«The Effects of Global Crisis into Euro Region: A Case Study of Greek Crisis Bora Selçuk1 and Naci Yılmaz2 Abstract: With the parallel to the ...»
Greek banking system making big profits between 2005 and 2006 faced with the serious losses after the intervention process. About one third of Greek foreign debt of 300 billion Euros belonged to Greek banks and occurred in the last two years. The Greek banks having the weak saving tendency borrowed at the rate of 1 per cent and lent it government at a rate of 4.5 per cent. The fact that Greek borrowing were done as a EU member and that the lender countries were the Western countries like the Switzerland and the EU countries such as Germany, France, Netherlands made the cost of borrowing cheap and it encouraged. In sum Greek banking system reached to the high profit rates in this way. Greek government supported the banks having more debts than could be carried by the system with 28 billion Euros in the spring of 2009 at the first stage of the crisis. Addition to this support, another support of 4 billion Euros was given to the Greek corporations being not able to pay for their debts to the banks (Aybar 2010: 76).
Despite the Greek rescue plans, the desired development in the economy could not be realized. While the unemployment ratio in the country reached to 15 per cent, the budget deficit realized over 10 per cent though the target was 8 per cent. The debt burden of the country increased even though the cuts were made in public spending.
The Greek government continued to borrow at high rates. The Portuguese application to the EU with the same problems caused the negative scenarios to come on the agenda. The fact that the international credit rating agent, the Moody’s decreased the credit rate of the country 3 grades to Caa1 from B1 and changed the outlook to “negative” caused to the rumors that the country could not pay its matured debts. Not
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being able to reach to the IMF target within the framework of restructuring caused to the thought that it would not free the new credit tranches. IMF declared that the 5th tranche would be set free. However, the doubts continued on the Greek ability to pay its debts. Aside from the package of 110 billion Euros, it was expected that it would need an additional finance of 30 billion Euros for each year in 2012 and 2013 (Özkan 2011:10-11).
Some efforts were done in order to take the additional measures as a consequence that the common rescue package, set up by the EU and IMF, had not created the foreseen influence (Kibritçioğlu 2011: 7). In spite of these efforts, the outlook seemed to get worse. The S&P decreased the credit rate of the country to the bottom level of CCC from B level (Inmam and Wearden 2011). A new bailout (rescue) package was created in July 2011 and some conveniences regarding to the first package were supplied (Bryson and Kruse 2011: 1). However, the predicament caused 17 EU countries to adopt a new bailout package of EUR 100 Billion on 27th October 2011. The half of that package was devoted to the European banks holding the Greek government bonds. Thus, it was aimed through the created positive effects to prevent Greece to face with a double deep of recession. The rapid events caused to the resignation of the Papandreou government after its announcement that it would present the bailout package to the public vote and the setting up of the interim government by the technocrat Lucas Papadimos. The worsening economic conditions in Italy made the Berlusconi government resign and replaced with the technocrat Mario Monti government (Barlett 2011: 2).
It was estimated that the possible big capital outflows of the highly integrated EU financial system may leave many financial institutions in trouble and aside from Greece, Portugal, Italy, Spain and Ireland which were affected directly by the current process, some countries such as Belgium, Poland, Cyprus and France also were affected as a consequence of the mutual borrowings (Boone and Johnson 2011: 5-6).
The Lessons From The Greek Crisis There were fiscal incentive programs in the base of the recovery trend. The rise in stocks also supported the growth. However, the ending of the incentives made the future of the growth uncertain.
When the identity of the decision makers were examined, it was observed that the countries located in the EU periphery, in which The United Kingdom became more marginal, entered into Brussels’ domain more by the influence of Germany and France. However, the Greek crisis showed that the continuation of the EU would
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be difficult without sound, effective and superior fiscal authority.
