Report on International Economic Relations Conference.

Greece. Possible solutions.

A bail-out for Greece?

MariannaNepoklonova

Group III 6 (IT)

Introduction.

Today the Greek downturn threatens all European countries with the possible devaluation of Euro. The EU now suggests that the U.S. should interfere in the European affairs in order to help bail out Greece. There is already a concern that Athens might be unable to pay its debts and might default on its obligations has pushed up borrowing costs in Europe, undermining the region's growth prospects. Moreover the United States sells more goods and services to Europe than to any other region regardless of the fact that since November 2009, the euro has fallen in value by 8 percent against the dollar, making American products more expensive for Europeans. So an extended period of weakness for the euro would undermine the Obama administration's ambitions to double U.S. exports in the next five years.

Reasons for the downturn.

Greece holds the record for the developed world’s most crooked economy: fully one quarter of its GDP earned off the books in a) illegal construction and b) unreported employment. Greece could easily avoided its debt crisis had it found a way to tax even half that income. But Greek government accuses speculators of misbalancing economy by buying sovereign credit-default swaps and profiting from the country's failure to make payment on its debts.

For most of the past decade the Greek economy has been growing faster than any other in the euro area. Greek competitiveness plummeted as wages rose three times faster, than in any part of EU, although Greek productivity grew more slowly and by 2009 the annual Greek deficit equaled 13% of the economy and public debt was 107% of the country’s GDP. Having many opportunities, Greece has chosen to pursue what economists call an "internal devaluation" through cuts in government spending and in wages. Greek deficit is now equal to 12.7% of GDP, which is four times the limit allowed by the European Union. All this has been undermining Greek competitiveness which turned out to be one of the biggest problems of the downturn.

Ways out.

  1. If Greece still used the drachma as its currency, instead of the euro, it could unilaterally devalue, making its exports more attractive while shrinking imports and creating domestic inflation that would ease its debt burden. But as a member of the euro-currency area, Athens does not have that option.

Germany is playing one of the first roles in the deciding the future of the Greek economy and the details about tools Germany could use to bail out Greece.

  1. Germany could use government-owned financial institutions, like development banks, to funnel funds directly to Athens. But due to Maastricht Treaty, which forbids any forward financing to countries using Euro it is impossible. Although EU in the faces of Counselor Merkel and President Sarkazy promised to help if Greece finds itself on the edge of bankruptcy.

But even in that case the Greek government will consider this help only a tool for uniting the EU and strengthening the European integration process. So Greek downturn is regarded by Greece only as an important test of European Union solidarity.

When it comes to the help of international organizations, Greek Prime Minister Mr. Papandreou claims that his country won’t expect any support from the IMF.

  1. Prime Minister promises to stick to his budget-cutting plan. But EU has taken it under control demanding prompt slashing civil servants' wages, selling state assets, higher taxes and a war on tax evasion. The EU is playing tough cop, waiting for frequent updates on Papandreou's progress.

Yet there are some cons: deficit-slaying is politically difficult, particularly when voters are still reeling from recession. "More aggressive spending cuts or tax hikes could curb or even derail recovery, perhaps inciting social unrest," warned a recent report by Roubini Global Economics.

Although that now Greece finds itself pressed with its back to the wall and being regarded by all countries of EU as a contagious economy which is more safe to leave fading behind, it has a couple of ways out. It is highly recommended that Greece should direct money at the struggle against tax evasion, forming public institutions to control employment, innovation projects, controlling the growth of wages. But it is up to Greece to decide which way to choose in this tricky position in order to save its place in the European Union and maintain its prestige among the countries as one of the most stable developed economies in the world.

Sources:

  1. National Journal; 2/27/2010, p4-4, 1p, “Europe Weakened By Greek Crisis», Stockes, Bruce.
  2. Stratfor; Analysis; 2/8/2010, p7-7, 1p, “Germany: A Bailout for Greece?”
  3. Newsweek; 3/8/2010, Vol. 155 Issue 10, p6-6, 2/5p,

” THE LONG SHADOW OF GREECE”, Theil, Stefan

  1. Canadian Business; 3/1/2010, Vol. 83 Issue 2, p12-13, 2p,”Next crisis: sovereign debt?”, MCCLEARN, MATTHEW