الرئيسية / أخبار عالمية / Greek Crisis and Fears about European Common Currency
Greek Crisis  and Fears about European Common Currency
اليونان والاتحاد الأوربي

Greek Crisis and Fears about European Common Currency

Presented By :Essam Omaran Mohamed – Democratic Arab Center

Introduction:

Greece suffered accessing to capital markets for the first time five years ago, with other countries such as, Ireland in November 2010 and Portugal following in May 2011. Both Spain and Cyprus asked the EU to get official fiscal assistance in the years of 2012 and 2013 consecutively Nonetheless, Spain was the only country required to recapitalize its banks sectors instead of a full salvation. Ireland stopped getting financial support by the end of 2013, and Portugal applied the same policy in May 2014. Five years ago, Greece launched an adjustment program but it took two years to start, it means that it came delay nearly two years. Nevertheless, the treatment is that weather restructuring of Greece debt will give the impact on banks’ balances and will reflect on the core EU states such as France and Germany.

However, in fear of infection were overreacting and that restructuring could take place without compromising stability. The delay of reconstructing in Greece and its remedying sparked suggestions for an intermediate approach between the two extremes: on one hand, a legal Sovereign Debt Restructuring Mechanism (SDRM), suggested by the International Monetary Fund(IMF) in the aftermath Argentina’s 2001 default but the suggestion was refused by the creditors, on the other hand, market based approach that based on Collective Action Clauses (CACs) that agreed to on case by case basis .The IMF presented variants to the (SDRM) that would not be consented to creditors, it contains making a contractual framework would be more effective through accumulating clauses in (CACs). The proposal aimed at reducing and limiting the risk that fund resources are used to bailout the private sector and its relevant creditors.

It has been noticed that Greece was the first country in the euro are to lose its accessibility to capital market in May 2010 as a result of the utmost importance of its debt that reached amounting was the largest and unparalleled in the history 200 billion  EUR and its buyback was 30 billion Eur. The problem is that potential for infection to the rest of euro zone state members. Moreover, the debtors have lost the accessibility to market, the IMF proposed a creditor bail-in as condition for fund lending. 

The Roots of the Crisis:

2009, saw the first emerging to Greece crisis during the newly elected Papandreou government, whereas the budget deficit reached 12.5 percent of GDP – Gross Domestic Products – it . The problem accelerated in unexpected way posing the European Central Bank at that time did not accept the Greek government bonds and these bonds would not be eligible for ECB to refinance operations after guarantee rules returned to the first level of the crisis at the end of 2010([1]). As the crisis evolves, Germany and other rich member states from the beginning did not have the desire to provide a financial assistance to Greek’s economy([2]).

The Euro zone  and IMF agreed to finance adjustment program in the beginning of 2010 with exact financial supporting of 110 billion EUR (48 percent of GDP).The program was financed by the euro area common currency member states with (80 billion euro) and the remaining amount provided by the International Monetary Fund(IMF). The forerunner of the previous stage was the private creditors who agreed to decrease approximately 50 percent of Greece debt as a new bailout package, the agreement was signed at the month of October 2011,excatly on 26th  and 27thEuropean Union summit (European Council 2011). In another words, program was managed togetherness by the European Commission, IMF and the ECB (the European Central Bank).

The argument is that before joining the euro area common currency, Greece was disciplined in public expenditures but after adopting the single currency, public spending elevated.

In other words, public expenditure was main significant matter triggering the crisis. In this sense, there was another dangerous reason which was public sector wages, for instance, that item increased 50 percent between the period of 1999 and 2007 rapidly more than in most euro area member states. Another practical and existing reason had extremely emerged on the grounds of governmental debts the taxations system. In other words, the Greek tax regime has  been charged of being too complicated character. This regime had led to peaky tax evading with the Prime Minister announced in 2011 that Greece had lost around EUR 30 billion per year in tax evading and fraud in social security systems. This represents approximately 14.6% of GD([3]). It means that there were huge amounts flowed out of the government cabinet because of widespread tax fraud.

