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Greek Crisis: What Are the Options - Case Study Example

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The paper "Greek Crisis: What Are the Options" is a perfect example of a business case study. Greece is the birthplace of modern-day democracy. Today, the country is in an economic crisis owing to the massive debts it has and is unable to pay. The crisis began late 2009, but this year the consequences bit hard…
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Greek Crisis: What are the Options? Student’s Name Institutional Affiliation Greek Crisis: What are the Options? Introduction Greece is the birthplace of modern day democracy. Today, the country is in an economic crisis owing to the massive debts it has and is unable to pay. The crisis began late 2009, but this year the consequences bit hard. Since 2010, the International Monetary Fund and the European Union have aided the country but the problem seems to be getting worse to a point of citizens leaving the country (Ben, 2015). The International Monetary Fund has taken various actions, the European Union and the international community as a whole to try and resolve this crisis and prevent it from affecting other economies. The paper sets to address whether it is worthwhile for the European Union to help bail Greece from its current situation and whether Greece should change its domestic economic policies in response to demands from the E.U (East African Union). To understand the situation in Greece, it becomes necessary to know the reasons why the country is in so much debt. There are different reasons for Greece getting itself in its current predicament. First was the inefficient pension system that made the country to spend 17.5% of its economic output paying pensions. The government also gave generous benefits to its employees. For instance, unmarried daughters would receive their dead father’s pension, and there were bonuses given to workers who arrived to work on time (Bitzenis et.al 2014). Early retirement also made the government spend quite a chunk of its money paying pensions for people that should be working. Tax evasion, particularly by the country's wealthy class, also led to a lot of funds being lost. Previous bailouts In late 2009, it emerged that the former government had been misreporting on the status of its debt. There was the crisis in confidence among lenders on the ability of the country to pay up its debt. The crisis was characterised by the widening of bond yield spreads and the credit default swaps insurance cost rose compared to those in other European states (Alderman 2015). By 2010, the country was running bankrupt, which would create another financial crisis. In response to this, the International Monetary Fund, the European Central Bank and the European Commission popularly known as the troika, set out two international bailouts for Greece totalling to 240 billion Euros (Alderman 2015). These bailouts came with harsh conditions. Austerity terms were tightened requiring deep cuts in the budget and tax increases. Greece would also have to overhaul its economy through eliminating tax evasion, government streamlining and making the country an easier place involve in business activities .The cash was supposed to buy time for the country so that it can stabilize its finances and stop fears on a potential breakup of the European Union (Wiesner, 2014). The bailouts did help quite a lot, but the economy shrunk by more than a quarter in five years. The unemployment rate rose to 25%, and the youth unemployment stood at 50%. The Bailout money went to pay off loans that the country owed instead of being pumped into the economy. The country’s debt is still too much, and it’s difficult for the country to repay it single-handedly. Greece continues to implement broad economic reforms that were brokered by the Prime Minister including unwinding of capital controls and the recapitalization of banks (Alderman 2015). The relationship between Greece and many European countries is very fragile, and many European leaders continue to show impatience with the pace and manner at which the country’s leadership is reacting to the crisis. The Third Bailout However, events in the last couple of months have shown the willingness of the country to stay in the zone; it would also be in the best interests of the EU to deal with the crisis and show its ability to handle such crisis (Lynn, 2010). A third bailout has been set up for the country by the EU under which members of parliament must pass various laws to boost budget revenue. They must be aimed at: a. Ending fuel tax benefits to farmers. b. Remove sales tax discounts applied on Greek islands. c. Remove all amnesties and exemptions in tax collection. d. Clarity on eligibility for minimum pension age to be set at 67. e. Reinstatement of reforms in healthcare keys among them a scrap of price control for drugs and centralization of hospital supplies procurement. f. Social welfare overhaul so that annual savings clock 0.5% of the GDP g. Tackle issues of non-performing loans and amending insolvency laws. h. Deregulation of natural gas. i. Privatising of ports in Thessaloniki and Piraeus. j. Reduce the travel allowances of state officers. The bailout programme runs for three years (2015-2018) provided in instalments by the EU bailout fund and follows an agreement reached at the 13th July EU Special Summit (Thompson 2015). The Memorandum sets deadline for most of the economic reforms, and the government must be in close consultations with the leaders. It also defines the need for social justice so that the burden is equally carried by all members of the society but fails to offer debt relief. Between June and July, Greek