Why Greece is Poor/Struggling Economically

The sovereign debt crisis that erupted in Greece in 2009 has until today not been sufficiently dealt with. Greece announced in 2009 that it had previously been understating its deficit statistics raising concerns about the country’s financial status. After revising its statistics, a massive increase in both the budget deficit and public debt was witnessed. This made Greece become an epicenter of the European debt crisis and regarded as the weak link in the Eurozone. As a result of the increased budget deficit and public debt, Greece was shut down from almost all other forms of external borrowing such as the international financial markets.

To avoid bankruptcy, Greece has received a series of bailouts from the European Commission, European Central Bank, and the International Monetary Fund. In total, Greece received 246 billion Euros in the first and second bailout and an enormous amount of 86 billion Euros in the third bailout. The objective of this paper is to briefly but comprehensively analyze why Greece is struggling economically and also to probe the impacts of these challenges to the people of Greece and Europe at large.

Greek Integration into the European Union

Greece’s economic situation was not sudden. Various factors that date back to 1979 when the Greek government signed the Accession Deed to the European Community join chains that later lead the country to the 2009 debt crisis. In 2002, Greece was accepted as full member of the Economic and Monetary Union (EMU) and the euro currency. Greek accession to the European Community was expected to boost the country’s economy and create better opportunities for its citizens.

However, it turned out that the disadvantages of this move were prominent than the benefits.

Majority of the Greek citizens were uncertain about the way forward after the accession. Challenges in the areas such as the structure of production, structure of the GDP and their purchasing power, and the different trade investments are just a few of the many that faced Greek citizens after accession. With the accession, Greece had also to face even stricter import and export policies and trade barriers that impacted its economy. Additionally, the country was required to take measures that would protect its local companies from external competition given globalization was also on the rise at that moment (Caldwell, 2016). Internally, the government was also facing the pressure of establishing regulatory policies that would ensure protection and development of the Greek market.

Production structure in the Eurozone was a significant issue that negatively impacted on the Greek economy. After the Greek accession, productions firms in the country were forced to improve on the quality and pricing of their products to meet the competitive environment the European Community brought. Majority of the European competitors, however, used superior technologies to those of the Greeks and also offered lower prices for their products and services. Regarding quality, the Greek products were less superior because manufacturers had not adopted superior technologies. Greek local market was also expanding at a high rate. Since the products from other countries within the European Community were lowly priced and had superior value to those manufactured in Greece, local consumers increased importation of goods (Caldwell, 2016). The increase in import volumes in Greece led to a trade imbalance.

It is important to mention that even after giving up many restrictive trading measures and the rise in the degree of trade openness after accession, Greek’s trade deficit continued to deteriorate. The country’s deteriorating trade deficit in the Eurozone area was heavily linked to its decline in market competitiveness. The government’s approach to reducing this deficit was hugely ineffective. For instance, the Greek government turned to tourism and remittances from expatriates and loans as their key approaches.

Raw materials and the issue of “time to market” are vital factors for the growth of any economy. Time and quality are considered as essential dimensions in the activities such as warehousing, logistics, and supply chain. Globalization and accession in the Eurozone area made it highly competitive for Greece to find export destinations for their locally manufactured products.

The increasing trade imbalance meant that Greece had to limit on its importation. As a result, Greece found itself lagging because it could not make considerable imports of technological goods to boost its volume of trade. In the long run, despite matching some of the competitor products in Western Europe, the Greek made products were still viewed as those that did not meet all standards.

The final, and also very fundamental issue that accession brought to Greece is that it allowed the country’s companies to relocate to other nearby countries to benefit from lower taxes and even subsidies from the European Community. Many Greek companies crossed its borders into Romania and Bulgaria where they targeted the lower taxes and wages advantages these countries brought (Caldwell, 2016). These companies have also moved to other countries to avoid being targets of increased taxes in Greece.

Since 2009, it is estimated that more than 11,000 Greek companies have moved to Bulgaria. The impact of such relocations has been massive to the Greek labor industry (Caldwell, 2016). Besides the increasing the unemployment rate, the Greek government is also losing on revenues that could have boosted its economy. It is predicted that even more companies will relocate from Greece to Bulgaria and Romania in case the European Community continues providing such companies subsidies in the name of increasing trade and the production of high technology goods.