In this context ,Greece represents a special case in the scale  of tax evading. Greece has a soundly ingrained culture of tax evading due to the historicity duration of foreign domination([4]).

In addition, it was hiding a large part of the debt, as successive governments have tried to meet the Greek limit of 3 percent of GDP, the debt is required of the euro member states. In the same context, debt levels reached the point at which the country would not be able to repay its financial obligations, and had to ask for fiscal aids from both EU and IMF – the International Monetary -Fund in the form of huge loans. However, that the conditions imposed on these loans may worsen the problems of Greece.

Haplessly, this culture has been paid the 21st century, where citizens believe that if they do not get generalized benefits proportioned  with their exceeded tax rates, they would not have had to pay([5]).

Evading taxes is morally wrong. A large number of Greeks failed to recognize this as a part of their code of ethics and morals.”Mananvyas “said

Also Athens Olympics that were held in 2004 participated in the problem because the government also accumulated huge  debts to pay for the 2004 Summer Olympics([6]). In addition to that, the huge amounts  borrowed were hidden, as ripple Greek governments aimed to achieve Maastricht criteria  the 3%-of-GDP cap ,that made Greece borrowed from the Euro zone member states in order to meet such criteria to join the Euro zone.

Debates about solving the crisis:

Since May 2010, the European Union and the International Monetary Fund have financed 110 billion euro of bailout adjustment program in form of loans to Greece to enable the government to abolish creditors. A more important matter is done in stages, as two of these loans(that provided by both EU & IMF), the majority of Greek private creditors have promised to write – off about three quarters of the debt to be paid to them by Athens. The creditors also approved to renew the current loans with a new loan at a lower rate. In addition, Both EU and IMF asked and instructed Greece to start a major austerity procedures that including government spending cuts, tax elevated, and pension reorganizing. It has been predicted that all austerity procedures would devastate effect of Greece’s weak economic rebounding. 2014 Greece budget aimed at economy downturn by at least 6.5 percent comparing to 4.5 percent in 2013.It expects that the recession will be dominated Greece economy for the next four years that shrunk started in 20018 to will be continued to the end of this year.

Most of the observers and commentators see that merge between 240 billion euro and the debt will be eliminated by the creditors will not be sufficient. It has been approved a two-year, by euro zone finance ministers to give Greece a retention period – until 2016 – is a state bailout of deficit reduction targets to be achieved, this approval is being adopted in 2015.

the German’s leaders waste several months before deciding to support and save the Greek’s economy ,lastly they saw the crisis that assaulted on Greek’s economy it should be solved . Angela Merkel announced that Germany will support Greece by taking fast procedure to mitigate the crisis despite of objecting the opposition parties in the capital of Germany unless issuing a legislation before providing the financial assistance to Greece to pay off more than 10 billion to the creditors([7]).

On the other side ,International Monetary Fund planned jointly with the Euro currency member states to provide USD 160 billion to Greece in a quick signal to support and mitigate the Greek’s crisis. At that time, most financial connoisseurs declared that if Mrs. Merkel moved slowly in towards solving the problem ,the infection would covered most areas of Europe and then Germany will not be able to dominate the crisis([8]).

Germany is one of the largest economy among countries in the euro currency area, so Germany may provide up great fiscal aids to Greek’s economy ,but the obstacles on Chancellor Merkel resulting from two different situations. The first situation is that willing to provide safeguard to the creditors and achieve more stability in Euro zone in order to encourage investors to provide new funds for Greece to avoid prevalence the infection throughout European continent. The last situation is that ethical danger is rooted in German electors ,are unwilling to concede authority to European Institutions and at the same time  granting funds to Greece in the context of Greece’s misspending and the shortage in productiveness([9]).

