The integration of countries into the international market economies may at one time or other culminate in a crisis. Hence, the crisis in Greece is, originally, an economic crisis as a result of deregulation and opening up of markets as implied by the international market economies. In light of this, it is critical to note Greece plunged into crisis after its entry into the European Union. The aftermath of Greece’s integration into the international trade alliances has been an enormous and growing gap between the privileged elite, who reap the benefits of capitalist neoliberal globalization and the remainder of the people who suffer significantly from the effects of job insecurity, unemployment and poverty to which a significant percentage of the Greek population are subjected. Thus, while observing that a significant number of the young population in Greece used to be engaged in jobs, in the nationalized sector; therefore, the privatization of its segments, subsequent deterioration and destruction of the manufacturing and agricultural sectors; as resulted from opening of markets, which led to significant unemployment rates amongst the Greek youth.
Therefore, this paper intends to respond to the question; what are the causes of the crisis in Greece? What actions were taken and what should be done now and future? Hence, the paper will be based on this question. However, while addressing these questions it is essential to observe that, the adopted model of export led growth has culminated in a significant current deficit in the Balance of Payments, which can easily be described as the highest in the European Union. Hence, the prevalent expectation is that the financial crisis will affect Greece critically, not only as a result of the effects of recession on tourism, but also as a result of its national output being almost equivalent to its public debt. Hence, the Greek government borrowed at high rates in the world markets, while the expenses to service this debt were significantly high to be redeemed from the lower social groups, which are overwhelmed by the poor. This is justified through less social spending, increased taxes, and tax rates.
As countries fund their financial needs through governmental bonds, significant liabilities with regard to the individual countries, external debt rise accordingly. Certain macroeconomic, political and other situations provoke speculation and concern amongst the financial markets regarding to the country’s capability to service their loans. This results in a rise for the given number of bonds yields as investors demand for a higher risk premium. Under favorable circumstances, the country’s real economy stays to some extent untouched, and the subsequent consequences are limited to losses for investors, accounting changes or higher external debt for given countries. However, most often, significant financial difficulties are associated with complications for the economy such as high unemployment rates, recession, slashed consumers, investor’s confidence, and in some cases political unrest.
The European debt crisis remains to be the most significant that the economic world has experienced. Subjective decision making and questionable policies had been incorporated by various EU members. In addition, strategic and corporate inefficient or ineffective policies are also regarded as origins of the Greek debt crisis. Thus, as a result of state-owned finest corporations that was running numerous deficits, making the public debts deteriorate further. However, with regards to individual European Union countries, it has been observed that the countries in the south seem to suffer more. Greece remains the first country to receive a bailout package injection from the International Monetary Fund.
The Crisis Background
The past events in Greece bear all the bearings of a state of emergency. The circumstances facing Greece can be described by indications of virtual bankruptcy; hence sovereignty on financial and fiscal policy have been lost, salaries and pensions have been severely diminished primarily in the private and also in the public sectors resulting in a critical deterioration of the economic atmosphere for a significant percentage of the population. The political environment was further complicated and aggravated by the paradoxical circumstances of the (Pan-Hellenic Socialist Movement) PASOK government. It is critical to observe that PASOK utilized a new austerity policy of neoliberal characteristics, which not only went against the party’s ideological pre-electoral pledges and profile, but, also contradicted the party’s historical course and past political actions (Petrakis, 2012). Greek society was surprised by this wave of changes; hence followed developments with justified embarrassment and insecurity, unconvinced about the efficiency or effectiveness of the new economic policy. The inception of political modernization; created a positive social and political climate. Greece was preparing to host the 2004 Olympic Games.
However, the government’s attempt to solve its intractable problem of pension reform was faced with significant failure, leading to massive demonstrations (Tinios 2005). The same met the attempts to reform higher education, transport, labor markets and health. These ill-fated reforms in Greece indicate the failure of the modernization projects, hence a measure of the efficiency and effectiveness of power, acquired by organized groups and parties. Interest groups had to support their interests; therefore, they opposed any attempt to reduce the state’s role and rationalize public services, since this would mean losing benefits and undermining their position in the power hierarchies.
