Part 1: The Mini Case Study Questions
Question 1: Events which precipitated the Greek Crisis
The 2009 speech by the Greek Prime Minister was the event that precipitated the Greek Crisis. Mr. Papandreou told the EU summit that the rate of corruption in Greece was high and its administration lacked transparency. Papandreou gave an example of previous governments hiding the financial performance of Greece for more than one decade. He explained that the reported 2009 budget deficit of Greece was not 3.9% of GDP nor 6%, but 13% (Thomadakis, 2015). This figure was above the Maastricht limit, which allows a budget deficit of 3%. Papandreou elicited a feeling of distrust and panic amongst the Greek economic partners resulting into a downgrade of the Greek creditworthiness and an increase in the interest rates on its debt. This combination events led to the emergence of the financial crisis.
Question 2: Why Greece was in so much trouble?
Greece was in trouble because its creditworthiness was poor; therefore, it could not gather enough money to run the operations of its government. It means that Greece was about to default on its debt, leading to bankruptcy. A reduction in the creditworthiness of Greece led to a large scale sale of its bonds triggering an increase in yields. If a country is unable to sale its bonds, it will not raise enough money to finance its debt (Papadimitriou & Zartaloudis, 2015). The country will resort to austerity programs such as reductions in salaries, increases in taxes and other measures that can help the government raise money to fund its obligations. Austerity programs are unpopular because of the negative financial implications they have on citizens.
Question 3: Which problems in Greece highlighted a wider problem in Eurozone?
The problem in Greece that highlights a wider problem in Eurozone is spending money beyond the capability of the government. Portugal, Ireland and Spain had resorted to much borrowing in order to finance their loans. For example, in 2010, the creditworthiness of Portugal declined because of a high debt/GDP ratio that stood at 90%.
Question 4: How did the Greek crisis affect the Euro?
The Greek crisis had a negative effect on the Euro. Because of the crisis, the value of the Euro dropped by 20%. In 2009, the value of the Euro was above $ 1.50 as of December 2009. This is in comparison to $ 1.20 as of June 2010. Because of the crisis, the Euro was weaker than the pound and the dollar, giving British and American exporters an advantage in the European market.
Question 5: The pro-growth policies that will help solve the crisis
To reduce its fiscal deficit and debt ratio, Greece has to develop sustainable and strong adjustment programs. Greece has to reduce its high level of public spending. The reason for the emergence of the crisis was high costs of financing public projects that Greece engaged in. Therefore, the government has to make hard decisions and reduce the amount of money it spends on non-essential programs and services. Before the crisis began, a huge amount of money went to paying wages. The government should reduce wages for its employees (Thomadakis, 2015). Enhancing trade relations with such countries as Germany and France will help to boost its exports. An increase in exports will mean that Greece manages its foreign exchange which is essential for stabilizing the economy. Finally, the country should strengthen its banking system to ensure that banks do not default and there is money to issue credit.
Part 2: The Greece Bailout
The Greek financial crisis began in 2009 after the speech of Prime Minister Papandreou. To protect Greece from economic downturn, the European Union provided a bailout of $150 billion in 2010. Greece was to use this money to protect its banking and financial systems from collapse. However, the $150 billion did not help Greece come out of recession. Hence, it required another bailout (Thomadakis, 205). In 2015, negotiations with the European Union for the third bailout began. From these negotiations, Greece got 85 billion Euros as a stimulus package for its economy. Greece did not get this money easily because of the political, social and economic factors surrounding the crisis (Papadimitriou & Zartaloudis, 2015). This paper is an analysis of the social, political and economic environment before and during the third bailout. The social, political and economic environment of Greece and the European Union was complex and hostile, which led to the near-collapse of negotiations.
Poverty and unemployment complicated the negations between Greece and the European Union for a bailout package. After the first bailout, the government of Greece poorly implemented austerity policies leading to a negative effect on the economy. Instead of improving the situation, people became poorer and the country was lacking basic social services like health care and proper schooling. Hospitals lacked medicine, even for cancer patients. The following chart shows the increase in poverty between 2010 to and (Papadimitriou & Zartaloudis, 2015).
