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An assessment of the Greek Financial Crisis

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Greek Crisis

Data credibility has been a problem since Greece applied to join the European Union in 1999. It is also a fact that most researchers, when citing the origins of the Greek financial crisis, use fabricated statistical data provided by the government. This was evident in the widely criticized deal between Goldman Sachs and the Greek authorities in 2001 (Eurostat., 2004; 2012).

Between 2005 and 2009, Eurostat expressed reservations about Greek fiscal data on yearly basis, with claims that all previously reported figures were manipulated to create a flaw that made it impossible for analysts to ascertain or predict deficit, GDP growth and debt (EC., 2010; Hellenic., 2011, 2012). Although the agency admitted that data problems are common occurrences in many countries, the quality of data received from Greece in the 2009 revisions was suspicious. The European nation used some questionable currency swaps at undervalued market exchange rates to deceitfully meet the requirements outlined in Maastrisht thus enabling it to earn membership of the Eurozone in 2002, a move that the government defended as legal and acceptable (Bénassy-Quéré., 2015).

Despite the denials, renowned economists believe that several factors such as tax evasion, current account imbalance, government spending, manipulated data and budget deficits were the main causes of Greek Crisis; a breach of Eurostat’s statistical data was only a trigger that opened the canker-worms. To understand the real causes of the debt crisis, a complete analysis will not only distinguish the most recent origins but provide a broad view of the causal factors (Corsetti., 2015).

  • Political Analysis

The political side of Greece financial crisis has an underpinning to the long-lasting challenges presented by its unstable foreign relations with Turkey. Terrorism in the neighboring Muslim-majority country has been a cause for concern for a large number of Greeks in Cyprus, in the sense that political unrest leave a large number of them homeless and in need of financial support. This has created diplomatic rift between the two countries, and even inspired huge budgets for the Greek military (Helena Smith., 2017).

In addition, years of scandals in the political and financial sectors, notably under the PASOK Party and ND Party, show how badly the nation’s development has been hampered by nepotism, bribery and corruption.

Figure 2: Satisfied Citizens in the EU

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Source: Special Eurobarometer (2017)

In furtherance to the pictorial evidence above, it is worth noting that no Greek minister has been probed or sent to jail for mismanagement of public funds since the 70s. This highlights the government’s acceptance of corruption as a part of administrative services. The systemic failure also breeds faithlessness in citizens, the EU and other world leaders. Greek politicians are generally idealized as a special interest group with an inclination to self-aggrandizement (Athanasios A., Constantinos K., and Emmanouil T., n.d.).

  • Economic Analysis

In the 90s, Greece was an emerging economic power with strong GDP growth in Europe until sustainability needs arose and its policymakers liberalized the financial sector, encouraging banks to dole out loans at minimal interest rates. The government also received loans from the EU at less interest rates. Consequentially, demand for consumer credit expanded and citizens embraced ravenous consumption patterns, leading to an unprecedented level of investments within the country. But an unfavorable difference in real per capita income became unavoidable when compared to EU-15 (Bank of Greece., 2010).

After 2008, the Greek national statistical agency reported that GDP growth was significantly lower than expected, and the Ministry of Finance encouraged reduction of salaries and bureaucratic positions/structures as the most productive strategy to improve competitiveness. The ministry also proposed that governmental spending should focus more on growth-stimulating sectors and less on non-growth sectors such as the military. By 2009, the global financial crisis hit hard on Greece’s highest earning sectors – shipping and tourism. The outcome was an outrageous 15% drop in revenues (Rebecca M.N., Paul Belkin & Derek E. M., 2010).

In the years that followed, Greek economy recorded a continuous increase in deficits due to poor planning, unproductive spending and reduced earnings. Affected firms were forced to cut down on their number of employees to reduce decline in profits and tax earnings, including application of cost-cutting measures in buying and leasing equipment, research and development, as well as in marketing and promotion strategies. New product rollouts were also stalled to maximise growth. Many companies which couldn’t adjust to competitions in the volatile economic situation relocated to the north of Greece and other Balkan countries (op. cit).

The fact that payment of taxes among citizens was not encouraged since defaulters are not punished, was one the biggest obstacle to economic recovery. In Manolopoulos’ explanation, this mindset was at the heart of the problem and goes further in explaining the unwillingness of a typical Greek citizen to make meaningful contributions for the general good (Charles S., 2016).