The failure to create tangible reforms in the public sector was a significant factor for the electorate’s growing dissatisfaction, frustration and resentment with the government; a significant percentage of the citizens observed that the government had failed in its mandate to improve their daily lives and significantly improve on the relationship between the state and its citizens. On the one hand, there were significant allegations on issues of economic scandals, involving a number of leading PASOK members (Pagoulatos and Triantopoulos, 2009). The New Democracy party pounced on the opportunity and initiated a prolonged pre-electoral campaign, whose arguments were based on the pledge to restructure the state to eliminate the clientelistic activities of PASOK; therefore, they would introduce a new morality and transparency in the political arena of Greece. This led to the March 2004 election which gave an overwhelming victory to the New Democracy party.
On the other hand, once elected into office, the New Democracy government did not fulfill its pre-electoral promises in spite of positive public opinion. Therefore, there were no significant reforms which were introduced, hence, appointments to the public sector assumed the past trends while public expenditure increased as public revenues decreased; hence the budget deficit kept on increasing to reach the unprecedented levels. In light of these, the government took little measures once the 2008 global economic crisis was looming. These measures were initiated when it was too late to have any significant effects in masking the vulnerable Greek economy (Pagoulatos and Triantopoulos, 2009). After having won the parliamentary elections a second time in 2007, the government was left with no option but to call for an early election in 2009 in a wake of allegations for several significant economic scandals.
The imminence of economic crisis was obvious; hence Prime Minister was not willing to continue his tenure in office and face the implications. The two significant Greek political parties had both failed institute the necessary initiatives for economic development and recovery, hence proved incapable of performing the task they had made promises to fulfill. The significant aspect was that the Greek society was not ready or informed about the inherent risks of an economic crisis. Significant Social-cultural changes had been effected during this decade which led to indifference and complacency. During the last decade, significant surveys indicated a heightened sense of political apathy, disenchantment with any form of politics and distrust of the parties; among them the European Social Survey (ESS, 2003). Therefore, it is not surprising that Greek community followed the economic and political development without any indications of pride, yet they did not show any precise willingness for change. The decades of clientelistic and populist practices had managed to diffuse potential political discourse that culminates in political alienation and atomization.
The perception that it is easy to acquire easy and quick returns, as long as one has the necessary access to the state mechanisms and the right contacts became a dominant aspect in Greek systems. This meant an implicit or explicit endorsement of the clientelistic system which significant portions of the population attempted to exploit. The result of these was an apprehensive and dangerous combination of political alienation and distrust with a widespread perception that the system’s purpose was to be used to extract collective or personal favors and spoils. The Greece economic crisis shocked the Greek population who were forced to appreciate in the shortest time possible that old certainties had been undermined; hence new practices had to be embraced.
Rise of the Crisis
The PASOK government that was elected into office in the 2009 election was intimately aware of the fiscal problems facing at the time. Therefore, it should not have taken the newly elected government to perceive the extent and impact of these problems (Petrakis, 2012). However, in spite of its awareness, the Greek government reacted at an exceedingly slow pace while at the same time circumventing the possibility of taking significantly drastic actions. In light of these, it is essential to note that during the electoral campaigns neither of the political parties involved made any attempt to acknowledge the gravity of the situation nor was it ever mentioned that the Greece was at the brink of bankruptcy. The arguments presented suggested that it was the incumbent government’s procrastination that steered the spread to critically high rates. In spite of the obligations of the PASOK government the
The fact remains that at the beginning of 2010 a serious package of economic measures were announced. Prior to these, no tangible actions had been taken; hence the delay may be attributed to communication and political considerations as the perception was that public opinion would not take kindly to the draconian measures that would follow. The incumbent government leaders accused the previous government of leaving the country in disarray, which their government inherited and had to clean up.
However, on realizing the extent of the crisis, the government opted to depend on the European Union and the International Monetary Fund; thus, negotiate a scheme to aid the Greek economy. This led Greece’s acceptance to the terms stipulated by the IMF in May 2010, which in conjunction with the ECB and the EU managed to secure financing for the Greek economic rejuvenation for the subsequent three years under the conditions of a memorandum, which resulted from an act of the Greek parliament (IMF, 2009). In light of these, Greece accepted a comprehensive, complex and detailed agreement, which saw the end of Greece’s capacity to make decisions on its fiscal policies while at the same proving significantly harsh measures in economic and social structures.
