on debt accumulated
over previous years and add to the current year’s deficit causing at the same an
increase at the deficit leading to borrowing and therefore to the creation of debt.
Deficit is expressed as a % of the size of the economy, which is measured by GDP
(Gross Domestic Product), that is the total value of goods and services produced in
the country.
Table 1 describes the historical evolution of the deficit in Greece for the last five
decades. For each decade the deficit is expressed as a percentage of the Greek GDP
averaged over the ten years.
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Table 1: Public deficit (source OECD)
9
8,4
8,1
8
7
5,9
6
5
4
Series1
3
2
1,2
1
-0,6
-1
1960-1969
1970-1979
1980-1989
1990-1999
2000-2009
S1
0
The deficit increased rapidly and severely during the 1980s and remained high in
the next two decades affecting Public Borrowing and Public Debt as reported in
Table 2.
Table 2: Public debt (source OECD)
115,1
120
101,5
100
80
71
60
40
26
20
0
1980
1990
2000
2009
S1
In order to understand the concept of deficit and debt, reference was made to
Revenues and Expenditures, since they are directly related to consumption and
productive investment (the latter shall generate revenue).
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Table 3 presents consumption and investment as a percentage of GDP and averaged
over each decade.
Table 3: Consumption and Investment (source OECD)
Consumption as % of GDP
100
90
Investment as % of GDP
90,1
88,8
85,1
77,2
80
70
60
50
40
30,7
23
30
20,6
22,6
20
10
0
1970-1979
1980-1989
1990-1999
2000-2009
The picture presented in the above table was anticipated. Consumption has
increased while productive investment has decreased. These facts were caused due
to the severe increase in public debt and the way the government spent the money it
borrowed (very limited investments for public infrastructure, increase of the public
sector in terms of wages and pensions’ expenditure). So, most of the money raised
by government borrowing was not spent on productive investments, while fewer
citizens’ savings were available to finance productive investment by private firms.
As a result the cumulative productive investment decreased.
According to the data presented in tables 1, 2 and 3, since the 1990s both Public
debt (external debt) and Consumption have increased dramatically. This means
that the country’s citizens consumed more than what it was produced through
imports, using the money borrowed from foreigners. The borrowed money was
flowing from the government to the citizens through various channels, e.g., wages
paid to public servants, payments to government suppliers, pensions paid to
pensioners.
During the 2000s Greece became more indebted to foreigners because:




Imports were increased in relation to exports
Fewer transfers were received from the E.U.
Investment increased due to the Olympic games
Greek citizens became less willing to save since interest rates were lower and
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
consumer loans from banks easily available and
Savings had become insufficient to buy the bonds issued by the government.
In summary, the increase in Greece’s external debt during the 2000s was caused by
the combination of the government’s large borrowing needs, and its citizens’
insufficient savings
Is there any hope? A Way out? Can Greece repay its debt?
The answer is yes but under certain conditions:
Condition 1: Reduce the deficit.
As we know the deficit is the government’s expenditure (interest payments on debt
included), minus its revenue. Therefore in order to reduce the deficit one should
look into ways to increase revenues, or/ and decrease expenditure.
The component of deficit that does not include interest payments on debt is known
as the Primary Deficit.
A zero primary deficit means that the government does not create a new debt
burden each year. Thus the main aim of the government should be to originally
attain a zero or negative primary deficit and create primary Surplus.
In terms of government expenditure it should be noted that this is comparable to
the European Union (EU) average, while revenue is well below because of tax
evasion. In an average European union country 13.4% of the GDP is collected from
direct taxes while in Greece the relative percentages is only 7.9. In this sense, tax
evasion is the main source of Greece’s deficits and action should be taken
immediately.
