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Greece, the EU have themselves to blame May 23, 2010

Posted by Yilan in EU, European Union, Yunanistan.
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The possibility of Greece defaulting on its sovereign debt looms ever larger as the country faces mounting difficulty in borrowing funds through capital markets due to its sinking credit rating and climbing government bond yields. In 2009, Greece’s budget deficit spiked to 13.6 percent of GDP and its national debt as a proportion of GDP shot up to 115.1 percent, one of the highest in the euro zone. In April this year, U.S. ratings agency Standard & Poor’s downgraded Greece’s sovereign rating to BB+, which is below investment grade.

The nation’s fiscal crisis is fueling alarm throughout the euro zone, and the euro has been descending steadily since the crisis surfaced in late 2009. As of May 7, its value was down 15.5 percent against the U.S. dollar compared to its high on Nov. 25, 2009. Meanwhile, yields on Greek long-term government bonds have risen.

Although the fiscal crisis in Greece has eased, thanks to an EU-IMF rescue package unveiled this May, structural uncertainty still remains. Greece needs to implement painful deflation policies to comply with the 3 percent limit on fiscal deficits under the EU’s Stability & Growth Pact. Some say that Greece and other indebted southern European countries in the euro zone may be forced to abandon the euro in the next few years to depreciate the value of their own currencies.

The sources of the Greek drama lie in the country’s political problems and flaws in EU governance. Problems of Greece’s politics lie in its immature democracy and the inability to get public support for reforms.

Over recent decades, Greek democracy has degenerated into populist politics. To draw political support from interest groups, Greece’s political party in power offered economic benefits such as industrial or agricultural subsidies, employment protection and wage increases. Particularly, politicians offered public sector jobs to local voters, which guaranteed job security in return for their votes. For example, Greek elementary and secondary school teachers instructed 10.1 and 7.5 students on average, respectively, the lowest level in the OECD, because the Greek government employed more teachers than actually needed.

From February to May this year, whenever the government announced public debt restructuring plans, there were street demonstrations protesting against the reform legislation. The inconsistent attitude of Greece’s Social-Democrat government also has been an obstacle. The government emphasized the need for government debt restructuring but fanned negative national sentiment against the IMF’s bailout program.

The problems are not just confined to the domestic arena. The EU’s slow and tepid attitude in the early stages of the crisis helped it grow into a full-blown disaster. Six months after the outbreak of the Greek crisis, the EU finally decided to provide aid to Greece through the IMF. The reason for the EU’s protracted actions is its weak governance. Since the EU has no central government, member countries had to go through the European Council to discuss ways to help Greece tackle its unprecedented deficit crisis. But a coordinated response was delayed as Germany, the EU’s biggest economic powerhouse, waffled on a rescue plan, mindful of growing public opposition to a bailout of Greece and a German state election on May 9. Thus, the Merkel government refrained from swift financial aid to Greece.

What will it take to tackle Greece’s fiscal crisis?

First, to preserve its euro zone membership, Greece needs to adopt drastic measures to improve its fiscal health and competitiveness (e.g., fiscal tightening, better tax collection and lower labor costs).

Second, the EU should give Greece more room to breathe by providing additional aid and rolling back sentiment against the IMF bailout program. More ECB purchases of Greek government bonds or pushing back the 2014 target year for Greek’s fiscal restoration also are worth considering.

Finally, to stabilize the euro zone, Germany’s leadership will be essential. Germany, the biggest beneficiary of European integration, was able to unify East and West Germany and expand its export market through the EU. By wielding its political leadership over European integration, Germany should actively participate in reforming EU governance by helping increase the EU’s budget and improve its decision-making mechanisms.

*The writer is a research fellow in the Macroeconomic Research Department at Samsung Economic Research Institute. For more SERI reports, please visit http://www.seriworld.org.

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1. InI » Greece Daily Newslinks 24 May, 2010 - May 25, 2010

[…] Greece, the EU have themselves to blame “ Turkey & Macedonia By Yilan The possibility of Greece defaulting on its sovereign debt looms ever larger as the country faces mounting difficulty in borrowing funds through capital markets due to its sinking credit rating and climbing government bond yields. … turkeymacedonia.wordpress.com/2010/05/23/greece-the-eu-have-themselves-to-blame/ […]


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