In an attempt to examine the inception of the Greek crisis, economists agree that the real causes for the Greek crisis are much deeper and older to the Greek political and financial scene. From a political perspective, it is evident that Greece has been facing numerous challenges in the past decades that have deteriorated its ability to function financially in a positive pattern. A number of foreign associations like with Turkey and the persistent terrorist activities in Greece have given rise to persisting political unrest. In light of these, Greeks support of Cyprus has continued to be a source of conflict with Turkey.
Moreover, individual terrorist actions against US targets have influenced the deterioration of diplomatic relations with the United States. However, these relations remain at a high level and have been meliorated in the recent past with the abolishment of the special visa which was previously required for Greek citizens to freely travel to the US. Furthermore, corruption continues to be and has been an integral aspect of Greek political culture. Greece has been affected in the past years by progressively large financial and political scandals, under both the ND Party and PASOK Party. Governments have publicly demonized nepotism and corruption hence taking more stringent measures against them. It is evident that Greeks are among the least satisfying EU nation in respect to administrative structures and systems. Nevertheless, according to Transparency International, the Berlin-based watchdog, Greece's corruption levels fell significantly in 2007, in light of these; it also made significant marginal improvement in 2008 (European Social Survey, 2003).
Therefore, from an economic point of view, Greece had emerged among the fastest growing economies in the European Union, since the mid 1990s, when its recorded GDP grew significantly, outperforming European Union averages. The reduced interest rates and the financial sector liberalization lead to a significant expansion in consumer demand and credit. This demand also led to large scale investments, which culminated the said growth. As a result of this economic success, the disparity in real per capita income between the EU and Greece had decreased significantly (Petrakis, 2012). Despite these, poor government planning and budgets along with the diminished competitiveness of the Greek economy led to an increase in the deficits at a rapid rate. Moreover, Greek exports have continued to become uncompetitive, due to higher inflation and an increase in labor costs in contrast to other EU member-states. A significant number of manufacturing enterprises depend upon cutting costs, thus impacting the number of jobs in these sectors.
Furthermore, the tourist sector, which is considered as the most critical sector for the country’s economy, also faces low profitability indices, due to low labor quality and increasing labor costs in the sector. In spite of the recent implemented initiatives, like the relaxation of overtime restrictions, the labor market in Greece remains significantly rigid in contrast to international standards. In a past World Ban latest Doing Business report, it is suggested that Greece ranks 142nd amongst 178 countries in terms of employment regulation and the inherent complexity of the employment indices (World Bank, 2009). Hence, the latter is indicated as double the OECD average. On the other hand, the wage increments have not been kept at par with productivity development. Hence, in view of this factor and its larger picture, the labor markets springiness have contributed to some extent to the diminished competitiveness illustrated by the Greek economy. However, the fact that Greece is performing exceedingly well in actual labor productivity cannot be ignored.
In social aspects, it is pertinent to note that Greece has faced significant challenges during the past decades. For instance, the Greek community, like the rest of the European community, has been facing the challenge of its aging population. These are observed as failing to match with a corresponding increase in the recorded birth rates; thus a reducing number of people are entering the working class. There are indications that the country’s population will illustrate a declining trend from the year 2020 and the number of population above the age of 64 will double by the year 2050 up to 31%, and one out of two people will be in the working age group. Additionally, the dependency ratio of people above the age of 64 to those between ages 15 and 64 will increase toe to almost 77%. Moreover, oddities and inequalities of the labor force create a peculiar model of labor structure in Greece. The total labor force is estimated to be 5 million, 60% of which comprise of males. However, the male labor force when compared to the total population is estimated to be only 48% (Gonzalez & Montaigne, 2010). This is an indication of low male labor integration in the economy, when the percentage of female labor inclusion is even lower. A significant contributor to this low performance is low mobility and structural stiffness in the labor market. Furthermore, an outdated education system in Greece is unable to keep pace with the rest of the European Union. This educational system can be attributed to be partly responsible, alongside other factors, for the rising unemployment rates. The existing education system is faced with high dropout rates and low graduation rates, making it among the most inflexible education systems in the European Union.