As far as the public sector it is concerned, Greece’s main problem is not that the
public sector is too large, but rather that the money is spent inefficiently. Total wage
bill in the Greek public sector is indeed higher than the EU average: for example, in
2007 Greece spent 11.2% of its GDP to pay public servants, while the EU spent
10.4%. The relevant question is not whether the total wage bill in the Greek public
sector is slightly above or slightly below the EU average, but whether the public
sector’s productivity is high or low. The issue of public‐sector productivity is
related to that of corruption. Indeed, one reason why productivity is low is that
some of the money allocated for public‐service provision ends up in the pockets of
corrupt public servants. Corruption is a major problem in Greece: in 2009,
Transparency International ranked Greece as the most corrupt of the 27 countries
of the European Union, together with Bulgaria and Romania.
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Condition 2: Growth of GDP
It should be noted that debt is relative to GDP. This means that if Greece’s GDP
doubled overnight, without any change in the public debt, Greece would have a
much smaller debt problem.
Greece can achieve and sustain high GDP growth if it makes its economy more
competitive. Gains in competitiveness are all the more important because of Greece’s
large external debt. Indeed, a country can repay its external debt by exporting more
than it imports.
Condition 3: Competitive economy
Competitiveness is what allows a country to enjoy sustainable prosperity and not a
façade one. During the 2000s, the average income of Greek citizens rose
significantly. This rise was unsustainable, however, because it was financed by
external borrowing. Now that Greece can no longer borrow, it already faces shrieked
incomes. The competitiveness of the Greek economy currently is the second lowest
among the 27 countries of the European Union with Bulgaria being first. In order for
the Greek economy to be made more competitive the government should provide a
stable institutional framework that promotes competition, investment and
entrepreneurship through the abolishment of many existing regulations. Key reforms
in the product market such as regulations that prevent entry into many industries
and professions (entry barriers) should be abolished. In addition regulations that
make it difficult for firms to fire workers should be loosened. This will ultimately
benefit workers because Greece will attract more investment and well‐paying jobs.
Mobility of workers across firms and industries is a sign of a healthy economy, but
mobility in Greece is the lowest in the OECD. Further more, competitiveness
requires a highly educated workforce: this makes existing firms more productive
and helps attract new firms, especially those engaged in high technology and high
growth activities. Greece must perform better in the area of education: both by
allocating more resources to it and by ensuring that resources are used more
productively. It should also invest more in research and development (R&D), an
area, which currently receives very few resources. For example, Greece invested
only 0.6% of its GDP in R&D in 2007. The average across the 30 OECD countries was
2%, with Greece scoring the third lowest.
Improvements in education will not bear much fruit unless they are combined with
regulatory reform that makes it easier for firms to operate in Greece. Indeed, in the
absence of regulatory reform, high technology and high growth firms will not come
to Greece, but instead educated Greeks migrate abroad. Because regulatory reform
will induce such firms to come, it will not only stem Greece’s brain drain, but will
also induce educated Greeks who migrated abroad because of better job
opportunities to return home.
In light of helping the SMEs and micro-businesses
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A permanent exit from the crisis will require growth in Greece’s productive sector. It is
estimated that reform of product and service markets could add up to 13.5 per cent to
Greek GDP over the long term according to the Foundation of Economic and Industrial
Research (Quarterly Bulletin 2/10, 2010).
SMEs are key drivers for economic growth and employment. In Greece they represent
99.9 per cent of all companies, with micro-businesses representing 96.5 per cent. These
businesses are faced with serious survival problems since according to statistics 6 out of
10 saw deterioration of their earnings in 2011 compared to the year before; 150.000 jobs
were lost in 2011. In a survey commissioned by the Greek association for SMEs it was
estimated that in 2012, 60,000 firms will close down and a further 240,000 jobs will be
lost. In light of the above, structural reforms to support enterprise and investment are
needed in order to facilitate the rebalancing of the economy towards stronger investment
and export performance and trigger a decisive shift towards higher value added activities.
The re-engineering of the public administration as referred in previous sections of this
presentation should proceed immediately commencing its efforts from the following
areas (Communication from the Commission, 18/4/2012, 183 final):







Export facilitation and promotion
Competition and market access
Transparent and efficient public procurement markets
Reduce administrative burdens and implement “better regulation” practices
Facilitate new investment
Helping business through tax reform
Increasing liquidity for SMEs
Such actions are indispensible and require sustainable efforts and strong political
commitment in order to remove a tangled web of complex legislation and ineffective
administrative structures. It is inevitable for Greece to make all the appropriate efforts to
provide a more hospitable environment for business, assisting the effort to turn around
the negative situation and lay the foundation for future economic growth.
