Greece: On the Road to Recovery?

Case Code: ECON046 Case Length: 16 Pages Period: - Pub Date: 2014 Teaching Note: Not Available

Price: Rs.500 Organization : - Industry : - Countries : Greece Themes: Economic Downturn

Abstract Case Intro 1 Excerpts

Excerpts

The European Union

The concept of a unified Europe for economic development as a way to prevent further wars among nations was paramount in the minds of the Europeans after the disastrous effects of the World War II. Significant efforts were made toward this end by the leaders of the European countries at various times. The European nations were also looking for a way to compete with the strong US dollar.

As a first step toward bringing the European countries under one umbrella, The Treaty of Paris was signed in 1952 to establish the European Coal and Steel Community (ECSC) to promote peaceful and profitable trade in coal and steel, the key resources which had been central to the war effort between countries. The countries which signed the treaty were France, West Germany, Italy, Belgium, Luxembourg, and the Netherlands.

The EURATOM (European Atomic Energy Community) Treaty was signed in 1957. The purpose was to create a specialist market for nuclear power in Europe, develop nuclear energy, and distribute it to member states while selling the surplus to non member states. In 1958, the Treaty of Rome was signed to establish the European Economic Community (EEC), which comprised Belgium, France, Italy, Luxembourg, West Germany, and the Netherlands. The treaty proposed a progressive reduction in customs duties and the formation of a customs union. It created a common market of goods, workers, services, and capital within the member states.......

Greece in the Eurozone

After World War II, the Greek economy experienced rapid growth mainly due to foreign investments, development of industries like chemicals, tourism, infrastructure, etc. In the 1990s, in Greece, the government controlled 75% of the business assets and the other sectors of the economy were also under the regulation of the government. (Refer to Exhibit I for more about Greece’s Economy). The state reduced its stake to 50% by 2008.

However, as per the Organization for Economic Co-operation and Development (OECD) reports, much of the private sector continued to suffer from weighty complex regulations. From 2001 to 2008, 75% of the government expenditure was allocated to the public sector wages and social benefits. However, there was no concrete evidence about any improvement in the quality of the services . Political analysts opined that the Greek politicians used public money for vote bank politics, thereby pushing the economy toward a crisis. The complex tax codes created by the government only helped the corrupt to evade taxes, according to observers...

The Crisis

Amid allegations of misuse of power by the Conservative New Democracy Party, in October 2009, elections were held, and the Panhellenic Socialist Movement party came to power. By then, the national debt had soared to € 262 billion from € 168 billion in 2004. During the year, Greece entered recession, with the GDP contracting by 2.3% in the first quarter and by 3.5% in the second quarter (year on year basis). In the year 2009, the Greek economy shrank by 2.3%. Economists said that unrestrained spending and failure to implement austerity measures were the main reasons for the country’s problems....

The Response

The European leaders, the IMF, and the ECB agreed that an uncontrolled disorderly default on Greek debt would be extremely risky as it would have a ripple effect on the other countries which had invested in Greece and thus should be avoided at any cost. They feared that such a default could spark a major sell off of bonds of other Eurozone members with high debts. European bankers exposed to Greece and other Eurozone government would not be able to bear the losses on those investments, they opined....

Consequences of the Crisis

The bailout packages received by Greece did not come free. The IMF and EU laid down the conditions of reforms and austerity programs. The austerity programs included more taxes, public sector pay cuts, pension reductions, new taxes on company profits, increase in luxury and sin taxes, and increase in value added taxes. Greece enjoyed a honeymoon period after it entered the Eurozone as the government spent heavily on public sector wages and other facilities. When austerity measures were included in the budget of 2010, people in Greece revolted in the streets for months.....

The Grexit

A referendum held in Greece in October 2011, showed that 60% of Greeks were against the austerity measures adopted as a condition for the bailout packages from the EU. Of the total population, 70% were in favor of being a member of the Eurozone ....

Revival on the Cards?

Samaras came to power in 2012. After that, the budget deficit had narrowed down, tax administration had improved, spending inefficiencies had reduced, and transparency and accountability of government operations had increased. Experts said that 2013 would be crucial for Greece, as it would determine if the country could continue to remain in the Eurozone or not...

Exhibits

Exhibit I:Brief Economic History of Greece
Exhibit II: Annual GDP Growth Rate Comparison - Greece and Euro Area
Exhibit III:Greece Government Debt to GDP Ratio
Exhibit IV:Unemployment Rate in Greece

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