It is critical to note that the Greek crisis is attributable significantly to the high poverty levels. They are a difficult challenge as the wide spread poverty levels among the Greek society continue to increase. Greece is indicated as having the highest poverty rates in European Union. Hence, 21% of the population is expected to survive on low incomes, which are lower, than the country’s median. Another contributing factor that should be taken into account is the poverty level in Greece, which is arguably lower in comparison to those of the rest of the European Union. For instance, in Germany an income of €9,455 annually is perceived as the poverty-baseline for a single-member household, while, in Greece, the corresponding value is equal to or below €4,264 (World Bank, 2009). It is argued that the rising rates of unemployment and increasing poverty levels would lead to the escalation of social tension to a significant level.
Thus, a high percentage of the Greek population, living in villages remains uninfluenced by the country’s economic benefits that prevail in the urban areas, significantly those concentrated around the cities like Athens. Employment opportunities are mostly to be found in the metropolitan areas, thus a significant increase in the rural urban migration. This phenomenon has the tendency of putting a strain on these cities infrastructure while at the same time languishing in the rural areas. Technological progress requires an investment in research and development, however, in the Greek case, low Research Development expenditure has been a contentious issue for a number of years. Greece technologically lags behind in comparison to European Union members. Thus, R&D activities are significantly restricted.
This issue is a persisting problem not only in the private sector, but also in the public sector, leading to massive reductions to innovation. Moreover, the Greek education system has been curtailed by its rigidity and centralization, hence unable to produce new ideas. As a result of this inflexibility, the education system has been unable to succeed in meeting the critical requirements of growing industries (Petrakis, 2012). For instance, there is an emerging need, for trained youth to get a vocational education to enable them meet the needs and requirements of these industries. Meanwhile, the education system is unable to sustain the requirements of the economy on the basis of knowledge. Thus, the economy has remained intensive in terms of labor, while lagging in technological advancement. The Greek economy continues to remain largely uncompetitive as a result of low productivity, increasing wages, high labor, higher education costs, and administrative costs (Mitsopoulos, 2011). Additionally, the risk of facing an increase in outsourced services as a result of stiff competition from the other European Union members and the rest of the world. These have significant negative impacts on the Greek population as a whole. Therefore, Greece needs to institute widespread reforms in areas in order to restore competitiveness. However, such reforms would require significant time, but they are characterized as essential in enabling the whole economy to be at par with the rest of the European Union members. Therefore, the low numbers of patents, which have been registered in Greece, are an indicator of the low levels of innovation.
In aspects that correlate with the environment, Greece has proved to be a significantly low performer. The waste management methods and techniques, including pollutant gases and dangerous industrial emissions, are indicated to be among the poorest in the European community. While a lot of regulations and legislations have been instituted, a large number of them are still set to be put in place. In this case, it is crucial to note that directives from the European Union are sometimes not integrated fully into the nationalistic environmental laws. Moreover, the inefficient co-ordination between environmental agencies, while a high number of laws are outdated, does not help the matter but highlights a composite need for significant updates and changes in the environmental legislation.
However, in a legal perspective, Greece’s competitiveness is premised on the realignment of reforms in the labor market. Attempts to make labor and pension reforms have been met with pertinent protests and demonstrations, which are a popular reaction in Greece. In spite of initiatives, taken to mitigate overtime restrictions, to polish active labor market policies, while at the same time reducing disincentives to take employment, Greece’s labor market continues to be rigid in comparison with other international markets and European Union.
The World Bank ranks Greece as the 142nd among 178 nations with regard to regulation of inflexibility of the employment index and employment, this indicates a trend almost two times above the OECD average and considerably higher than European Union countries (World Bank, 2009). On the other hand, the necessary and critical pension reforms are not implemented at a satisfactory rate. This makes the future generations to bear a harder burden in the future. Hence, the sustainability of public finances is expected to be shortchanged by the long-term costs of maintaining an ageing population, until the social security system is comprehensively reformed and the implementation of a support package measures by the government.