From this chart, it is possible to discover that the poverty rate of Greece was on an increase during the period of the crisis and before the negotiations. Greece is poorer than such countries as Ireland, Cyprus, Spain and Portugal, despite them facing similar problems. The poverty rate in Ireland was 30%, that of Spain was 28.2%, while Portugal experienced 25.3% and Cyprus - 27.1% (Papadimitriou & Zartaloudis, 2015). During this period, Greece had a high rate of unemployment amounting to 24.9%. Form 2010 to 2015, Greece was experiencing a steady increase of unemployment because of low foreign investments and a cut in governmental employment. Therefore, during the negotiations, the government of Greece made it clear that austerity policies were against the interests of its people. However, the European Union insisted on the implementation of these measures forcing the Greek government to seek the opinion of its citizens through the referendum. Social challenges made it difficult for the European Union and Greece to come to a viable solution during negotiations.
The lack of adequate learning facilities and hospitals are the social problems Greece has faced after the first and second financial bailouts. Because of the austerity programs, it was difficult to find heating oil in Greece. For two years, many schools had to use makeshift stoves to keep children warm. The public healthcare system was a mess. Hospitals and care homes lacked enough facilities and resources to provide services to the sick (Papadimitriou & Zartaloudis, 2015). For example, it was difficult to find cancer drugs resulting into the deaths of most cancer patients. Many professionals left Greece in search of better employment opportunities and social amenities. Such people were doctors, lecturers and other skilled individuals. The destinations of these professionals were such Eurozone countries as United Kingdom, France and Germany. To prevent an escalation of brain drain, Greece sought to negotiate a better deal with the European Union during this period. Greece needed to finance its social sector, making it attractive to its people (Thomadakis, 2015). Germany insisted on a limited spending on social benefits and a cut in economic funding. Germany is a leading economic player in the European Union and it has a great influence in the Eurozone. Therefore, conflicting interest between Greece and Germany were a challenge preventing the design of a viable solution for Greece. Political leaders in Greece also made it difficult for the Prime Minister Tsipras to effectively negotiate a bailout package.
The political forces in Greece were against any austerity measures that Germany and other Eurozone countries proposed. The implementation of these policies was the reason for the collapse of the government of Papandreou. Papandreou’s socialist party got 12.3% of the total votes in the 2012 elections. This is a small share of votes, considering that this party was forming the government. There was a protest against the austerity measures initiated by the party. This riot led to the popularity of the Syriza party under the leadership of Prime Minister Tsipras. The party won the elections due to its promise that it will not implement austerity programs that the European Union, IMF and World Bank wants. The impact of the Syriza party’s takeover was distrust between the government of Greece and the European Union (Papadimitriou & Zartaloudis, 2015). The European Union led by Germany insisted on austerity as a condition of bailing out the Greek economy, while the government of Tsipras stood its ground insisting on funding developmental infrastructures in Greece. This demand was unacceptable for Germany and the Eurozone. Therefore, to receive the third bailout, Greece made concessions. These adjustments included increasing taxes, cutting of pension payments and enforcing automatic cuts in spending if the next budget faced deficit.
Social, political and economic challenges made it difficult for Greece and the Eurozone to come with a viable solution during negotiations for the third bailout of Greece. During the previous bailout packages, the Eurozone and Germany insisted on austerity programs. Austerity programs made Greece experience shortages in most of its social amenities (Thomadakis, 2015). They included hospitals and schools. Under economic challenges, poverty and unemployment were high in Greece. Such countries as Ireland, Portugal and Spain had low employment and poverty index in comparison to Greece when they were experiencing similar economic problems (Papadimitriou & Zartaloudis, 2015). This is not an indication that austerity programs are unacceptable, but if the implementation is poor, then the economy will decline instead of improving. From the beginning, the people of Greece refused austerity measures protesting against them. Politicians took advantage of these protests for the purposes of criticizing the contemporary government. Prime Minister Tsipras took over thanks to these protests, promising to fight against austerity and any power forcing Greece to implement them. However, he failed, and during the third bailout negotiations, Greece had to implement austerity policies, or default and leave the Eurozone. It is not in the interest of the Greeks to leave the Eurozone, hence the government has agreed to initiate austerity programs. Some of them involved raised taxes, cut pension payments and automatically cut spending in the circumstances of a budget deficit.