All concerns parties met in the capital of Greece and were impelled to find a suitable solution for decreasing Greek public expenditures by signing  agreement between  government and the creditors. The aim was to pave the way for the ruler in Greece  to acquire new loans and present a guarantee for the investors throughout the world that European debts are flawless([10]). If Greece applied the austerity procedures and could downturn the government expenditures, Greece’s debts will be expected to down to 124 percent of GDP – Gross Domestic Products- by 2020.

All adopted procedures will help Greece to buy back its banking sector debts at its declined capital market prices and encourage the European Central Bank to cut the interest rate on current salvation loan by refund profits earned on Greece debts it owns .In other words, it will not contain any write – off of rescue loans by Germany and other payees. Cutting the interest rate will be suspended until next December to get the approval from national parliament in euro area.

Nevertheless, there had been similarities in the French situations towards the Greek’s debts crisis as Germany did. Nicolas Sarkozy ,the president of France had had a motivation to avoid ethical risk and the infection to spread.  on the other hand, the president Mr. Sarkozy’s action aimed to prevent  the creditors to achieve great losses on Greek debts by providing  financial assistance aligned with Germans situation. France tried to support the Greece because the French banking sectors invested more Greek debts than  the creditors from the European countries. Moreover, Germany has a stronger economy than France and a lot of commentators predict that France might be the next destination for the euro crisis after the euro member states like Greece ,Italy ,Ireland , Portugal , and Spain([11]).

The current negotiation between the EU and Greece:

Commanders of Euro zone jointly approved to provide a third rescue plan to Greece from the site of the Council of the European Union in Brussels([12]).The Greek crisis is the most risky since the European Union had been  created in 1957, the head of European Commission said ”the risk of Greece leaving the euro zone had been averted”. In this course , Greek Prime Minister Alexis Tsipras said that after a “tough battle”, Greece had secured debt restructuring and a “growth package”. Nevertheless, all commentators saw the keen of European commission and the Council of the European Union to make Greece stick to the euro zone and avoiding to crash out .It extremely observed by the head of European Commission- Jean-Claude Juncker- when he said ” if there had been no deal, Greece could have crashed out of the euro”([13]).

Euro Summit , Brussels 12 July,2015: the Greek government should be followed number of procedures as follows:

  • The liquefaction of the assets will become the only guarantee to pay off the recent credits and 25 billion EUR of 50 billion EUR will be assigned to the banks sector to achieve the capital adequate , and the remaining balance of 25% of 50 billion will be assigned to reach the governmental debts to GDP ratio and the remaining of the 50% of 25 billion will be assigned to direct investments([14]).
  • The 50 billion euro should be founded in Athens and be administrated by the Greek government under oversight of the related European bodies.
  • The government in Athens adheres to the costs reduction of the Greek department in consistent with a time table agreed with the European bodies([15]).

Greece recently introduced economic reconstructing, but no breakthrough sends – as it was. At the same time, Athens in an attempt to get financial help before it is cash bits, such as the viability of the EU sends a new economic program, Athens has warned of the danger to its creditors. Greece started to reform a plan in order to convince its partners the EU and IMF and euro area member states that its program and the austerity procedures would save huge surplus. Moreover, the government announced later the list of Greece’s new reform.

This list contains a lot of aspects of government expenditures and its obligation in order to deliver a chunky surplus . ”It is in 26 pages long, covering taxation, privatizations, Greece’s public sector, its labor market and healthcare among others” The guardian newspaper said. On 5th April, 2015, Greek Finance Minister YanisVaroufakis says Athens plans to meet all obligations towards creditors. The Finance Minister announced that following a meeting with the International Monetary Fund head and told reporters the government plans to ”reform Greece deeply” and Athens would do the best to improve the ”efficacy of negotiations” with its creditors.

The IMF Managing director Christine Lagarde said in a statement following the meeting with Varoufakis that ”she welcomed his confirmation that the loan payment due would be made on schedule. ”I welcomed confirmation by the minister that payment owing to the Fund would be forthcoming on April 9th” Lagarde said.