Banks were closed for three weeks, halting economic activity. The action was to prevent a potential bank run by customers who feared the Grexit and the financial meltdown (Laura, 2013). At the time, banks in Greece are in a severe state as they only depend on ECB’s emergency funding, and they cannot loan from capital markets (Thompson, 2015). Strict capital controls are enforced; each person can only withdraw a maximum of 420 Euros per week from their accounts. Under the new bailout program, banks will get 10 billion Euros so that they can recapitalise by the end of 2015 (Lynn, 2010). The “Grexit.” There has been the likelihood that in the event that the Eurozone and other support structures fail to continue supporting Greece, the country may exit the European Union. A Grexit would be triggered by the failure of the European zone to bail out Greece from its current financial woes (Laura. 2013). It is important to see what the exit of Greece may spell for the country and the European Union. Greece accounts for 2% of the European economy and its exit may not have an instant impact on the Eurozone the exit would have both positive and adverse effects on the Eurozone. On the negative side, it may weaken the Euro in several ways. The exit would create enormous uncertainty in markets causing instability of the currency. It would also result to political contagion since it means that members of the European Union do not find reason to keep Greece in the union (Ivan, 2013). Such would mean that the union is inflexible and unable to respond to the crisis. In response to the exit, the European Central Bank would have to ease its monetary policy. The actions would flood the zone with fresh liquidity hence pushing the Euro down. On a positive note, the exit of Greece would trigger action for change in the Eurozone. Various problems face the Eurozone and they would have to be addressed (Douzinas, 2013). The result of this would boost the Euro. Greece is a weak member of the Union, and its exit would make the group stronger (Guali, 2013). The exit would also most probably kill the rise of populist parties that claim to reject austerity and stay in the Eurozone hence feeding political stability in other parts of the Eurozone. In the event of a Grexit, money would be pulled out from some regions while flowing to other areas. During previous bouts of the crisis, the action helped prop the Euro. The result would be safe havens in countries like France, Netherlands and Germany. On the other hand, what would be the likely effects if Greece left the single currency? The country would plunge into deep recession, and a new financial crisis would emerge. The exit would mean that the country would have to default on its debt since it would no longer be receiving any external support. It would then start printing its currency to pay civil servants while banks would lose their funding from the European Central Bank (Chu, 2015). In a bid to prevent the collapse of these institutions, the government would then put restrictions on moving money out of Greece. The new Greece currency would as a matter of fact have a lower international value compared to the Euro. The price of imports would hike, and the living standards of people of the world’s oldest democracy would reduce (Chu, 2015). On a lighter note, Greece exports would be a bit more competitive in the international markets while the tourist industry would most likely get boosted (Guali, 2013). Conclusion It hence in the best interests of the Greek people to stay in the confines of the Eurozone. While the terms set by the EU may seem harsh and the deadlines are quite stringent, the country would have the support of the European Union to settle its debt and revamp its economy. The conditions would also help the government to reduce fraud and its expenditure. They would see equality among the citizens of Greece. The long run effects of these laws would prevent previous mistakes that led Greece to its current financial crisis.   References Alderman, L. 2015. Greece’s Debt Crisis Explained. New York Times. Retrieved from www.nytimes.com/interactive/2015/business/international/greece-debt-crisis-euro.html on 21st Oct 2015. Ben, S. 2015. Greece and Europe: Is Europe holding up its end of the Bargain? Retrieved from www.brookings.edu/blogs/ben-barnanke/posts/2015/07/17-greece-and-europe.html on 21st Oct 2015. Bitzenis, A. et.al 2014. Reflections on the Greek Sovereign Debt Crisis. London: Cambridge Scolars Publishing. Chu, B. 2015. The Independent. Grexit: How likely a Greek Exit from Euro and what is would happen to the Economy? Retrieved from www.independent.co.uk/new/businesss/comment/how-likely-is-a-greek-exit-from-euro- and-what-would-happen-to-the-economy-1053852.html on 21st Oct 2015. Douzinas, C. 2013. Philosophy and Resistance in the Crisis: Greece and the Future of Europe. New Jersey: John Wiley & Sons. Guali, J. 2013. Building a Dynamic Europe: The Key Policy Debates. London: Cambridge University Press. Ivan, T. Et. Al. 2013. Case Studies on Modern European Economy: Entrepreneurs, Inventions, Institutions. London: Routledge Publishing. Laura, D 2013. The impact of International Economic Disturbances on the Soviet Union and Eastern Europe. Transmission and Response. Elsevier. Lynn, M. 2010. Bust: Greece, the Euro and the Sovereign Debt Crisis. London: Bloomberg Press. Thompson, M. 2015. CNN Money. Greek Bailout: Europe Strikes Deal after Marathon Talks. Retrieved from www.money.cnn.com/2015/07/12/economy/Greece-bailout-europe- strikes-deal-after-marathon-talks.html on 21st Oct 2015 Wiesner, C. 2014. The meanings of Europe: Changes and Exchanges of a Contested Concept. London: Routledge Read More
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