HOW IT ALL STARTED?
The Greece crisis continues to occupy a center-stage in the global financial markets as of June
The salaries of the workers in the public sector rose automatically every year, instead of being based on factors like performance and productivity. Pensions were also generous. A Greek man with 35 years of public-sector service could retire at the ripe old age of 58, and a Greek woman could retire with a pension as early as 50 under certain circumstances. As a result of low productivity, eroding competitiveness, and rampant tax evasion, the government had to resort to a massive debt binge. Greece’s entry into the Eurozone in January 2001 and its adoption of the euro made it much more easier for the government to borrow because of the declining greek bond yields and interest rates .For instance, the yield spread between 10-year Greek and German government bonds plunged from more than 600 basis points in 1998 to about 50 basis points in 2001. As a result, the Greek economy boomed, with real GDP growth averaged 3.9% per year between 2001 and 2008, the second fastest after Ireland in the Eurozone .But that growth came at a steep price, in the form of rising deficits and a burgeoning debt load. This was made worse by the fact that these measures for Greece had already exceeded the limits mandated by the EU’s Stability and Growth Pact when it was admitted into the Eurozone. Greece’s debt to GDP ratio was at 103% in 2000, well above the Eurozone’s maximum permitted level of 60%. Also, Greece’s fiscal deficit as a proportion of GDP was 3.7% in 2000, also above the Eurozone’s limit of 3%.
After the financial crisis of 2008-09, investors began demanding much higher yields for sovereign debt issued by the PIIGS (Portugal, Ireland, Italy, Greece, and Spain) as compensation for this added risk. By January 2012, the yield spread between 10-year Greek and German sovereign bonds has widened by a whopping 3,300 basis points, according to research by the Federal Reserve Bank of St. Louis.
As Greece’s economy contracted in the aftermath of the crisis, the debt-to-GDP ratio peaked at
180% in 2011. The final nail in the coffin came in 2009, when a new Greek government led by Papandreou’s son George came into power and revealed that the fiscal deficit was 12.7%, more than twice the previously disclosed figure, sending the debt crisis into higher gear.
TOURISM IN GREECE AND IT’S IMPACT ON GDP
Greece is still a safe country to travel to. Greece attracts more than 16 million tourists each year, thus contributing 18.2% to the nation’s GDP in 2008. The same survey showed that the average tourist expenditure while in Greece was $1,073, ranking Greece 10th in the world. The number of jobs directly or indirectly related to the tourism sector were 840,000 in 2008 and represented 19% of the country’s total labor force. In 2009, Greece welcomed over 19.3 million tourists a major increase from the 17.7 million tourists the country welcomed in 2008.
The direct contribution of Travel & Tourism to GDP in 2013 was EUR11.2 billion which is 6.5% of GDP. In the year 2014, the contribution of Travel & Tourism to GDP in 2014 was EUR11.8 billion which was7.0% of GDP. This primarily reflects the economic activity generated by industries such as hotels, travel agents, airlines and other passenger transportation services (excluding commuter services). The direct contribution of Travel & Tourism to GDP is expected to grow by 3.4% pa to EUR16.2bn (7.4% of GDP) by 2024.
CAN GREECE RECOVER?
The future of its economy and its ability to provide high and rising living standards to its citizens depend on growth-enhancing reforms and not simply restraining in spending or obtaining debt relief. It is high time to recognize that Greece’s economic challenges are rooted in its problems of competitiveness, productivity and social inclusion. The power to address these issues does lie with Greece.
The Global Competitiveness Report of 2014, showed that the country was indeed making measurable improvements in the functioning of its goods and labour markets. Improvements to the business environment and moves towards the liberalization of professions were injecting competition into markets and making them work better. The country was also getting its macroeconomic house in order, addressing such tricky issues as raising the retirement age and reforming the civil service.
Greece was finally returning to growth after years of recession. Yet since the beginning of the year, Greece has been rolling back reforms, halting privatizations and reintroducing barriers to efficiency. This backsliding is not just bad for negotiations with creditors but also for Greece’s long-term economic prospects.
THE GREEK AUSTERITY PLAN
20% reduction of the minimum wage for younger workers.
How will Euro zone Crisis affect the global economy?
