Week 12 Greece in talks with eurozone as Angela Merkel says reform plan must 'add up'

The Greek government presented the reforms demanded by its lenders on Friday, but despite talks over the weekend, eurozone creditors decided that the reform plans might not be detailed enough to allow a much needed tranche of bailout funds to be released. Without more aid, Greece could run out of cash while a €450m (£329m) payment needs to be made to the International Monetary Fund.

To avoid the country leaving eurozone, Greece’s reform programme must “add up” to ensure the financial stability of the country is restored. Due to low liquidity, the heightened risks have led the ratings agency Fitch cut Greece’s default ratings and unsecured currency bonds from B to CCC. Although Greece is proposing to raise around €3bn (£2.2bn) of new tax revenue, including measures to fight tax evasion and VAT fraud, as well as higher taxes on alcohol and cigarettes. However, its lenders are concerned that it has not agreed to deliver reforms to pensions and the labour market.

http://www.theguardian.com/…/greece-eurozone-talks-economic…

Macroeconomic aspect- GDP and Recession

Source: National Statistical Service of Greece

According to the the National Statistical Service of Greece, the Gross Domestic Product (GDP) in Greece expanded 1.20 percent in the fourth quarter of 2014 over the same quarter of the previous year. GDP Annual Growth Rate in Greece averaged 0.97 percent from 1996 until 2014, reaching an all time high of 7.50 percent in the fourth quarter of 2003 and a record low of -9.90 percent in the first quarter of 2011. Yet, the severe recession of recent years has seen GDP per capita fall from 94% of the EU average in 2009 to 73% in 2013. 

Greece has been suffering from Recession for the past six years and finally came to an end in the first quarter of 2014. Long-lasting recession can be attributed to three factors, interest rate, global imbalances, and perceptions of risks.

Loose monetary policy lowers the interest rate resulting in consumption boom, which sowed the seed of debt crisis. Global imbalances refers to excessive savings by surplus
countries led by China due to oil exporters in Middle East for building up foreign exchange reserves and excessive consumption by deficit countries led by the US. In US, lenders took advantage of low interest rates to expand business activities but, after having exhausted credit-worthy borrowers, they turned to riskier segments of the market which gradually leads to sub-prime meltdown. 

Yet, some suggests that the Greek government was the one to blame on because tightening fiscal and monetary policies were ineffective and, after all, it wasn't forthcoming about how much it was spending during the boom, so it's had to cut its deficit from an unthinkable 19.1 percent of potential GDP to 1.6 percent today.

http://www.tradingeconomics.com/greece/gdp-growth-annual

Leibniz Information Centre for Economics - The Great recession of 2008-2009

Macroeconomic aspect- Unemployment

Source:World Economic Outlook Database October 2014. (n.d.). Retrieved March 22, 2015, from http://www.imf.org/external/pubs/ft/weo/2014/02/weodata/index.aspx

With all the hassle behind the changing scenes of political environment in Greece, let's not ignore their underlying problems.

Today we will look at the unemployment problem of Greece.

Determining just by looking at the figures, fewer people are unemployed. From the all time high of 28% in Sept 2013, it dropped to 25.8% as at Nov 2014. Optimistically saying there might be more people employed, or there are simply less people seeking jobs, resulting in the decline of their labor force.

The study Unemployment in Greece: trends and main causes described the possible reasons behind the high unemployment rate. (P.584 onwards) Educated individuals seek for jobs which the employers do not need more people to fill in the vacancies, such as high-sounding and public sector instead of jobs with better employment perspectives. The mismatch of skills and the excess of labour supply over demand results in structural unemployment.

The government also failed to match vacancies and job seekers, showing their failure in turning frictional unemployment into a way of reducing long-term structural unemployment.

In addition to the above mentioned two reasons, the authors also mentioned the good benefits provided to unemployed people, strict employment regulations, and the immigrants who compete for the labour demand, all contributing to less people being employed.

Hope you enjoy this explanation of Greece's high unemployment rate! Stay tuned and see you soon!

