The world economy experienced a decline in financial and economic activities resulting to a serious economic down turn. The world recession initial characterization was by GDP (gross domestic product), employment, capacity utilization, investment spending, household incomes, inflation fall, and business profits, while the unemployment rate and in bankruptcies rise in both social and private enterprise.
In Greece during the pre-crisis era, Greece was the fastest growing economy in Europe coupled with a decline in the unemployment rate. Greece registered an increase in its Gross Domestic Product for the period of 2000-2007 averaging 4.2% compared to the 1.9% of the Euro zone. In addition, the economy experienced a reduction in unemployment by 2.9 percent, which hit a low of 8.3% in the year 2007.
The growth in the economy is a significant increases in house commerce coupled with a negative contribution from the external sector. The economy adopted an expansionary monetary policy which had positive impacts on the domestic demand. However, in 2000-2007 while the skyrocketing public sector indebtedness and massive debt burden in the private sector need to get in favor advanced to private businesses and households. The high debt to GDP ratio of the economy according to the Euro zone designation was lower, and in addition, the net savings of the economy were negative implying that the existing debt could only be offset through external borrowing. As a result, the government borrowing amounted to 10% of its GDP, thus over the years the external debt grew overwhelmingly. In the year 2008, the nation’s report was 149% of its GDP this was due to a sharp increase in government spending coupled with an increase in external debt.
The financial and economic crisis resulted when Greece was facing difficult situations, which consist of, foreign indebtedness, and chronic imbalances. These conditions placed Greece in a disadvantageous position in relation to the value that incurred during debt servicing. High indebtedness will provide high risk of omission as well as risk premia due to variations in interest rates. Apart from the increase in interest rates, the global economy and economic crisis negatively impacted other sectors in Greece such as the financial system, banks, trade investment, and unemployment.
Recession and job
In trade, recession is an excellent introduction to business and firms are likely to reduce their tax earnings and profits decline, whereby it is affecting the manufacturer by cutting on hiring employees and freezing them alone. Expenditures incurred for promotion and marketing may also be brought down. These cost-cutting measures will affect other businesses, both large and small, which produce the goods and services used by the big manufacturer.
In an effort to cut costs, and augment the bottom line, the producer may end buying new equipment, limit research and development, and prevent new product rollouts is a factor in the growth of income and market share. An unknown number of small businesses had to close as a result of the recession.
Also, some larger employers, mostly in light manufacturing and typically in North Greece, relocated to other Balkan countries where labor costs and taxes are lower than in a major city in Greece, whereby the economy will always depend on the employment cost in the town of Greece.
Recession and unemployment
The highest proportion of working poor in Greece has a greater impact, which affect it, fast, and low wages, inability to take full responsibility, and soft skills. Threat in recession makes everyone get up in the sleeve in retailer, big business, and on employees. The narrower claimant count of jobseekers in Greece has risen to a million mark and these but be expected to increase in the mid next year.
A lot of stress and burdens in the labor market across the world has increased high rate of unemployment, due to juxtaposed with sluggish real wage growth in persistence during the recession ,which appear in domestic production due to labor market caused by, depression. The unemployment rate is a measure of the labor market’s strength, and economy which provide vital support in understanding the forces at any level. En every industry market, workers and firms customize style and policies that usually affects flow rates, such as minimum wages, severance pay, labor taxes, advice notice, and unemployment insurance.
Until very recently, labor market institutions and norms in Greece appeared to favor primary earners, mostly male breadwinners, at the expense of lesser earners. For instance, unemployment among men aged 30-44 in 2008 was a mere 3.9%, while for women aged 20-29 it was as high as 20.5%. One implication of the usual pattern was that unemployment and poverty rarely overlapped, affecting different population groups.
Recession and financial systems in Greece
Recession in Greece eroded the power of money rehabilitation, which became apparent, in Greece that, this crashed in protest of wider significant reduction in the world. This recession affected especially in a number of manufacturing industries, including automobiles, aircrafts, building material, consumer goods, steel, and maintain such as airlines, and logistics which controls the greatest economy of Greece as a whole.
Recession and banks
In Greek banking system is hit by the economy and authoritative statement which creates, causing the debt to output ratio on long term sustainability. In addition, no monetary policy approach is taken by the authorities until no borrowing activity was no longer viable in the banking industry in Greece due to the fiscal impact of recession.
Government response to recession
During the economic slow down that meet globally in 2008 to 2009, most governments had two solutions to select type in their response to the solutions. Out of the two choices- monitoring stimulus and austerity- the Greece government opted for government stimulus. This paper argues in favor of this decision and offers possible explanations why the Greece government chose such incentive plan in order to reduce recession.
There is the use of government stimulus in response to low financial crises, the principles of the New Keynesian economic theory. One of the reasons why these principles are more effective in resolving an economic recession is the fact that when governments use appropriate financial interventions, they are able to explain the crisis at hand while also being able to see any future similar problems. When the Greece government used an incentive plan in response to the crisis, it was able to reduce the head and made the economic situation less tiring for Americans. In contrast, austerity measures are less tolerant that fiscal stimulus and the solutions they offer are powerful but short term.
Though, some critics argue that government intervention; through stimulus, is detrimental to the economy in the long run; such intervention is necessary because it stabilizes the market forces. During an economic downturn such as the recent one, the only way the economy of the country can find out of the recession is if the economy’s market forces are strong and strong enough to withstand the situation on financial turmoil in the global economy. Government incentive interventions are able to stabilize the trade imbalance if the market forces.
