Download UNIVERSITY OF IOANNINA DEPARTMENT OF ECONOMICS

UNIVERSITY OF IOANNINA
DEPARTMENT OF ECONOMICS
COURSE: ENGLISH FOR ECONOMISTS IV
INSTUCTOR: TSELIGKA THEODORA
ACADEMIC YEAR: 2013-2014
Greek/World economic crisis and public sector (welfare state)
STUDENTS
ANDREAS SINTOS 2512
ARISTIDIS NTOKA 2484
SOTIRIS STAUROPOULOS 2519
GIORGOS TSIAHTSIRAS 2543
KONSTANTINA KOSMA 2427
15 May 2014
1. Introduction
In mid-2007 began a major economic crisis which was the biggest crisis the world has
faced since the Great Depression (1929). It started from the market confidence crisis
in the banking system of America and affected most countries. Due to the crisis
several measures were taken in these countries, which mainly focused in cutting
down government spending and shrinking the welfare state. In this project we
analyze the impact of worldwide crisis and we focus on the effects of the crisis in
Greece.
2. Worldwide and Greek crisis
2.1 Causes and effects of worldwide crisis
The world economy, or global economy, generally refers to the economy, which is based on
economies of all of the world's countries' national economies. Consequently, all the world's
economies are connected together. When the economy crisis started in America, it spread
to the whole world.
All began when BNP Paribas terminated withdrawals from three hedge funds citing "a
complete evaporation of liquidity. This led to the mortgage bubble burst. The mortgage
bubble means that the values of securities rose in extremely high levels. So all the people
that have invested in houses and any other examples of securities could not take their
money back. Finally the U.S. Senate's Levin–Coburn Report concluded that the crisis was the
result of "high risk, complex financial products, undisclosed conflicts of interest, the failure
of regulators, the credit rating agencies, and the market itself to rein in the excesses of Wall
Street.
But it was not the first time that there was a global crisis. Back in 1930 the crisis started after
the fall in stock prices and became worldwide news with the stock market crash of October
29, 1929 (known as Black Tuesday). The crisis ended with the Second World War. If the
result is the same again, then there will be problems that no one can fix not only for
humanity but for the whole world.
Nowadays the global recession led to rise of unemployment, decrease of international trade
and the prices of products fell rapidly. This means that there were many changes in all the
sectors of the economy. For example, the price of oil increased dramatic and this fact made
the consumers to switch to gasoline. So for the countries that import oil, the economic
growth began to have cathodic route. As a result the crisis affected also Greece.
2.2 Causes and effects of Greek crisis
For the year 2012 the economy of Greece, according to word Bank Statistics was the 42nd
largest in the world. As a member of the European Union for 2013, Greece is the thirteen
largest economy among the 28 members. The average income per person for the same year
was 22.083 which ranked Greece in the 37th place in the world. In 2009, the year of the
beginning of the Greek debt crisis, the per capita income was 28.452. The Greek economy
was one of the largest growing in the Euro zone from 2000-2007 and grew at a yearly rate of
4, 2% of GDP. This loss of approximately 6000 was the result of the arrival of the Global
economic recession of 2008. But this economic crisis was not something unprecedented for
Greece.
Greece has faced again a crisis in the 1930. The reason of the crisis back in 1930 was that
the national economy was based οn exports. People abroad could not buy luxury
agricultural goods such as tobacco, olive oil, and raisins--commodities whose international
demand fell sharply during the hard times of the Great Depression. Serious political changes
followed.
In our days the Greek debt crisis is believed to have been caused by a decade and move of
excessive Government spending. Since then budget deficits which had not been reduced
during the good years with strong economic growth, had as a result that the debt rapidly
developed into an unsustainable size. Another problem which Greece has suffered, is the
problem of the tax evasion. The income of Greeks reduced, the political situation changed
radically, the unemployment increased, there are many austerity measures that have been
approved by Greek parliament and led to frequent protests and riots. Greece has received
240 billion Euros from creditors to prevent a sovereign default on its debt and a possible exit
from the 17-nation euro area. The enormous military expenditure, public sector jobs,
pensions and other social benefits led to high budget deficit each year. The deficit began to
grow since 1996 and especially with the introduction of Euro in 2001.
