greece and the international financial crisis: past, present and future

© Elena Panaritis

Greece and the International Financial Crisis:

Past, Present and Future

How did Greece get in this mess? What were the forces bringing the big bang of October-December 2009?

Greece is a very old country. Elements such as the language have been continuously present for thousands of years.

The Hellenic world Roman Empire Byzantine Empire and Christianity.

The end of the Byzantine Empire came with Greece’s occupation by the Ottoman Empire in 1453 and for more than 400 years.

1821: Greece stood up to the Turks and by the 1830s became a modern state.

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Greece in the 20th century: a period of poor evolution of the state 1912-13: Balkan Wars 1914-1918: World War I 1921: A Greek expedition to Asia Minor, 1940-1945: World War II and German occupation of Greece 1944-1950: a civil war with devastating human loss 1967-1974: a dictatorship followed by a war in Cyprus 1974 to present: restoration of democracy 1981: Greece becomes a full member of the E.U.

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As a result… a German civil code, a French commercial code and a French

land code. Every time a problem was dealt, a parallel system was created

resulting in numerous overlapping laws. For many years Greece had one of the highest emigration rates

to the U.S. and Australia. The largest part of GDP was remittances from abroad.

Provision of promotions and salaries to stop increases in inflation. The thirteenth and fourteenth salaries were created because of war-stricken generations.

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And then came the E.U….

The E.U. is the first-ever exercise of non-homogeneous entities getting together on a vision that was unclear. Politics / peace / economics / fiscal policy / crisis management

Dutch disease: With European transfers we stopped producing: no agriculture, textiles, fish or shipping

The economic crisis made us realize that we need a common fiscal policy

The underlining principle should be predictable processes.

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History of the Crisis

2006 in the US: a downward adjustment of the overheated new-economy

(internet) stock market The FED keeps interest rates low as they follow traditional

economic thinking (low r – higher I), creating a disincentive in investing in Stock Market products

Investment in Up and Coming neighborhoods housing was the next Market Hit. This leads to more housing construction in the US and a follow-up internationally

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2008 in the US and abroad Broken property rights system in the US does not guarantee the quality

of the asset (mortgage); coupled with super badly regulated financial markets lead to the BUST

Those who invested to what used to be solid low risk assets based derivatives now suffered and continue to suffer

A continuation of the Traditional Thinking in Finance and Economics is not allowing the correct regulatory reform

Super sensitive Financial Markets especially rating agencies A panic attack on the side of the Banks in EU that Lehmann Brothers

scenario may be repeated led to Hungary’s downfall EU followed a FISCAL EXPANSION reducing the ECB rates of

borrowing to the private banks. This increased Fiscal Deficits further among all EU members and held back any pressures for real reforms in the Member countries regarding their sustainable economic growth and development models

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EU in 2009 High Fiscal Deficits (2020 projections for EU area debt = 120%) High Aging population GDP projections (2008: 0.7, 2009: -4.2, 2010: 1.0, 2011: 1.7) Informality is rather large No Fiscal Consolidation The EU followed a Short Term Expansionary CREATING A

HUGE OUTPUT GAP The EU has been basing its economic model of growth and

development in a rather outgrown post WWII model – one full of INPUT rigidities and High Transactions Costs – in addition the EU has not yet managed to have a Fiscal Consolidation

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EZ: “Till debt do us part?”

Source: New York TimesEurope’s Web of Debt

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European Union: Shares of 2009 EU GDP (%)

Big & Small

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2009 Greece A crisis is mounting in Greece about its ability to service its sovereign

debt. High Fiscal Deficits (2008: -7.7, 2009:-13.6) High Debt/GDP over 100% (2009: 115,1%, 2010: 122,9%) Weak growth Nominal GDP growth (2009: -0.7; 2010: -2.8) Real GDP growth (2009: -2.0; 2010:-2.6) latest data 2010 2nd Q -3.7 Unemployment (2009: 9.4; 2010: 11.8) latest data June 2010 11.6 Weak competitiveness Current Account BLC is in deficit (2009: -11.2;

2010: -8.4) (primary 2009: -5.4; 2010: -1.1) High level of informality (now in process of mapping and measuring

considered close to 50%) High level of aging population

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Therefore, how has the Financial Crisis affected Greece?

Greece was caught with deep routed vulnerabilities: Rigidities in Entry and Exit of Entrepreneurial Activities;

Employment; Labor Market; Sticky Wages and a less functional Public Sector that kept growing and creating a larger and larger DEAD WEIGHT LOSS

The 2008 fiscal expansion followed by the EU easing lending with lower ECB interest rates

A fiscal policy and Foreign Debt financing keeping all vulnerabilities under the carpet before 2010

An over-sensitive International Market

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The key challenge has been to fight with its original sin to convince the markets and its counterparts that it can seriously and sustainably restore:

Confidence Fiscal sustainability Competitiveness Safeguard financial sector stability Create a functional Pubic Sector Create a Friendly and Attractive Investment Environment Formalize the informal sector (reducing transactions costs – secure property

rights) The Transfers of EU created the common problems of Dutch Disease THUS WE MUST BUILD AN ECONOMIC MODEL FOR A LARGER

ECONOMY – larger number of transactions and volume of transactions Strengthening of data reporting – reorganization of National Statistical Office Improvement of tax administration – progress in revenue collections Pension reform

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The reform package and the growing pains of the EU- Have they lead to a safe “Program for Greece and the EURO?”

The program is front-loaded with Fiscal Measures that are SUPER heavy and recessionary

The structural reforms are outlined in the program but their implementation is very much based on the country

Institutional reforms fall under the same treatment

THIS IS OUR OPPORTUNITY!!! This is Europe’s Opportunity! Let us not miss the Opportunity to miss the Opportunity

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Already implemented structural reforms to restore competitiveness and growth:

“Kallikratis program” = reorganization of public sector Income policy (minimum wage, retirement age, ease of entry &

exit in the job market) Business environment and competition (one-stop shops for start-

ups, open closed professions, better absorption of EU funds) Pensions system reform: New system consists of a

contributory pension to top-up a non-contributory means tested pension limiting early retirement, increase normal retirement age to reduce pension spending.

Greek banks : Crucial to manage carefully the current tight liquidity conditions

Additional safety net by the creation of the Financial Stability Fund

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Greece needs to be given the time to implement the program, the time to try to reverse the trend

Wake-up call for the EU and the world The sovereign dept crisis of Greece may be looked at as a

“blessing in disguise”: to warn countries about the need to keep the fiscal house in order. This gives the rest of the world ample warning to make the necessary adjustments and policies to prevent similar crises from occurring.

greece and the international financial crisis: past, present and future

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