The Greek sovereign debt crisis has required multiple controversial bailouts. The bailouts that prevented Greece from defaulting, led to two opposing opinions from leaders of the members of the European Union (CE’), (1) to support Greece to remain member of the Rezone and, (2) to pressure Greece to exit the Rezone. Greek constant economic restructuring Introducing the “populist policies” during election seasons were the core of Greek political parties strategy.
Political parties were forced to craft and innovate new economic structures to gain support from the voters. In asses, for example, the notion of public protection and equal income redistribution threatened confidence in Greek’s voters. The massive increase of the public spending (10% increase of the GAP from 1980 to 1 990) caused turmoil in Greek economic structures. The newly elected government’s acquisition of Bank of Greece resulted in the Greek government having direct control of the country’s monetary policies.
This caused dramatic economic impacts such as; public debt tripled to 89% by 1990, from 28% in 1 980; economic grog. H/the plummeted due to the decline of the GAP (at less than 1 %), and the interest rate on debt increased to 10% of GAP in 1990. Subsequently, in 1993, the overspent led by Andrea Pandered and Constantine Summits, of PASO, enforced stricter tax policies. In return, the government created a surplus of 4. 2% of GAP (1994) from a deficit of 5. 1% (1990) (Rossini et al. 2011 Unfortunately, this led to widespread tax evasion, not only from private companies but also amongst the large number of informal economic structure such as misinterpreted and self-employed citizens, resulting in a budget deficit that spiraled out of control over time. However, the excessive “concealed” borrowing (through Goldman Cash) by the government used pacifically to meet the Masochist requirements, successfully landed Greece in the Rezone in 2001(Rossini et al. , 2011). The revealing of the true status of Grace’s economic state by George Ponderosa; Greek Finance Minister in 2010, disclosed that instead of 3. % of GAP the actual debt was 12. 5%. This has a big impact on the E and created chaos. Grace’s debts have reached point where the country was no longer able to repay its loans and were forced to seek help from the EX. partners. The turmoil impacted the yield on Greek government bonds to increase significantly (2;year bond doubled to 4. 0% from 2. 0%). The EX. and the International Monetary Fund (MIFF) decided to help Greece with a massive loan of ?155 billion to avoid Greece from defaulting.
Keeping Greece in the Rezone The financial crisis was particularly impacted Greece because of the country’: uncompetitive economy, administrative weaknesses, and rampant tax evasion in key sectors. The European Commission estimated in 2006 that 309 of Greek taxes – or 3. 4% of the Greek GAP -? were unpaid (Featheriness, 201 1). Featheriness further asserts that, when the international credit crisis spread in 2008-2009, Grace’s “record of low reform capacity was matched b inherited economic weaknesses that made Greece very vulnerable…
Thus, the Greek economy lacked competitiveness and sustained significant current account deficits in foreign trade and commerce”. The uncertainties of the economic status forced the Greek government to drastically raise its government bonds yield rates due to potential insolvency. The impending collapse Of the Greek economy widened the effect of the 2008 global finance crisis due to the exposure faced by banks (EX. and non-E) that held Greek government bonds, estimated at ?200 billion.
Though it became clear that Greece would not be able to pay back the yield on its bond, global markets expected that Greece would receive a bailout immediately (Arroyos & Outclass, 201 1 The market assumed that the sustainability of Greek debt would be directly guaranteed by the ability of the European Central Bank to accept lower rating bonds as collateral against short-term loans. Additionally France and Germany had their own interest in supporting Greece to remain i the Rezone.
French and German banks were particularly exposed, holding an estimate between ?60 – ?120 billion of Greek government bonds. If France ND Germany opposed to the bailouts for Greece, they could be forced to ABA out their own banks. Similarly, the Greek exit from the Rezone would potentially prevent moral hazard. The Greek government should have taken the responsibility for its own debts, however, this could not guarantee that Greece would be able to solve its debt problems; it simply deflects the problems outside the Rezone (Arroyos & Outclass, 201 1).
In my opinion, the failure of Greece to repay its debts could set unscrupulous precedent to other countries and increased the likelihood for other highly indebted entries; such as Italy, Portugal and Spain, to repay their debts and to stay inside the Rezone. This could have further eroded the investors in the EX.. Hence, remaining in the Rezone could potentially avoid the collapse of the Euro, especially by reducing the threat of economic shocks to other weaker countries such as Spain, Italy, Ireland and Portugal.
The stability Of the Euro is important for the global economy because the Euro represented 37% of the global foreign exchange transactions (Rossini et al, 2011). From the European Council point of view, supporting Greece would eave reinforced the monetary union and strengthened the core of European stability. Thus, the creation of?700 billion safety net (after the controversial Greek bailout) was agreed upon by the European leaders not only to protect the weaker countries from defaulting but also to reinserted investors confidence.
Greece should have left Rezone before the bailout In order to avoid default, the Greek government compromised on the austerity measures within the bailout conditions. However, what would have happened if Greece decided to divert its course and cut its ties; political and economical relationships, with the ELI. Exiting the Rezone could have been beneficial. Recreating the Drachma (traditional Greek currency) would have allowed Greece control over its own monetary policy. Having sole control of its monetary policy, the government would have been able to produce and inflate its own currency into the system.
Since the Greek government is unlikely to have monetary resources to stabilize the banks, the most logical option would simply be for the new Greece Central Bank to print money. The government would need to flood the system with at least ?150 billion worth Of its own currency, equal to 63% of its GAP (Person & Repaper, 2012). This impact would cause the Greek economy to fall much further; inflation would rise (Darers, 2011), the unemployment rate would increase; and the government budget revenues would largely disappear since few pay taxes (Rossini et al. , 2011), resulting in the financial sector to collapse.
Economy activities would plunge even lower. Similarly, infusing too much money into the system could lead to an increased risk to the exchange rate. However, in the long term, the plummeting currency would present Greece with the economic edge over its competitors. Subsequently, the greatest benefit for Greece to leave the Rezone is that Greece would be able to devalue its currency to better reflect its economic reality. Currency devaluation would help Greece to reestablish some of its missing competitiveness and make its exports more attractive (Person & Repaper, 2012).
However, one can argue that, Greece has limited exports and is dependent on its limited service industry – tourism and shipping. Furthermore, Grace’s exit from the Rezone could avoid the controversial bailouts and avoid the Greek government having to conform to the conditions of austerity measures. Also, Greece would potentially sever the relationship amongst its neighboring countries and members of the EX. as a whole. Which path should Greece take? There are some potential benefits for Greece to leave the Rezone, but the risks involved outweigh the benefits.
The eminent risk is associated with the potential collapse of the Greek Central Bank, which can drive down Greek economy health even further. Though Greece could potentially choose to default and rejuvenate its own economic Structure, it may take a very long time to navigate the political and financial nuances, to successfully construct its own economic structure from scratch with the support of its citizens. Will Greece be able to stand on its own? The answer lies within the Greek government and its people.