Until the government of leftist leadership in agreement on the reform package, the bailout provided by International Monetary Fund and the European Commission and the European Central Bank would be frozen.Last Wednseday8th April,2015 Athens presented another detailed package and failed to impress creditors after setting a first sort of planned measures.

The above diagram explains the most countries that are unveiled to Greece debts France comes first with approximately amount 40 billion USD, UK followed by 8.30 billion USD and Japan comes at the end by 0.64 billion USD.

Finally, Greece has not gotten bailout funds since nearly a year, and has resorted to such measures, it borrowed from state organization. These funds provided the key reforms last week in hopes of a new package, but it has yet to win agreement on suggestions with the EU and the IMF lenders. 

Conclusion:

Blundering through the crisis:

Over the next few years ,it expected the Euro zone  besides the EU is cleave to  the continuous  crisis which initiated to emerge since 2010. The most  European member states require more bailout packages. The ECB commits to buy their governmental debts , whereas they pay high rates for borrowing.Universally, Europe is not an effective player economically ,while the other powers over the world ,like USA and China could manage and beat the crisis successfully. Moreover ,the European Union still depends on fiscal aids from a third party. After emerging the crisis in the year of 2010, the Euro zone failed to deal with crisis successfully and the method that had been  followed to manage  the  crisis can be categorized as a blundering([16]).

Split up the Euro zone and its Common Currency:

The worst scenario will be in 2020, breaking up the euro zone and common currency. why?

  • Over the next four years ,it will be expected that  economic aspects are stuck to both the EU and Monetary Union will be divided into several conglomerates and number of countries in the euro zone will do its best to re-enter their national currencies.
  • Management of the fiscal regime to keep stability and decrease unnecessarily  compress was faced by significant withstanding  and controversy.
  • The monetarily institutions in EU were frail , and there had been some obstacles throughout the banking sector in European countries particularly  loans systems.
  • In addition to ,there had been a chronically trusting crisis ,inherent in the stagflation in most member states of the European Union([17]).
  • Care systems across all member states were limited and pave the way to a substantial augment in the poorness.

Finally,If Greece does not have the possibility in future to repay its creditors, a risk precedence will be occurred .As a result of Greece default paying its obligations this makes the creditors increasingly more worried about the potential of other nations that owed, such as Italy, or those with weak economics, such as Spain, the fears of not repaying their debts or leave out the euro area single currency. Athens execute its plans to save its economy, it has to abdicate the view of accusing the state’s lenders of getting advantages of Greece’s funding limits to add a more burden on Athens.

I see that if Greece does not take the necessary actions and the people intend to help the government by adhering with tough austerity measures to ensure that the country’s economy funding flow year by year, Athens will its self opt out the common currency area .In my point of view the government will arrange a referendum to decide either staying inside the single currency area or leaving out. 

Bibliography:

  • CIGI PAPERS NO. 33 — JUNE 2014, SOVEREIGN DEBTCRISIS MANAGEMENTLESSONS FROM THE 2012GREEK DEBT RESTRUCTURING”MIRANDA XAFA” page 7.
  • CIGI PAPERS NO. 33 — JUNE 2014, SOVEREIGN DEBTCRISIS MANAGEMENTLESSONS FROM THE 2012GREEK DEBT RESTRUCTURING”MIRANDA XAFA” page 7.
  • http://www.mananvyas.com/the-origin-of-the-greek-sovereign-debt-crisis/ ”MananVyas”.
  • http://www.mananvyas.com/the-origin-of-the-greek-sovereign-debt-crisis/”MananVyas”.
  • http://www.mananvyas.com/the-origin-of-the-greek-sovereign-debt-crisis/”MananVyas”.
  • http://www.bbc.com/news/business-13798000
  • http://www.nytimes.com/2010/04/30/world/europe/30greece.html?_r=0,Louisa Goliamaki.
  • http://www.nytimes.com/2010/04/30/world/europe/30greece.html?_r=0,Louisa Goliamaki.
  • The Greek Sovereign Debt Crisis: Politics and Economics in the Eurozone, Shelby Woods, University of Washington, page 28.
  • http://www.nytimes.com/2010/04/30/world/europe/30greece.html?_r=0, Louisa Goliamak.
  • The Greek Sovereign Debt Crisis: Politics and Economics in the Eurozone, ShelbyWoods, University of Washington, page 19.
  • http://www.bbc.com/news/world-europe-33503955, Donald Tusk.
  • http://www.bbc.com/news/world-europe-33503955, Donald Tusk.
  • Euro Summit Statement, Brussels, 12 July, 2015, SN/4070/15, Page 4.
  • International Policy Analysis, Future Scenarios for the Euro Zone, scenario team Euro Zone 2020/March, 2013 – Friedrich Ebert, Page 5.
  • International Policy Analysis, Future Scenarios for the Euro Zone, scenario team Euro Zone 2020/March, 2013 – Friedrich Ebert, Page 7.
  • CIGI PAPERS NO. 33 — JUNE 2014, SOVEREIGN DEBTCRISIS MANAGEMENTLESSONS FROM THE 2012GREEK DEBT RESTRUCTURING”MIRANDA XAFA” page 7.
  • CIGI PAPERS NO. 33 — JUNE 2014, SOVEREIGN DEBTCRISIS MANAGEMENTLESSONS FROM THE 2012GREEK DEBT RESTRUCTURING”MIRANDA XAFA” page 7.

([3])    http://www.mananvyas.com/the-origin-of-the-greek-sovereign-debt-crisis/”MananVyas”.

([4])    http://www.mananvyas.com/the-origin-of-the-greek-sovereign-debt-crisis/   ”MananVyas”.

([5])    http://www.mananvyas.com/the-origin-of-the-greek-sovereign-debt-crisis/   ”MananVyas”.

([6])    http://www.bbc.com/news/business-13798000

([7])    http://www.nytimes.com/2010/04/30/world/europe/30greece.html?_r=0,Louisa Goliamaki

([8])    http://www.nytimes.com/2010/04/30/world/europe/30greece.html?_r=0,Louisa Goliamaki.

([9])    The Greek Sovereign Debt Crisis: Politics and Economics in the Eurozone, Shelby Woods, University of Washington, page 28.

([10]) http://www.nytimes.com/2010/04/30/world/europe/30greece.html?_r=0,LouisaGoliamak.

([11]) The Greek Sovereign Debt Crisis: Politics and Economics in the Eurozone, Shelby Woods, University of Washington, page 19.

([12]) http://www.bbc.com/news/world-europe-33503955,Donald Tusk.

([13]) http://www.bbc.com/news/world-europe-33503955,Donald Tusk.

([14]) http://www.bbc.com/news/world-europe-33503955, Donald Tusk.

([15]) Euro Summit Statement, Brussels, 12 July, 2015, SN/4070/15, Page 4.

([16]) International Policy Analysis,Future Scenarios for the Euro Zone,scenario team Euro Zone 2020/March,2013 – Friedrich Ebert,Page 5.

([17]) International Policy Analysis,Future Scenarios for the Euro Zone,scenario team Euro Zone 2020/March,2013 – Friedrich Ebert,Page 7

supervisor – Dr. Jan Volkel – Euro Med Studies

أضف تعليقك أو رأيك

عن المركز الديمقراطى العربى

المركز الديمقراطي العربي مؤسسة مستقلة تعمل فى اطار البحث العلمى والتحليلى فى القضايا الاستراتيجية والسياسية والاقتصادية، ويهدف بشكل اساسى الى دراسة القضايا العربية وانماط التفاعل بين الدول العربية حكومات وشعوبا ومنظمات غير حكومية.

اضف رد

لن يتم نشر البريد الإلكتروني . الحقول المطلوبة مشار لها بـ *

*

إلى الأعلى