Austerity Measures

Economies that face trade deficits use borrowings as the primary recipe for accessing finance. Greece, having fallen into a deep deficit, could not use this option because it was excluded from market funding. The country has until today (2018) not been returned to the financial market. To deal with their situation, Greek official creditors proposed an action plan to achieve revenue-expenditure so that the debt would be paid back off by the difference and that Greece would ultimately return to the financial market. This proposal touched on the reduction on overall spending of the country and an internal devaluation since it was by then impossible to strike an external devaluation. Additionally, it proposed cash-raising measures and reforms as some of the key measures to help the Greek economic growth during such hard times.

The results of these measures turned out to be dubious on the economy. According to Caldwell (2016), the Greek economic and statistics show that these measures were based on unrealistic assessments. These unrealistic assessments did not give the government a precise image of what timeframe the proposed policies would bear fruits. It is a paradox, according to Caldwell (2016), to impose austerity measures in a country experiencing a significant economic downturn. As a result, question marks were put on whether it was right for the Greek government to impose these measures. The Greek economic situation at the moment says it all.

These austerities measured prolonged Greek’s recession period and prolonged its debt. Furthermore, despite some of these measures yielding fiscal results, they were limited in engendering the economic growth. In the long run, Greece was fooled by the perception that there were fiscal yields yet in the real sense the economy was going down the spiral.

Greece had the opportunity to enforce some measures to provide the primary surpluses to repay their debts and regain the confidence of the bond markets. Some of these possible measures included boosting exports, increasing its production and productivity, reduce its public spending, and/or reduce its consumption. According to Kyriakidou, Kyriakoudi, Triarides, Vardakas & Falagas (2018), on social and other grounds, the only plausible move by the Greek government out of these three was to boost exports, increase production, and reduce its public spending.

Despite an increase in the export as a response to the trade deficit, it was unfortunately still insufficient to meet the market forces. Increasing production and productivity was next to impossible for Greece since reforms required to increase investment were inadequate. Since it was impossible to achieve the first three approaches, massive attention was put on reducing consumption. The reduction in consumption as the only way to increasing primary surpluses brought challenges to the market. As a result, greater economic recession was witnessed, the unemployment rate rose extremely, and employees experienced salary and pension cuts. This horizontal measure was also regarded by many Greeks as unfair as they were the ones who paid the ultimate price. What followed was a biting and dramatic downgrade of the social conditions especially in the weaker segments of the country’s population. Besides, Bitzenis, Papadopoulos & Vlachos (2013) say that the Greek government was very reluctant in using the first three primary surpluses increase reforms as they feared that it would undermine the previous clientelistic practices.

Weaknesses in the Greek Economy as Сontributors to Poverty and Economic Struggle

Greece loses a lot of money through the bureaucracy that accounts for a quarter of the public debt. According to data provided in 2010, Greece lost 18 billion Euros in the state sector (Vardakas & Falagas, 2018). It should be understood that approximately 65% of the Greek economy is accounted for by the state. The public sector only gets 35%. In reality, there are no hopes in recovering or growth through investment in an economy where the state accounts for such a massive percentage of the economy. Such expectations would only be alive if those numbers were to be reversed.

Greece lost 5 billion Euros from smuggling and contraband goods. Smuggled and contraband goods do not account to the overall import and exports of the country. Contraband goods also bring the devastating effect of crippling the local market by introducing low priced products that are often low quality. Besides, the government to not get revenues on these products.

In 2010 alone, the government also lost 30 billion Euros from tax evasion. Companies and individual citizens lie on their income tax returns making it harder for the government to trace how much profit they make or how much tax they should remit. A country where people evade tax and go unpunished is always on the brink of economic failure. It is impossible for the government to provide essential services to its citizens when the crucial source of revenue is curtailed.

In addition to other losses, these amount contributes to more than a quarter of the public debts. According to Young & Murphy (2013), in case the government was able to close the loopholes that lead to these losses, there would be no salary and pension cuts, and the recession would not be as pervasive.

A 2012 report shows that bureaucracy of starting and operating a business in Greece costs the country an amount equal to 7% of the country’s GDP (Vardakas & Falagas, 2018). It is with no doubt that many Greek companies are relocating or starting their businesses in other more friendly countries. At the same time, Greece has closed professions that cost the state about 1% in GDP growth (Young & Murphy, 2013). It is supposed that if Greece were to reduce the bureaucratic cost for businesses at the European level, it would open its economy to a possible GD increase of 3.5%.

