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A macroeconomic review of the Greek debt crisis
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The Greek Dilemma
A macroeconomic review of the Greek debt crisis
Abhaysing BainadeBangyu Liu
Jummai AromeOlubunmi Makanjuola
Yuri Shogenov
Outline
• A brief history of the Greek debt crisis
• Key drivers for the debt crisis
• The Greek dilemma
• Scenario 1. Staying in Eurozone
• Scenario 2. Withdrawing from Eurozone
• The adjustment programme
• Assumptions
• Macroeconomic assessment & recommendations
• Conclusion
A brief history of the Greek debt crisis
A brief history of the Greek debt crisis
Greece Vs Ireland
Key drivers of the debt crisis
Key drivers for the debt crisisHigh living standard and weak economic competitiveness.
Greece ranking 22nd 2011
Source: World Economic Forum
Key drivers for the debt crisisHigh living standard and weak economic competitiveness.
High Government Spending and Weak Government Revenues
Key drivers of the debt crisisHigh living standard and weak economic competitiveness.
High Government Spending and Weak Government Revenues
Sovereign debt soaring out it’s bear ability.
Fitch Moody's Standard & Poor's
CCC Ca CC
The Greek Dilemma
Austerity measures v sovereign default
Structural reforms v withdrawal from Eurozone
• 60% of Greeks are opposed to the bailout & austerity measures deal
• 70% of Greeks want to stay in Eurozone(RBS European Economics, 2011)
Scenario 1. Greece Staying in Eurozone
• The Euro will lend more credibility to Greece’s economy and increase both investors’ and creditors’ confidence about Greece’s ability to service its debts.
• Greece can curb its high inflation rate because it will have the support of other members of the Euro zone especially access to competitive loan rates and also to low rates of the Eurobond market.
• Greece continue to undertake the austerity measures which included the much needed reforms that will make the country a more manageable state and give it a more reliable tax base and a less encumbered private sector.
• Greece would have to opportunity to recover faster and catch up with other economies in the EU in terms of GDP quicker than being by itself
• Greece would be forced to undertake major fiscal consolidation and to implement substantial structural reforms in order to place its debt on a more sustainable path and improve its productivity and competitiveness so that the economy can re-enter a positive growth trajectory.
Scenario 2. Greece leaves EurozoneIf Greece leaves the euro zone, good economic reasons
will be that by devaluing its currency, exports can rise therefore cash will come in.
Disadvantage is that being the 1st country to leave the euro, it could lead to a massive bank run.
A debt default and decision to abandon the Euro would affect the reputation of the economy.
Greater pressure on other Eurozone economies
Scenario 2. Greece leaves EurozoneNo funds will be made available from Europe or IMF
except they accept austerity measures
They will lose EU regional aid and farm subsidies worth over 9billion euros every year.
Greece’s banking system would collapse, inflation would explode and contagion would even kill the entire euro edifice.
The adjustment programme
Implement structural reforms to achieve the recovery of the economy, Its sustainability and promote growth
What reforms?
•Fiscal reforms
•Labour market reforms
•Product market reforms
Assumptions
§Greece is going to stay in economic monetary union (EMU)
§Greece will implement fiscal and structural reforms fully
§EU will NOT create barriers in implementation of fiscal and structural
reforms
§Structural reforms that are underway won’t be taken into account
§Access to the capital markets at reasonable cost
§The basic interest rates on Greek bonds will NOT go up significantly
Structural fiscal reforms
• Formulate sustainable fiscal framework and monitoring mechanisms• Top-down approach to budgetary preparation• Set government expenditure ceiling• Limitations on borrowing capacity for the various public
entities.• The requirement to seek parliamentary approval if
expenditures exceed budget.• The requirement to publish regular data on budget
execution.• Cracking down Government corruption.
Structural fiscal reformsImproving the tax system and tax collection.
• Greece tax compared with other OECD countries, it has stand at high level. So improve tax rate is not wise choice.
• Simple and transparent tax system, and broaden tax base
• Enhance tax collection by using audits, improving punish of tax evasion, cracking down bribery.
Macroeconomic Development since 2000
Public and external imbalances (% of GDP)
Efficiency, Productivity
•Relative to the simple average of the highest OECD Countries in terms of GDP per Capita, based on 2008 PPPs. The sum of percentage gap in labour resource utilization and labour productivity do not add up exactly to the GDP per capita since decomposition is multiplicative•Labour resources utilization is measured as total number of hours worked per capita•Labour productivity is measured as GDP per hour worked
Way towards Sustainability….
Efforts should be made to boost growth and getting people back to work is important
Reforms to improve labour market outcomes should be implemented rigorously
Reforming product markets is imperative for sustainable jobs, greater competition and more investment
Progress in improving the business environment should continue
Getting people back to work and boosting longer term growth
Recently, non-subsidized sub-minimum wages for youth was introduced to boost jobs. Training should be provided to enhance their skills
Firm-level wage agreements were introduced and to promote it, the administrative extension of the sectoral agreements to firms that were not party to the negotiations should be eliminated.
The use of fixed-term contracts should be promoted through a reduction in the early termination costs. This will ease further employment protection for temporary work.
Remove employment protection legislation distinctions between blue-and white-collar workers & severance pay could be transformed into a system of individual accounts, like Austria
Reforming product markets Be business friendly
Implement export strategy with vigor and reduce bureaucratic barriers to exports
Privatization of railway services and the liberalization of the sector.
Like other OECD countries, adopt a system for Regulatory Impact assessment.
Develop a “competition culture”
Reforming product markets
Set clear and adequate rules for planning private investment and frequently monitor land use plans.
Remove identified regulatory restrictions to entry in tourism, retail and wholesale sectors.
Promote competition in the electricity sector by separating the operations (generation, transmission and distribution) in the sector.
Conclusion
§Greece should stay in European Union and economic monetary union
§Recovery, sustainability and growth of the Greece economy can be achieved through strict implementation of the structural reforms
§Government’s ability to respond to unanticipated shocks is crucial for persuading markets that the programme of the reforms is credible
Questions
Output gap, GDP and other key indicators