3. Public sector and economic crisis
3.1 Public sector and welfare state
The public sector in many countries of the European Union includes various services like
(education, public hospitals, public roads, police, etc ...) while the mode of application of
the public sector from country to country varies.
The last five years or so in Greece because of the crisis and the measures based on the
Memorandum started an effort to reduce the public sector because it is one of the reasons
why Greece is in a state of economic crisis. The fact that the public sector was high, it can
easily be seen by the large number who were employed in the public sector before the
crisis . One way to measure the size of the public sector is the level of government spending
as a percentage of GDP. According to the diagram below which shows the size of
government spending as a percentage of GDP in selected European Economy (2012) we can
see that Greece is among the countries with the highest public sector in Europe.
The welfare state is a form of benefits in social rights (education, work, public health, etc) of
member inspiring after being displayed after the Second World War in order to create
equality in the needs of people from lower social strata. The welfare state also contributed
to the system by providing goods and services at prices below the market or even free in
order to be social justice. The welfare state appears as a principle of Greece in 2001.It is
worth noting that in the mid seventies there was a crisis for the institutional welfare state
where many researchers dealt with this fact and concluded that there are different forms of
welfare states in various European countries. According to their researchers this is because
the growth mode of the welfare state in these countries is different.
3.2 How has the crisis affected the public sector worldwide
The crisis started in the summer of 2007 with the collapse of the US financial markets. That
fact had a direct impact to the whole world and especially to Europe where the bailing out of
failed banks, the stabilization of the financial sector and increasing unemployment were
indicating that the public budget should be reduced. In order to do this, each country had to
adopt austerity measures. The austerity measures were first been imposed in countries that
had received emergency loans from the IMF, the World Bank and the EU in 2008 such as
Latvia. In 2010, the IMF, the OECD, the G20 and the European Commission agreed that more
countries should impose such austerity measures and the public sector was the main target
of them.
In this figure we can see that many European countries have reduced their public sector
employees in a big degree compared with the change in each countries change in total
employment.
Figure 2 indicates that the share of employment in public administration total employment
increased in the majority of EU countries between 2008 and mid-2010.
The state is the key factor in public sector wage-setting in most of the countries. With
austerity policies being practiced all over Europe, the paying determination mode has
changed and collective bargaining hag given its place to unilateral state decisions. Firing
people on a large scale is a measure that is not implemented in most European countries.
The special employment status of public sector employees protects them of being so.
The European Commission agreed with the conjecture promoted especially by the European
Central Bank, that in order to improve the international competitiveness each country had
to implement pay cuts in public sector wages. On the other hand, in order to accomplish a
balanced and sustainable recovery, public wage restraint in deficit countries and a more
dynamic wage development in surplus countries are needed. In order to have a success of
the consolidation reforms the pay cuts on the public sector should be concentrated on high
income-earners so that the results to aggregate demand to be positive.
3.3 Greek public sector in crisis
Greek public sector influences the economic crisis in Greece. As it is shown in the chart
below, Greek fiscal deficit as a percentage of GDP was dramatically increased in the periods
1980-1989 and 1990-1999.From 1979 Greece was borrowing money from abroad. The
dramatic increase of fiscal deficit happened because the bulk of the money was spent to
increase salaries in public sector, i.e., more civil servants and higher wages, and for
increasing pension expenditures, i.e. more retirees and higher pensions. As a result of all
these factors Greek public debt as a percentage of GDP soared to 71 in 1990 from 26 units in
1980, while it increased again in the years 2000 and 2009.