One of the major concerns of using government incentive to stimulate the economy during a recession is that this drives the economy further into debt. Admittedly, this is a highly unlikely result of using fiscal stimulus. On the other hand, the risks of using austerity as a response to depression may often have a more negative impact on the economy in the long run than the recession itself. For instance, austerity requires governments to carry out cuts in spending at a time when the economy is shaky. Austerity measures of implementing tax cuts have a similar impact on the economy (Crippen, 2002, p. 156).
Proponents of austerity argue that even the use of government stimulus could lead to a short term decline/weakening of the economy. When governments use a commercial stimulus strategy in times of economic recession, there is only one variable to control or govern- government debt. There is no doubt that ensuring that the debt does not respond to exponential levels while reviving ensures that the economy is enough to stabilize is quite difficult. However, this is less complex and unpredictable than austerity because in order for austerity to be effective, the government has to consider both the GDP and government debt since the debt has to reduce fast and the Gross Domestic Product has to grow fast since it is necessary for the debt service costs to lose if the economy is to develop.
The balance required to do that austerity effective has proven to be unattainable for some countries that are still trying to recover from the 2008/2009 recession, for instance, Greece used austerity, instead of running incentive measures, which were able to reduce government debt. However, its GDP shrank too fast and led to a weakening of the economy. Eventually, Greece had to rely on bailouts and restructuring of its debt owed to the complications of austerity which are absent in the government stimulus that Greece used during the 2008/2009 recession period in the economy.
Other reasons why government incentive measures are preferable to austerity is the fact that such stimulation are able to reduce the degradation of the economy, which is common during a recession, and this prevents the recession from leading to outright economic downturn. One of the minor (but quite likely) possibility of using government incentive measures is the devaluation of currency once the banks, which receive incentive payments start lending out money. If the government, withdraws the stimulus on stage once the economy starts to recover, and banks practice safe lending practices, there is a risk of exposure bait devaluation (Gravelle, 2010, p. 46).
Another justification for the use of government stimulus in response to the 2008/2009, recession is that, different austerity does not diminish the economy and as such, issues such as increased unemployment are avoided. In fact, the US government proved that the use of fiscal stimulus packages during the recessions created more job opportunities for the American public. In March, this year, the White House Council of Economic Advisors released a report that indicated that the launch of the control stimulus package during the recession led to the creation of about 3.5 million job opportunities. This increase in the number of jobs available in Greece assign business sector to the three percent increase in GDP, which the stimulus instigated. The report also revealed that early (necessary) contraction of the economy, which occurred when, the stimulus package was first implemented, the US economy expanded and, therefore, the availability of additional job opportunities in both the private and public sectors. This expansion has also enabled the government to increase spending in improving infrastructure and investing in clean life in spite of admittedly the high government debt (Needham, 2011, p. 223).
The increase in government spending that is as a member of economic stimulus is necessary and just focus on wants. In economic recessions such as that of 2008/2009, investment limit in the economy especially in the private sector is due to lack of investor confidence. As such, failure to increase government spending slows down the economy further and hence economic recovery slows down. In previous recessions, interventions by the IMF and the World Bank negated the need for increased government spending, but since these interventions were lacking in the 2008/2009 habitat management incentive were an excellent alternative to perform well alongside improved economic policies as was the case in Greece (Brown, 2009, p. 47).
As noted earlier in this paper, the increase in government debt is an inevitable consequence of using financial incentive programs. This makes the success of such programs seem as a short term measure. However, it is necessary to bear in mind the fact that during economic recessions such as the 2008/2009 one, a considerable capital has to be brought in to the economy for it to heal, and in the absence of support from the IMF and World Bank. The government is the only organization with the means to obtain the actual amount of funds required, and as such, increase in government debts is inevitable, and with proper planning, and prudent borrowing, and spending by the government, the debt can be controlled.
The use of government incentive to boost demand in Greece economy and other world economy was more successful than austerity in abating the effects of the recession, together with this, the way to economic recovery is because of the economic expansionary principles of these principles. Studies indicate that these principles were responsible for the fast recovery since the world trade expanded and thus; did not bear weight on any punitive damages. Through increased government spending, Greece was able to finance its international trading activities. This negated the need for protectionism measures, which are most unlikely in use solution if there is austerity instead of economic stimulus (Capital. Net, 2009, p. 5).
The expansion of Greece and global economy was a direct result of use of financial incentive programs and increased the final output of the economy. This eased the impacts of the recession on the labor market. This had a direct impact on the increased availability of employment opportunities. The fact that the use of government assistance enables economies to grow at a moderate/ steady pace also ensures that the economic recovery during a recession is continuous and sustainable even after the recession. This is a distinct advantage over the use of austerity measures since such measures are not easy to maintain after the economy has recovered in the case of the economy of Greece.
It is necessary to note that in spite of all the above justifications for the use of government incentive to offset economic recovery during an economic recession, financial analysts believe that the use of such stimulus could be dangerous if the economy starts to improve on its own while the stimulus is still in place since this could lead to inflation. However, in such a situation, if the federal government raises the interest rates of borrowing in banks, in time, to counteract the effects of stimulus packages, it will resolve this issue easily.
All in all, while government incentive packages may not be a complete solution to economic recession, if they feel well and they are implemented in an environment where there is high supervision of banks, such packages are much more reliable and valid that implementing austerity measures. Through this recession, economy can be easily controlled by implementing policies and regulation on spending by both parties involved in the economy like in the banking industry, government spending, and trading activity.