Credits to:
Theodore Katsanevas and llias Livanos, Unemployment in Greece:
trends and main causes
Trading Economics, Greek Unemployment Rate 1998-2015

Macroeconomic aspect- Fiscal and Monetary policy

Source:World Economic Outlook Database October 2014. (n.d.). Retrieved March 22, 2015, from http://www.imf.org/external/pubs/ft/weo/2014/02/weodata/index.aspx

Fiscal policy and monetary policy are the two major tools for achieving macroeconomics objectives. Monetary policy is about controlling the money supply. Devaluation and revaluation of currency are tools to stabilise the economies. Through devaluation, Greece can stimulate the economy by increasing net export.

However, just like Hong Kong, Greece is under unified
exchange rate regime. The exchange rate cannot be changed by the Greece government. There are three major source of income for a country: increase in tax revenue, borrowing and printing notes for government use. 

The Greece government is currently adapting the second method. However, it is not an effective method in the long run. The government has to raise tax to pay back loan and interest in the future. Inside the Euro-zone, Greece government cannot directly print out notes from copiers to pay debts. The remaining method. According to Professor Lui, an increase in tax reduces consumption and investment. Expecting the tax rate to rise in the future, people will save more now. Due to Ricardian Equivalence, the result will be the same. In order to pay back the debts, it is more efficient for Greece to increase tax revenue now or simply reduce government expenditure. 

Nonetheless, the new Greece government refuse to do both of them. The only way left is to carry out monetary policy, which the Greece government does not have the power to do so. Facing the reality, it is time for Greece to consider leaving the Eurozone or not. 

Leaving the Euro-zone, Greece can regain the monetary independence. By printing notes, the Greece government can pay off the debts. The cost is letting the currency to devaluate. Citizens’ purchasing power will be decreased. Similarly, it is an indirect way for the government to collect tax. Leaving or not requires serious consideration. 

Nevertheless, continue borrowing money is not an effective and efficient method. Either increase tax-rate and reduce government expenditure or devaluate currency and print out notes are are possible solutions to the problem.

Work Cited:
YCR Wong. (2015). Yue Chim Richard Wong ⺩于漸 | Greece and Hong Kong – Fiscal Opposites, Same Politics « Yue Chim Richard Wong ⺩于漸. Retrieved March 3, 2015, from http:// www.wangyujian.com/?p=5844&lang=en

用經濟學做眼睛. (n.d.). Retrieved March 22, 2015, from http://www.francis-lui.blogspot.hk/2014/11/blog-post_79.html

Composition of GDP- Graphs

Negative net exports

Greece has a negative net export -3.3%, which is unhealthy to the economy.  Greece has long been the European Union (EU) member state with the lowest export share in GDP. And it has been exacerbated during the crisis, with Greek export performance deteriorating significantly and lagging behind the recovery in other programme countries. The paper also commented that Greece lacks openness (Böwer, U., Michou, V., Ungerer, C., 2014)


Investment and Public Debt

Investment declining

Investment declines to about 25% in 2003 to half of it in 2013.  The lack of attractiveness thus enthusiasm of investors can be resulted from pessimistic expectations of getting profit back because of the government debt born, the lack of development opportunities compared to other countries, or the absence of government policies that encourage investment. 

Public debt rising

Public debt exceeds total output and it keeps increasing. From the GDP figures, it can be seen that the economy improved and peaked in times near 2006, but it declined and recently reached a stage of stability.  The figures of public debt follow the trend: from 100.9% of public debt in comparison to GDP, it fell to 82.4% in 2006, but it dramatically bounced back to 175% in 2013.  This should be attributed lack of government income and excessive government expenditure.  The government relies on borrowing as a source of money for running.
 
References
Böwer, U., Michou, V., Ungerer, C., (2014). The Puzzle of the Missing Greek Exports. European Economy. 518 (Introduction), pp.2

2004 The Greek Election

Indirect presidential elections were held in Greece in December 2014 and February 2015 for the succession to Karolos Papoulias. Stavros Dimas, the candidate of the ND-PASOK government failed to secure the required majority votes from the members of the parliament during the first three rounds of election in December 2014. Accodring to the Greek Constitution, a snap election is then help on January 2015. The far-left SYRIZA party won, and Prokopis Pavlopoulos was elected. 