Besides the so far unfavorable and hostile environment for businesses in Greece there are
still business areas characterized as “investment opportunities”. According to the “Invest
in Greece” Agency, Greece offers a favorable environment for Information and
Communication Technologies (ICT) investment, with strong market fundamentals,
availability of a superb talent pool, leading R&D activity, a welcoming ICT
ecosystem, and rewarding public and private sector projects. The availability of ICT
talent and its required low compensation (compared to other places) should make
Greece a particularly desirable destination for international information and
communication technology firms.
As indicated in the Foreign Policy Association (March 13/2012), another investment
area for Greece coming out of the debt crisis would be to cater to the health care and
retirement needs of Northern Europeans since Greece has well-educated doctors
and nurses, some of which are practicing their medicine abroad because of the
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closed nature of the industry in Greece. The country can also offers a very pleasant
climate for retirement. Greece could aspire to be the ‘Florida of Europe’, where the
young go to attend college and stay for the summer to enjoy the weather and the
beaches, and the old go to retire and receive quality healthcare and nursing
coverage. Transforming the healthcare and education sectors to cater to the needs
of other Europeans will not be easy, but the current crisis presents an opportunity
to fundamentally restructure the way the society and the economy operate.
More “sources of future growth” could be found in harnessing the potential of the
energy sector for growth, in promoting the environment and waste management, in
exploiting the country’s ability of being a tourist and cultural destination and in
building an innovative, knowledge based economy.
Entrepreneurship today, in an economy such as the Greek, where the public sector is
shrinking, the role of the welfare state is reduced, the faith in the political system is
being tested, social inequality, unemployment and insecurity for the near and
distant future increase, could be the answer for healthy gradual economic growth.
The establishment and operation of dynamic, creative, innovative, extravert and
competitive enterprises in a society free from stereotypes and pathogenies, can
create added value.
Conclusion
The economic policies of the last three decades have brought Greece close to
bankruptcy. Reforms that other countries undertook many years ago were
postponed over and over again, leaving Greece with an unproductive public sector,
an unfair and inefficient tax collection system, an unsustainable pension system, and
a heavily regulated economy whose competitiveness is low and declining.
Greece’s current problem is the combination of high debt, high deficit and low
competitiveness. It is because of this combination that until recently Greece could
only borrow at very high interest rates in financial markets. Markets were not
conspiring against Greece; they were merely reflecting economic reality‐‐‐as well as
protecting the interests of those who had lent their savings to Greece.
To repay its debt, Greece must succeed on two fronts. First, the government must
improve its finances and turn a significant primary surplus. Second, the economy
must become more competitive. Success on each front requires important reforms.
Reforms targeted towards the government’s finances include austerity measures,
such as tax increases and cuts in pensions and public servants’ wages. Greece has
already made important progress in sustainability reducing its public deficit
through expenditure and tax measures. The Government expenditure has been cut
from almost 16 per cent of GDP in 2009 to 9.25 per cent last year. The parliament
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has enacted a huge volume of new legislation and all of the prior actions that were
needed before the Second Economic Adjustment Program were completed.
However, the hardship caused by austerity measures will bear fruit only if these
measures are accompanied by more radical reforms designed to make the public
sector more efficient and the economy more competitive.
The reforms that Greece has agreed on with its lenders (EU/IMF) aim at enabling it
to repay its debt. Some reforms contribute to that goal by improving the
government’s finances, while other reforms aim at raising competitiveness and
growth. Many of the reforms are necessary and overdue.
The economic transformation of Greece will not be completed overnight, but
significant steps can be expected already. Deep structural reform and the cohesion
of imbalances that have built up will take time, but actions put forward in this
presentation should pave the way for recovery and lead to a more dynamic, modern,
innovative, fair and sustainable Greece.
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