The World Bank report on its Doing Business pitched Greece as 142nd among a total of 178 countries for its unproductive regulation of employment and the complex nature of the nation’s employment index which contributed to a springy labor market and drastically reduced competitive advantage of the Greek economy (World Bank., 2015).

Figure 3: Greece GDP (1999 – 2009)

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Source: Data Monitor, Greece, 2009

As shown in Image 3, the income gap vis-a-vis the best performing countries is highest for Ireland and Greece before the financial crisis. However, a variety of structural reforms in the product and labor market have greatly controlled shortfall in productivity while enhancing utilization of labor.

For its “statist” nature, the public sector’s inefficiency was a key contributor to the financial crisis because it offered generous pension packages, a pre-determined retirement age and incremental salaries which made public service more attractive. An inefficient and corrupt bureaucracy thereby created a sense of job security, laziness, and an unavoidable impoverishment. Also, the spoil-sharing mentality presented a worse scenario for implementing policies, and up to date, there is no statistical data to prove there’s a link between employee productivity in the civil service, job performance and basis for increased salaries. Worse still, there are no incentives to promote competitiveness among civil servants, instead, public sector wages and pensions rose by 9% in 2008 and workers continued to receive mouth-watering wages whereas firms in the private sector were downsizing and going for closure (Trading Economics, n.d.). To buttress the Greek low-end governmental position in restructuring the public sector for growth, retirement age remained at 58 with full pension offered whereas the average retirement age in the rest of EU stood at 63. Stats show that a Greek retiree earns about 98% of their original salaries (op. cit).

Figure 4: Impact of the 1st and 2nd Greek Bailouts on Employment

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Sources: Eurostat, World Bank and Trading Economics (2016)

In December 2009, an estimated 750,000 Greece nationals registered at the Public Employment Service (commonly known as OAED) but only one-third of the applicants received job offers. However, the number raised hopes for the Greek economy considering that it represents a 20% increase from what was recorded in November 2009. Despite the private sector’s huge lay-offs from 2009, the public sector maximised Greece’s first and second bailouts in expanding its workforce and increasing productivity levels.

  • Social Analysis

An unbalanced increase in birth rates and the aging population in Greece present another challenge since fewer people are joining the labour force. According to economic statistics, a noticeable decline is expected from 2020, when citizens aged between 64 and above will most likely double. By 2050, only one out of two persons will be eligible to work. In addition, a dramatic 77% rise is also expected in the dependency ratio between people older than 64 and those aged 15 to 64 (Nikolaos A., 2017).

Further, inequality in the workforce is also a challenge for the Greek economy which has a total labor force of about 5 million with 60% males. Notwithstanding the large number of males, an analysis of the total labor force shows only 48% are productive, an indication of low male participation in the rebuilding process. Contributions from females are even lower (Thanasis D., 2015; Kathy n.d.).

Although the trend has been blamed on low mobility in the labour market and structural stiffness, the outdated Greek education system stands tallest among other social factors for its low graduation numbers and high number of drop-outs recorded in comparison to the rest of EU-15 (Yannis P., 2017)

  • Technological Analysis

For many years, Greece has recorded low returns on R&D due to minimal expenditure which falls far below other countries in Euro zone. R&D activities were restricted for both private and public sectors thus stifling innovation as we see in the image below.

Figure 5: R&D Expenditure

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According to the OECD data, most economists believe the centralized nature of Greek education system hampers technological growth by producing less number of quality graduates. In the years preceding 2009, what the country needed was more vocational education for its teeming youths whose inputs could have balanced high demands from booming industries. The labor-intensive economy was worsened by increasing wages, administrative costs, small number of registered patents and high inflation rate, which placed Greece below EU and OECD-average in technological advancement (Michael M., 2011).

It must be emphasized, however, that despite the setback from low investments on R&D, Greece has competitive advantage that it can exploit to rise above its security and financial problems; the European nation boasts of a qualified workforce, strategic location, and many multinational corporations such as Siemens, Ericsson, SAP, Motorola, and Coca-Cola which established their regional R&D headquarters in the country.

On the other hand, Greek public sector’s inept attitude to high productivity rates suppressed technological development. With a largely labor-intensive economy, inefficient and unproductive workforce, increasing wages, outrageous pension packages, and high administrative costs, we need not probe further on why inflation in Greece became much higher than EU-average.

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