Decade
1960‐1969
1970‐1979
1980‐1989
1990‐1999
2000‐2009
Greek fiscal
deficit as a
percentage
of GDP
‐0.6
1.2
8.1
8.4
5.9
Year
Greek public
debt as a
percentage
of GDP
1980
26
1990
71
2000
101.5
2009
115.1
After the salary of employees in the public sector rose, consumption increased. This
significant increase in consumption affected the investments by reducing them. In this term
the percentage of money spent on productive investments, i.e., public infrastructure
projects, was less than 25% of the total. In economic terms, all that happened was wrong.
Whereas the money from loan spent for consumption, the government will be forced in the
future to levy taxes to cover this loan. One of the ways to make extra profits would be if
investment increased. Unfortunately investments decreased, complicating the whole
situation.
Decade
Consumption as
a percentage of
GDP
Investment as a
percentage of
GDP
1970‐1979
77.2
1980‐1989
85.1
1990‐1999
90.1
2000‐2009
88.8
30.7
23
20.6
22.6
Greece continues to borrow from abroad until signed the Memorandum in 2010.
Afterwards, to provide liquidity in the public sector of the economy Landers wanted the
exact application of the Memorandum. The measures of the MoU were:
1) reduction of public expenditures and the total state sector of the economy
2) deregulation of the labor market
3) increase in indirect taxation
4) enhancing competition in product and service markets.
With all these measures that make people with low social status suffer, Greek welfare state
is seriously destroyed. Memorandum tries to make our country competitive, but most of
citizens’ rights are trampled upon government's wrong estimations of loans for
consumption.
5. Conclusion
The economic crisis leads to job insecurity, unemployment and poverty, those
eventually lead to social exclusion more and more people, which are facts for various
mental disorders. In many countries crisis has overcome and all enjoyed increases in
production in the industrial sector. However, the effects on the labor market are still
obvious.
References
1. Βαγιανός Δ. , Βέττας Ν. , Μεγήρ Κ. (2010) ,
Η οικονομική κρίση στην Ελλάδα:Μεταρρυθμίσεις και ευκαιρίες σε μία κρίσιμη συγκ
υρία
http://greekeconomistsforreform.com/wp-content/uploads/Reform_GR.pdf
[22.04.14]
2. Αργείτης Γ. , Δαφέρμος Γ. , Νικολαΐδη Μ. (2011) , Κρίση δημόσιου χρέους στην
Ελλάδα: Αιτίες και προοπτικές , Αθήνα , ΙΝΣΤΙΤΟΥΤΟ ΕΡΓΑΣΙΑΣ ΓΣΕΕ Παρατηρητήριο
Οικονομικών και Κοινωνικών Εξελίξεων
http://www.ineobservatory.gr/sitefiles/files/report4.pdf [22.04.14]
3. Ιn deep analysis- Το Μέγεθος του Δημοσίου Τομέα , Πετράκης Π.
http://www.indeepanalysis.gr/?q=node/1660 [30.04.14]
4. Ineobservatory- Το ύψος της απασχόλησης στον δημόσιο τομέα στην Ελλάδα
βρίσκεται σε ένα μέσο επίπεδο συγκριτικά με άλλες ευρωπαϊκές χώρες
http://bit.ly/1qsEsfd [30.04.14]
5. Kean- DEBT CRISIS AND THE WELFARE STATE IN GREECE , Sakellaropoulos T.
http://bit.ly/QiOsXp [26.04.14]
6. Olympia- Κοινωνικό κράτος (welfare state) και Ελλάδα [02.05.14]
http://bit.ly/SPnk4u
7. Oxford Journals- Economic crisis, austerity and the Greek public health system ,
Kentikelenis A. , Papanicolas I.
http://eurpub.oxfordjournals.org/content/22/1/4.full [30.04.14]
8. Wikibooks- Η βαθιά οικονομική κρίση που μαστίζει την Ελλάδα την τελευταία 5ετία
http://bit.ly/1l2qlYn [01.05.14]
9. Wikipedia- Ελληνική κρίση χρέους 2010-2014
http://bit.ly/1fRYYRF [11.04.14]
10. Workmall- Greece The Crises of the 1930s
http://workmall.com/wfb2001/greece/greece_history_the_crises_of_the_1930s.ht
ml [13.04.14]