Transcript Document

Greece and the International Financial Crisis:
Past, Present and Future
How did Greece get in this mess? What were the forces bringing the
big bang of October-December 2009?
 Greece is a very old country. Elements such as the language
have been continuously present for thousands of years.
 The Hellenic world
Christianity.
Roman Empire
Byzantine Empire and
 The end of the Byzantine Empire came with Greece’s occupation
by the Ottoman Empire in 1453 and for more than 400 years.
 1821: Greece stood up to the Turks and by the 1830s became a
modern state.
© Elena Panaritis
Greece and the International Financial Crisis:
Past, Present and Future
Greece in the 20th century: a period of poor evolution of the state
 1912-13: Balkan Wars
 1914-1918: World War I
 1921: A Greek expedition to Asia Minor,
 1940-1945: World War II and German occupation of Greece
 1944-1950: a civil war with devastating human loss
 1967-1974: a dictatorship followed by a war in Cyprus
 1974 to present: restoration of democracy
 1981: Greece becomes a full member of the E.U.
© Elena Panaritis
Greece and the International Financial Crisis:
Past, Present and Future
As a result…
 a German civil code, a French commercial code and a French
land code.
 Every time a problem was dealt, a parallel system was created
resulting in numerous overlapping laws.
 For many years Greece had one of the highest emigration rates
to the U.S. and Australia. The largest part of GDP was
remittances from abroad.
 Provision of promotions and salaries to stop increases in
inflation. The thirteenth and fourteenth salaries were created
because of war-stricken generations.
© Elena Panaritis
Greece and the International Financial Crisis:
Past, Present and Future
And then came the E.U….
 The E.U. is the first-ever exercise of non-homogeneous
entities getting together on a vision that was unclear.
Politics / peace / economics / fiscal policy / crisis
management
 Dutch disease: With European transfers we stopped
producing: no agriculture, textiles, fish or shipping
 The economic crisis made us realize that we need a
common fiscal policy
The underlining principle should be predictable processes.
© Elena Panaritis
Greece and the International Financial Crisis:
Past, Present and Future
History of the Crisis
2006 in the US:
 a downward adjustment of the overheated new-economy
(internet) stock market
 The FED keeps interest rates low as they follow traditional
economic thinking (low r – higher I), creating a disincentive
in investing in Stock Market products
 Investment in Up and Coming neighborhoods housing was
the next Market Hit. This leads to more housing
construction in the US and a follow-up internationally
© Elena Panaritis
Greece and the International Financial Crisis:
Past, Present and Future
2008 in the US and abroad
 Broken property rights system in the US does not guarantee the quality
of the asset (mortgage); coupled with super badly regulated financial
markets lead to the BUST
 Those who invested to what used to be solid low risk assets based
derivatives now suffered and continue to suffer
 A continuation of the Traditional Thinking in Finance and Economics is
not allowing the correct regulatory reform
 Super sensitive Financial Markets especially rating agencies
 A panic attack on the side of the Banks in EU that Lehmann Brothers
scenario may be repeated led to Hungary’s downfall
 EU followed a FISCAL EXPANSION reducing the ECB rates of
borrowing to the private banks. This increased Fiscal Deficits further
among all EU members and held back any pressures for real reforms in
the Member countries regarding their sustainable economic growth and
development models
© Elena Panaritis
Greece and the International Financial Crisis:
Past, Present and Future
EU in 2009
 High Fiscal Deficits (2020 projections for EU area debt = 120%)
 High Aging population
 GDP projections (2008: 0.7, 2009: -4.2, 2010: 1.0, 2011: 1.7)
 Informality is rather large
 No Fiscal Consolidation
 The EU followed a Short Term Expansionary CREATING A
HUGE OUTPUT GAP
 The EU has been basing its economic model of growth and
development in a rather outgrown post WWII model – one full of
INPUT rigidities and High Transactions Costs – in addition the
EU has not yet managed to have a Fiscal Consolidation
© Elena Panaritis
EZ: “Till debt do us part?”