According to Article 32 of the Greek Constitution, the President is elected for a five year term by the Hellenic Parliament at least one month before the incumbent’s term expires.
The previous president of Greece was Karolos Papoulias, from 2010 – 2015. He was part of the Panhellenic Socialist Movement. Since the government went into debt crisis, the PASOK couldn’t earn the people’s trust. Having on 5% of the people entrusting the PASOK government, 92% felt disappointed.

The new president, Pavlopoulos is a member of the Central Committee of New Democracy. He is also supported by the SYRIZA party. SYRIZA being a left wing political party, embraces the ideals of Anti-Capitalism.

Macroeconomic aspect- Debt crisis

Greek-government debt crisis has long been a tough challenge for the Greek government in economic recovery. Even though, on the 20 February 2015, the Greek government reached an agreement with its creditors in Eurogroup to extend its support program by four months, it does not mean that all of the problems faced by the Greek government have been sorted out. A wide range of issues, such as the discussion on debt sustainability and the need of a third rescue program between Greece and its Eurozone partners , the policy of how the Greek government and domestic banks will fund themselves over the coming months, and even the maintenance of political support from the Greeks to the government, are still great barriers ahead of them. So what triggered this catastrophic incident? 

Five main causes, which were highlighted in Stability and Growth Program 2010 by the Greek Ministry of Finance, had shown part of the story about the significantly deteriorated economy. They are low GDP growth rate, high public spending causing huge fiscal imbalances, high government debt level, budget incompliance together with statistical incredibility. In late 2009, due to the soaring government debt level along with high structural deficits, fears of a sovereign debt crisis broke out and the investors began concerning Greek government's ability to meet its debt obligations. In April 2010, the national account data revealed the Greek economy had also been hit by three distinct recessions. Such negative news triggered crediting rating agencies to downgrade Greek government debt to junk bond status, creating alarm in financial market and gave rise to Greek government debt crisis. In the following years, the Eurozone countries, European Central Bank (ECB) and International Monetary Fund (IMF), launched bailout loan to rescue Greece conditionally. 

Indeed, in addition to the aforementioned causes, tax evasion and officer corruption also add fuel to the worsening situation. In 2010, the estimated tax evasion costs for the Greek government amounted to well over $20 billion per year. The latest figures from 2013, also show that the State only collected less than half of the revenues due 2012, with the remaining tax owings being accepted to be paid by a delayed payment schedule. It is mainly due to the high percentage of self-employment in Greece.
A list of reform measures has been prepared and presented on 23 February. It is no doubt that the agreement reached by the Greek government and ‘Troika’ is the first step for achieving a more enduring arrangement. Whether Greece will get it through is still an unknown. How it will go on depends on the approval of the Eurogroup to the measures.
Credits to:
FXSTREET: Is Friday’s deal now the end of the Greek crisis? – ING
The Wall Street Journal: Greek Deal: ‘Tough Negotiations and Brinkmanship Will Be Back’ — Strategists
Wikipedia- Greek government-debt crisis

2001 Greece Joining the Eurozone

In 2001, Greece officially adopted the Euro as its single currency. As the Greek government at that moment was suffered from soaring inflation and excessive debt, they chose to join the Eurozone in order to catch up with the economic situations in most other European countries.[1] After being a part of the Eurozone, Greece undoubtedly gained a number of benefits. For example, building up strong affiliation with European countries which in turn receiving economic and political aids, strengthening the power in negotiation[2], having more business opportunities with foreign countries as same currency was used with EU.[3] It seemed that joining the Eurozone did no harm to Greece. However, it is not the truth.