In spite of Greece’s signing many Intellectual Property protection laws, their implementation is compromised. The critical issue is the enforcement of laws. This is attributable to the fact that judges often may impose low penalties or fines for Intellectual Property Rights crimes, since they are not considered as serious offences. Thus, piracy rates have become increasingly high in the entertainment sector, books, and more critical, business software (Petrakis, 2012). Hence, Greece is perceived as one of the most offenders of software piracy laws in the European Union. The enforcement of laws and regulations has proven to be a challenge for Greece. It is argued that the issue will remain in the foreseeable future. Greece’s main concern are the individuals, who are attempting to baffle the through perceived loopholes. In reference to corruption, which is widespread in Greek society, it is evident that these legal loopholes are often used for the benefit of upper social-economic groups. Finally, it is challenging for participants originating from diversified markets to contrive as a result of Greece’s multiple regulatory systems.
This results from the fact that mandates are often overlapping and conflicting. For instance, the banking segment, the capital markets sector, and the insurance sector, there are different designated regulators. Therefore, it is not hard to appreciate the complexity and confusion of the market participants for these sectors which interact with each other. Hence, the absolute conclusion of this analysis is that the prevailing origin of the Greek crisis is attributable to its extremely low economic competitiveness. It is crucial to note that all aspects of this interpretation result in poor competitiveness, preventing stable and healthy growth of the country’s economy.
The origin of the Greek crisis is naturally the combination of the factors leading to the current state. However, some aspects are deemed to be critical catalysts during the past decades and aided in the escalation of the public debt substantially. Significantly, disorganization and political encumbrance between the two main political parties created withstands for Greece’s incessant development and growth. The public administrations failed to carry out previously decided reforms and projects. However, changes were so sensate and so permanent that decreased competitiveness was significant while burdening the public finances to unsustainable degrees.
Furthermore, widespread tax evasion and corruption led to repeated budget deficits for decades that were compensated with more debt. Evidently this was adding up to unsustainable, uncontrollable and gigantic proportions. Public corporations, which failed and kept avoiding bankruptcy by ample public funds, contributed to the subsequent events that led to the crisis in Greece. Without doubt the EU membership significantly helped Greece to reduce their borrowing cost during the first years. Optimism and confidence was broad with regard to the public debt at the time. Although, benefits like financial growth and stability gained from the EU inclusion are not to be neglected. Excessive private interest and optimism of the investment banking sector and rating agencies led to a substantial risk being taken by the Greek government, thus culminating in a shared responsibility. Moreover, economic and monetary inequalities lead to unrest and social differences within the EU. Extensive trading deficits and surplices are common to the scale of EU member-states benefit from the debt crisis, like the Greek debt crisis, by experiencing an investment and export boom.
Thus, implementation of the EU financial directions and harder controls are needed to be embraced by the Greek government. However, a more coherent system and a flatter system as a whole will enable the EU to function with less risk, more sustainably, and reduced crises in the future. For instance, a balanced trading system is needed where trading surplices and deficits would be under control in order for all the EU countries to grow and develop at a similar pace. Hence, a balanced productivity should lead to a wage-gap limitation. A stabilized purchasing power and consumer confidence across EU member-states will ascertain financial stability. Therefore, economic cooperation is expected to result in social and political integration. With regard to the crisis management, stable steps are essential and necessary for financial compliance; including the significant technical and economic help facilitated by the international bodies. Economic practice and theory have repeatedly shown that in order to kick-start the economy, direct development and investment is needed. It is critical to observe that austerity measures work towards opposite, namely social and economic unrest.
The debt crisis in the EU, significantly Greece, is expected to have far reaching consequences and implications for the functioning of the EU and the Euro zone. The debt crisis has given an indication that a reform of prevailing EU mechanisms should be put in force. If this does not happen, the Euro zone’s stability will be significantly jeopardized, hence affecting the euro currency negatively. In order to avoid similar crisis in the future, a defined set of mechanisms should be implemented and designed at a supranational level. This should include a mechanism, which promotes convergence regarding the competitive position of individual members of the EU, thus preventing trade imbalance when and where necessary.
Additionally, economic policy, which includes wage, policies, credit regulations, budgetary policies, and social policies, remains at the hands of policy creators. Therefore, in the event of a crisis at the EU periphery, an adjustment mechanism is critical to be in place to mitigate the crisis at a supranational level. In case of the creation of such a mechanism; a literal transformation of the European Monetary Union into a formidable political union with an inclusive and common Fiscal policy is possible. However, this task appears to be unrealizable for the foreseeable future.