Source: New York Times
Europe’s Web of Debt
© Elena Panaritis
European Union: Shares of 2009 EU GDP (%)
Big & Small
© Elena Panaritis
Greece and the International Financial Crisis:
Past, Present and Future
2009 Greece
 A crisis is mounting in Greece about its ability to service its sovereign
debt.
 High Fiscal Deficits (2008: -7.7, 2009:-13.6)
 High Debt/GDP over 100% (2009: 115,1%, 2010: 122,9%)
 Weak growth Nominal GDP growth (2009: -0.7; 2010: -2.8)
 Real GDP growth (2009: -2.0; 2010:-2.6) latest data 2010 2nd Q -3.7
 Unemployment (2009: 9.4; 2010: 11.8) latest data June 2010 11.6
 Weak competitiveness Current Account BLC is in deficit (2009: -11.2;
2010: -8.4) (primary 2009: -5.4; 2010: -1.1)
 High level of informality (now in process of mapping and measuring
considered close to 50%)
 High level of aging population
© Elena Panaritis
Unsustainable Debt
© Elena Panaritis
Greece and the International Financial Crisis:
Past, Present and Future
Therefore, how has the Financial Crisis affected Greece?
Greece was caught with deep routed vulnerabilities:
 Rigidities in Entry and Exit of Entrepreneurial Activities;
Employment; Labor Market; Sticky Wages and a less functional
Public Sector that kept growing and creating a larger and larger
DEAD WEIGHT LOSS
 The 2008 fiscal expansion followed by the EU easing lending
with lower ECB interest rates
 A fiscal policy and Foreign Debt financing keeping all
vulnerabilities under the carpet before 2010
 An over-sensitive International Market
© Elena Panaritis
Greece and the International Financial Crisis:
Past, Present and Future
The key challenge has been to fight with its original sin to convince the markets
and its counterparts that it can seriously and sustainably restore:
 Confidence
 Fiscal sustainability
 Competitiveness
 Safeguard financial sector stability
 Create a functional Pubic Sector
 Create a Friendly and Attractive Investment Environment
 Formalize the informal sector (reducing transactions costs – secure property
rights) The Transfers of EU created the common problems of Dutch Disease
 THUS WE MUST BUILD AN ECONOMIC MODEL FOR A LARGER
ECONOMY – larger number of transactions and volume of transactions
 Strengthening of data reporting – reorganization of National Statistical Office
 Improvement of tax administration – progress in revenue collections
 Pension reform
© Elena Panaritis
Greece and the International Financial Crisis:
Past, Present and Future
The reform package and the growing pains of the EU- Have
they lead to a safe “Program for Greece and the EURO?”
 The program is front-loaded with Fiscal Measures that are
SUPER heavy and recessionary
 The structural reforms are outlined in the program but their
implementation is very much based on the country
 Institutional reforms fall under the same treatment
THIS IS OUR OPPORTUNITY!!! This is Europe’s Opportunity! Let
us not miss the Opportunity to miss the Opportunity
© Elena Panaritis
Greece and the International Financial Crisis:
Past, Present and Future
Already implemented structural reforms to restore
competitiveness and growth:
 “Kallikratis program” = reorganization of public sector
 Income policy (minimum wage, retirement age, ease of entry &
exit in the job market)
 Business environment and competition (one-stop shops for startups, open closed professions, better absorption of EU funds)
 Pensions system reform: New system consists of a
contributory pension to top-up a non-contributory means tested
pension limiting early retirement, increase normal retirement age
to reduce pension spending.
 Greek banks : Crucial to manage carefully the current tight
liquidity conditions
 Additional safety net by the creation of the Financial Stability
Fund
© Elena Panaritis
Greece and the International Financial Crisis:
Past, Present and Future
Greece needs to be given the time to implement the
program, the time to try to reverse the trend
Wake-up call for the EU and the world
 The sovereign dept crisis of Greece may be looked at as a
“blessing in disguise”: to warn countries about the need to
keep the fiscal house in order. This gives the rest of the
world ample warning to make the necessary adjustments
and policies to prevent similar crises from occurring.
© Elena Panaritis