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Since 2001, due to the adoption of single currency with other Eurozone countries, Greece spent more and more on the public, especially the public sector wages[4], which in turn caused an increase in the government borrowing, making the country unable to pay the debt when the economic tsunami swept the globe.[5] The situation worsened when Athens became the host of Olympics Games in 2004,and tax evasion exists in Greece. According to some governmental data, Greece’s GDP has shrunk every year since 2008, with the biggest drop of 9% in 2011. The Greeks’ living standard is adversely affected with total unemployment of over 25%.[6]

Facing a tremendous challenge of economic downturn, the Greek government would not withdraw from the Eurozone. Greece is now running out of money. If Greece leave the Eurozone, the government would not be able to borrow money from the European countries. That means they would not be able to repay the debt. Also, the banks in Greece would collapse because the Greek would rapidly withdraw their savings out of their account and the re-introduction of Drachma will dramatically rise[7], which must send shockwaves to the whole Greek economy. However, it may do good to Greece in the long run when Greece chooses to exit the Eurozone as the drachma- the previous currency of Greece- may allow Greece to has more control on monetary and trade policy.[8]

The formation of new left-wing government implies a very high probability of Greece exiting from the Eurozone. Whether they will abandon the euro is just a matter of time, however, this moment is possibly not a right time.

Work Cited:

 

[1] http://www.nytimes.com/2000/06/20/news/20iht-A1_2.html

[2] http://www.valuewalk.com/2011/12/greeces-admission-european-union/

[3] http://www.indiana.edu/~eucenter/documents/Euro-and-Greece-Explained.pdf

[4] http://www.bbc.com/news/business-13798000

[5] http://money.cnn.com/2013/08/28/news/economy/merkel-greece-euro/

[6] https://hbr.org/2015/03/why-greece-and-cyprus-may-be-better-off-without-the-euro

[7] http://www.telegraph.co.uk/finance/financialcrisis/9334125/What-would-happen-to-Greece-if-it-left-the-euro.html

[8] http://www.usnews.com/debate-club/should-greece-leave-the-eurozone

2009 Downgrading of Greece Credit Rating

In Dec 2009, after the finance minister in Greece’s new socialist government disclosed that the nation’s deficit would soar this year to almost 12.5 per cent of gross domestic product, the Greece credit rating is downgraded by 3 global leading rating agencies. At first, Fitch rating agency downgrades Greece's credit rating to BBB+ from A. Followed by Standard and Poor’s rating agency downgrade Greece’s credit rating. Lastly, Moody’s rating agency downgrades Greece to A2 category from A1. Yet, it is the first time in 10 years a leading agency has given Greece a rating below A grade.

Credit rating agencies as providers of opinions about the creditworthiness of companies and countries have become very important players in financial markets due to growth in Capital and Investment Market. They are high influential over the credit supply to firms and are held accountable for their actions. Yet, they were criticised for the failure of rating correctly certain financial products. They were accused of exacerbating the EuroZone crisis by downgrading the sovereign ratings, contributing to the severity of the bank collapse.

The reason of downgrading of credit rating is mainly due to the high level of outstanding debt and consistent financial budget deficit. It reflects concerns over the medium-term outlook for public finances, given the weak credibility of fiscal institutions and the policy framework in Greece, exacerbated by uncertainty over the prospects for a balanced and sustained economic recovery.

So, what are the negative effects of downgrading credit-rating? Financial investors, in particular banks and insurance companies, used to invest heavily in sovereign bonds of Eurozone countries. Downgrading may therefore not only increase the likelihood that other members of the currency union will be forced to bail out the ailing country but also weaken its own domestic banks. Both issues may pose a threat to the sustainability of their own government debt levels. Foreign investors may therefore interpret negative rating news on one country as a signal of worsening fundamentals in the Eurozone as a whole and subsequently withdraw their funds. This reaction may worsen the fundamental economic situation and trigger even further withdrawals. Thus, it becomes more difficult to raise money in the bond markets and through the European Central Bank’s liquidity operations. The rating announcement would then become a self-full-filling prophecy and trigger a currency crisis.

Although the Greece government has announced big spending cuts to reduce its levels of debt, this policy has only partly offset the country's longer-term risks. The government should implement new revenue-raising measures swiftly enough to cut the deficit from 12.7 percent to 9.1 percent of GDP next year in line with budget projections in order to upgrade the credit rating again.