GREEK DEBT CRISIS

This article happens to be the first part of the two-part article on Europe. In this article, the discussion revolves around Greek debt crisis.

You might be wondering why Greek debt when there are so many countries out there with debt issue. This ongoing saga revolving around Greece has been a concern since the start of great recession, which has put the entire world market under uncertainty. Though the GDP of Greece is approximately only 2% of the EU GDP and 0.25% of global GDP, Greece has helped in bridging EU with the Balkan section of the world. Moreover, EU revolves around economic and monetary union of member states through coordination of economic policy-making, fiscal policies, independent monetary policy and single currency.  Most importantly, the primary objective of EU is to create single market in Europe. Having strived towards this dream for more than a decade now, and having successfully expanded to 28 member states, it is not the time to let go of any member state. This action would result in opening up many questions about the long-term viability of EU. Instead of focusing on taking the EU forward, member states have to start defending to their people about the long-term viability of EU, if there were to be Grexit. Such an exit would also set precedence for other countries to leave the EU. If that were the case, should EU relax the conditions for Greece as it can also set precedence for other member states asking for similar considerations?

Right now, the immediate goal is to retain solidarity in the EU region by coming up with a solution for Greece.  When it comes to suitable solution, it is difficult to pass on suggestions from here without clearly understanding the real expectations of the people in various countries in Europe. At the same time, having researched on this topic for a while and using various references, I would like to put forth suggestions based on historical data, current economic conditions in Europe and around the world.

HISTORICAL DATA AND CURRENT CONDITIONS:

1.          Handling of West German debt in 1953

2.      Growth performance of Greek economy growing almost double digits in the 1950’s and on an average 6.5% until mid 1970s through devaluation of currency, trade liberalization and removal of price controls combined with fiscal and monetary discipline, wage moderation, favorable business conditions and cheap credits to priority sectors

3.         Current unemployment rate close to 25%

4.          OFDI and IFDI (especially, inward foreign direct investments), and increased trade with various countries in EU and rest of the world

Strategy can be put in place to revive Greek economy taking this information into account, and in turn strengthen EU region. Though I would leave it to troika & Greek leaders on the best step forward, with Greece not having the option to devalue the currency, it is important to give consideration revolving around the historical data.

TO FISCALLY DISCIPLINED COUNTRIES:

From the perspective of a fiscally disciplined country, it certainly appears unfair for certain countries that spend beyond their means to get an easy way out. But, we also need to understand that some of the issues stemmed out of housing bubbles across the globe through liberalization of the financial sector resulting in rapid credit expansion and below-normal interest rates, surge in FDI in various parts of the world resulting in systemic risk. Further, Greece also converted their currency primarily to Euro. All these are factors to consider. Most importantly, by coming up with a rational compromise, it can help the entire European region in the long-run.

EU PERSPECTIVE:

From the perspective of EU, a recent article suggests that different countries in Europe believe that they have different issues pertaining to structural aspect, supply and demand side economics. But, it is important for EU to understand that in order for effective functioning of the single market, it is also vital for all the member states to come together to address these problems together. Otherwise, EU will not be able to come up with an overall optimal solution. Further, it has become a necessity for other partially or non-participating European countries to get involved in EU integration for the betterment of the entire region in the coming years.

 

WHICH OF THE THREE ISSUES CAN BE ADDRESSED IMMEDIATELY?

For sure, demand side economics. When it comes to structural issues, it needs to evolve over time with appropriate policies.  Whereas on the supply side, creativity and talent should come to the forefront, and unions and senior management should work together to have an open discussion on that front to come up with viable solutions.

 

WHAT SHOULD EU EXPECT FROM GREECE?

Based on reading various articles, major concerns that have been repeatedly brought for discussion are the lack of infrastructure, corruption, bureaucracy resulting in weak business environment and low global competitiveness. Moreover, inward FDI has come down as a result of this sovereign debt crisis and reduced confidence. It is important for the Greek leaders to create an environment that would draw foreign investors and enterprises to come to Greece.

Secondly, Greece should open up for foreign companies to promote healthy competition and to increase options for labor force, thus reducing unemployment rate. It appears that only around 8% of the firms in Greece happen to be foreign-owned. Hotel, Tourism and Restaurant sector appears to be an area where FDI can come in. It is also important from Greece to consider diversifying their area of focus into various industries depending on the strengths of the labor force.

Greece should also clearly present their plan of action to EU for repaying the (revised, if approved) debt. The other area of concern in Greece is the FDI spill over and industries localization to only certain parts of the country.   Considering the size of the country with 11 million people, it might help if the country’s spread of industries becomes more homogeneous. It is also important to make sure that any surge in FDI will not create a housing bubble, which appears to be case in the recent times in some safe-haven countries.

 

WHAT CAN SUCCESSFUL GREEK ENTREPRENEURS AND EU DO?

One way to build confidence would be for Greek expatriates to invest in their country, and set precedence for others.  EU should also work with Greece to increase trade treaties. Greece can also work on expanding their relations with other countries around the globe.

 

 

REFERENCES:

1.     http://data.worldbank.org/country/greece#cp_cc

2.     http://eprints.lse.ac.uk/32566/1/GreeSE44.pdf

3.     http://ccsi.columbia.edu/files/2014/03/Greece_OFDI_16_Jan_12.pdf

4.     http://www.imf.org/external/pubs/ft/scr/2006/cr0605.pdf

5.     http://www.economist.com/blogs/buttonwood/2015/02/greece-and-euro-crisis

6.     http://ec.europa.eu/economy_finance/euro/emu/index_en.htm

7. http://www.washingtonpost.com/world/europe/greece-sets-sights-on-merkel-in-effort-to-roll-back-austerity-measures/2015/02/03/c0435d46-a9a5-11e4-a162-121d06ca77f1_story.html

8.     http://www.wsj.com/articles/eurozone-gdp-shows-meager-expansion-1415947091

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