An alternative view of the crisis in Greece
–Mark Bolsom is the Head of the UK Trading Desk at Travelex, the world’s largest non-bank FX payments specialist. The opinions expressed are his own.-
Greece has been dominating the headlines lately with many commentators heavily criticising its burgeoning deficits and perceived threat to eurozone stability. But is such heavy criticism really justified, or are the Greeks simply being made scapegoats for systematic failings? After all, Greece did not cause the current financial crisis, but is instead one of the major victims.
It is easy to argue that Greek policymakers have been irresponsible. When Greece joined the euro in 2001, the government borrowed huge amounts from markets. Public spending soared and public sector wages followed suite. However, tax evasion has also dogged the Greek system, and even though the economy boomed, tax receipts did not go up in line with earnings.
Consequently, when the financial crisis hit they were in a bad way. The problem now is that it looks like Greece may default on its debt repayments as their deficit is now at 12.7 percent of GDP – over 4 times higher than the eurozone growth and stability pact allows.
Nevertheless, every member state has breached EU guidelines at one time or another without facing severe sanctions. In 1996, for instance, the French government asked every bank for help in cutting its deficit. Italy also embellished their public finances to meet the entry requirements for the Economic and Monetary Union.
Questions remain over who exactly Greece is in debt to. In many cases, they are financial institutions that received government bailouts at the peak of the crisis, to prevent them from going under. It seems that these financial institutions are now applying pressure on Greek policymakers to deliver a credible deficit control package.
This includes slashing public spending, freezing or cutting public sector pay, raising taxes and even raising the retirement age. Greece has committed to reducing the budget deficit to 8.75 by the end of the year, and aims to bring the deficit to under 3 percent by 2012. It is difficult to know at this stage what this will do to Greece’s growth prospects in the next ten years, and how helpful these austerity measures will be.
It is surprising that more pressure isn’t being applied to financial institutions to help bail Greece out. The bail-out of the UK banks cost the government around 850 million pounds – in the U.S., the figure is nearer 3 trillion pounds.
In contrast, the International Monetary Fund estimated a Greek bailout would cost around 20 to 25 billion pounds. As one commentator said, in comparison, the Greek bailout would be “pocket change.” Certainly, if the Greeks are not bailed out, the consequences will be far reaching, limiting the Greek government’s ability to raise money and is driving the euro lower against other major currencies.
Social policy in Greece is likely to be impacted for years to come, prompting social unrest and the threat of general strikes. In short, whatever the final plan, the situation looks set to rumble on indefinitely.
Nobody is advocating the degree of fiscal irresponsibility that got Greece into this mess in the first place. But perhaps what would be helpful is that Greece received the same kind of financial support the banking world did in 2008, rather than the barrage of criticism that is terrifying the markets.
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