Also, the Greek government is spending roughly 60% of the state budget on public pensions and salaries. This colossal percentage leaves the government with very little to invest in and provide public services. The state’s dominance in the economy also has made it considerably very difficult for the Greek population to get remunerations that reflects their contributions in the economy because such income is derived from protectionist regulations. The Greek government has imposed structures for largesse distribution. These structures are in three categories with the second being the provision of privileges to various groups. These privileges provide guild-like professions that restrict competition and benefit those “within” (Young & Murphy, 2013). Lack of competition in any market is characterized by low quality and high prices. Protecting some professions from competition has made innovation and progress of the Greek economy to stagnate. These statistics show that Greece is a victim of its own making. The country is facing stiff economic conditions because of measures that it made by itself.

Greece’s Self-Destructive Model

A significant increase in the number of employees in the public sector was reported in Greece between 1970 and 2009 (4% per annum). The public sector, on the other hand, witnessed a slight increase of 1% per annum. Greece held the top position as the country creating the highest number of employment opportunities among the OECD countries. However, as data would later reveal, the country’s production model followed erroneous beliefs. As a result, Greece witnessed its source of wealth (productive forces) get transferred to non-productive and supporting structures especially the state sector. The devastating effect of this situation is that instead of directing the produced wealth to the sectors favoring growth and development, a huge amount was directed to the preserving sectors. According to Young & Murphy (2013), these devastating results mortgaged Greece’s economic future. They are these occurrences that were used to explain why production in Greece faced a dramatic decline. Consequently, the Greek national economy was transformed from a productive to a consumer economy.

The Effects of the Crisis

The Greek debt crisis had drastic and unimaginable effects on the country’s unemployment rate. Compared to the reported 7.3% unemployment rate in 2008, Greece hit its record high of 25% in 2015 (Vardakas & Falagas, 2018). This was the highest unemployment rate in the Eurozone area. Unemployment was significantly high among young people and those in the agricultural sector.

In the years preceding 2009, Greece managed to meet the EU’s Growth and Stability Pact budget deficit criterion. For instance, between 2003 and 2007, Greece managed to record economic growth rate of approximately 4% per annum (Vardakas & Falagas, 2018). The debt crisis of 2009, unfortunately, made the country to violate the criterion. During this period, Greece reported a 15% deficit of its GDP. Between 2007 and 2013, Greek economic sank into deeper recession and contracted by 26% (Vardakas & Falagas, 2018). Other effects that followed the chain was the government’s imposition of austerity measures such as salaries and pension cuts and an increase in taxation. In light with these austerity measures, Greek total household income reduced by one third between 2007 and 2012. It can be estimated that as a result of the crisis, a per capita loss of 4,400 Euros was estimated.

Conclusion

This report looked at some of the reasons for the economic struggles of Greece. Findings state that the 2009 debt crisis can be linked with the challenges the country faced after accession to create an unfavorable environment for workers and the economy to thrive. The crisis impacted people directly as the government imposed austerity measures that saw their salaries and pension cut and taxes increased. As a result, household earning reduced by one third and the unemployment rate rose to a high historical value of 27.9% in September 2013.

References

  1. Caldwell, D. (2016). Greece : Economic Crises and Management. Hauppauge, New York: Nova Science Publishers, Inc. Retrieved from http://search.ebscohost.com/login.aspx?direct=true&db=nlebk&AN=1226109&site=ehost-live
  2. Kyriakidou, M., Kyriakoudi, A., Triarides, N. A., Vardakas, K. Z., & Falagas, M. E. (2018). Biomedical research productivity and economic crisis in Greece: a 22-year study. Scientometrics, 116(3), 1559–1564. https://doi.org/10.1007/s11192-018-2827-2
  3. Bitzenis, A., Papadopoulos, I., & Vlachos, V. A. (2013). Reflections on the Greek Sovereign Debt Crisis : The EU Institutional Framework, Economic Adjustment in an Extensive Shadow Economy. Newcastle upon Tyne: Cambridge Scholars Publishing. Retrieved from http://search.ebscohost.com/login.aspx?direct=true&db=nlebk&AN=860102&site=ehost-live
  4. Young, E. F., & Murphy, T. D. (2013). Economic Crisis in the Eurozone. Hauppauge: Nova Science Publishers, Inc. Retrieved from http://search.ebscohost.com/login.aspx?direct=true&db=nlebk&AN=1406118&site=ehost-live
  5. Laskos, C., & Tsakalotos, E. (2013). Crucible of Resistance : Greece, the Eurozone and the World Economic Crisis. London: Pluto Press. Retrieved from http://search.ebscohost.com/login.aspx?direct=true&db=nlebk&AN=638380&site=ehost-live
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