In 21st century, when we are all a part of global market, if Greece falls can the world be left behind? The fall of Greece will be followed by the fall of Portugal, Ireland, Italy, Germany and Spain. With so many of its members defaulting, there are huge chances that Euro zone itself may collapse and if it happens so, then this will mark the beginning of the next global recession. The members will have no other option, other than to dissolve the European Union, forcing them to go back to their old currencies. When they go back to their old currencies, the loss incurred by the entire fiasco will be shared differently by the different member countries followed by high inflation rates within these countries. Going by the current position of global economy, most of the emerging and developing countries are under debts. With the outbreak of another recession, the burden of truth will ultimately fall on such countries. It will hamper their growth, increase their inflation rate and lower their credibility. In order to know how deep the roots of this crisis will go we must ponder upon the following thoughts;
WHAT INDUSTRIES DID GREECE USED TO THRIVE ON?
Greece is the 45th largest economy of the world, with a GDP of $238 billion per annum and ranks 51 in purchasing power parity at $286 billion per annum. It stands to be the 13th largest economy among the 28 members of the European Union. Although Greece has performed poorly in handling it’s debts, it did show potential for growth back then. Service sector contributes 81% towards its
GDP, whereas industries contribute 16% and agriculture 3.5%
Shipping industry has been the tower of strength for Greece and still stands to be. the Greek merchant marine comes third globally both in the number of ships owned and in tonnage, and at times in the 90s Greece was first . Even after being hit by the adversities of both world war one and world war two, Greece’s shipping industry has not jus survived but also made significant recovery. After the second world war, the government of Greece promised to support the shipping industry by covering its insurance. There has been a growth registered in it’s merchant fleet, and shipping has remained one of the few sectors in which Greece still excels.
Every year Greece receives approximately 16 million footfalls and is ranked 7th most visited country in the European Union and 16th in the world. It contributes 18.2 % to its GDP. Tourists are attracted towards various ancient historical places and museums owing to Greece rich cultural past. But in times of crisis, inflation has had a deep impact on its tourism business. Tourism in Greece has now become much more expensive than it used to be before making tourist stingy about spending on a vacation in Greece.
Agriculture contributes 3.8% to national GDP and provides means of earning to 12.4% of it’s population. After entering the European Union, Greece’s agricultural sector has seen a lot of up gradation which has resulted in increase in its agricultural output. It majorly produced cotton, pistachios, rice, olives, figs, almonds, tomatoes, watermelons and tobacco. It comes 11th in terms of total amount of fish caught and ranks 1st in terms of fishing vessels among the members of EU.
LESSONS WE HAVE TO LEARN FROM GREECE
The government holds the faith of an entire nation. A few bad decision by the government can bring a turmoil in it’s economy. As we can see from this case, government took not just few but many bad decision which led Greece into a debt trap. The weak fiscal policies did not match up to the monetary policy of the European Union, in result of which, Greece could no benefit as much as it could have, had they made their fiscal policy stronger. The government also ended up spending more on public expenditure and failed to generate much revenues. These created a deficit, leading Greece to borrow more money to meet their domestic expenditure.
As we learned from the case, having same monetary policy will not prove beneficial until and unless you have equally strong fiscal policies to match with it. Also it is important that all the members are brought under the administration of a single institute which can keep a tight check on their earnings and administer their growth. When so many economies are inter linked with each other through a single currency it is important that they are bound by some terms and conditions and there must be a separate institutes that looks after whether these regulations are being followed or not and in case of defaults, such institute must have the power to take corrective actions against such defaulting members.
When economies get inter linked through channel of trade it becomes very important to maintain a certain level of transparency. It was only in 2008, when global recession hit, that everybody realised that Greece presented cooked up reports about is financial performance. This was due to the fact that Greece always maintained opacity about its working. Had it not been the case, Greece would have not been in crisis today. The very crux of the story began with a lie and its end is still unsure.
A lot of amount that was wasted could have been saved had Greece had curbed its public expenditure. The easy borrowings at cheaper rate of interest, sent Greece on a spending spree. Most of these expenditure did not generated revenue. As a result there was an excess of supply of money in the economy. It spent the money hugely on public policies like subsidies and pension. They failed to generate additional sources for revenue through which they could have met their expenditure without borrowing from external sources.