The lesson learnt from the Greek crisis caused to the new suggestions for the future of the EU. While the group headed by Jacques Attali suggested to establish the European Finance Ministry, François Lafond, German Marshall Fund Director, defended that the more powerful common banking rules leaded by Germany and France should spread over the member countries. Lafond claimed that the control capacity and authority of the institutions like the ECB should be increased (Yıldızoğlu 2010: 321).
The change of power in an economy during the global crisis needs also the change of the economies that shaped it. In the created scenarios concerning to the new period, the positions of the US and the EU shaping the global economy were replaced by the powers such as China, India and Brazil (USAK 2011: 40). These power changes started to make itself feel all over the EU.
The most important lesson given by this crisis was that the EU being a multilateral economic, political and trade network was exposed to the domino effect of the monetary and economic systems. This process more possibly could prevent the EU member countries from applying the national protective policies forcing them to move together.
Before dealing with the medium and longer term scenarios, some measures and developments which could be faced by the EU in the short run are being
The positive effects of saving programs being applied are starting to be seen even though they are slow now. According to the June 2011 Report published by McKinsley GI, there are positive developments even though there are some differences from one country to another at the dates of saving from the crisis (Roxhburgh and Mische 2011: 1-2). Despite that the interference of ECB in buying the debt papers of the troubled countries created some effects in setting up the credibility, but it could not solve the longer term problems. Even though the bailout packages applied by some countries such as Ireland, Greece created some comforts in debt repayment, they increased the moral hazard through the EU (Boone and Johnson 2011: 2-3). The debt restructurings became the most important part of saving from the debt deadlock. If this process continues, the exit from the Euro and return to the national currencies will be a difficult option for the troubled countries (Eichengreen 2009: 9).
Before dealing with the basic longer term scenarios, the development that comes in mind first is the possibility of monetary expansion in short and medium term in the EU.
The ECB injected liquidity in big amounts in order to save the weak economy and banks
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and also kept the interest rates low as much as possible in order to avoid the recession.
If the current situation continues, the possible developments will be the continuation of the depreciation in Euro and the realization of inflation well over the targeted level. As a result, a powerful program leading to the recession should be applied during the next 2-3 years for the countries in debt deadlock. Thus, the slowing growth, decreases in asset prices and credit crunches will be seen. The negative development for the Greece in the short term could be that Greece leaves the Euro zone. This will lead to a rapid economic backwardness and depreciation in new currency. The Euro zone also will affected by this situation and the minimum effect will be such as the recreation of investor credit and recession during at least the next 2 years (PWC 2011: 5-10).
When the economic and political developments were taken to the center, it was not possible that the current financial architect of the EU could continue together with the financial system formed by the crisis. In this process, in the longer term 3 basic scenarios were foreseen in the monetary and economic future of the EU. In the center of these scenarios, there were the scenarios taking place in the Future of Global Financial System Report published by the World Economic Forum (WEF) in 2009 (WEF 2009, 48-51 ).
According to the first scenario, the national currencies used in the pre-Euro times will be returned by giving up the Euro emerging with high hopes as a common currency unit. The cost of such development will be high for the member countries.
The turning back to their national currencies needs a serious operation costs for the members and especially for Germany. The EU also will lose its higher credit and prestige. The disappearance of the Euro having an effective place after dollar especially in the global trade will be an important development. That means a monetary breaking for the Union (Danske Research 2011).
According to the second scenario, the EU is the edge of restructuring. The Union is near to a comprehensive reform preventing the factors that led financial fragilities to spread fast and the good working of the monetary and financial system and an optimum currency area. The most important pace in this restructuring is the work of a central management in finance. The scenario being the source of this thought does not allow the member countries in the EU with their sovereignty rights to continue to their ways in the form of a national state. The national states could be injured by the taken measures (Danske Research 2011).
Aside from these two views, there is also another view between these views.
According to this view, if a central fiscal management cannot be founded and backing into the national currencies cannot be dared, then a more narrow currency zone
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can be created. This new monetary zone will set harder currency standards when using the Euro and the countries such as Greece, Ireland and Portugal located in the periphery of the EU not catching to these standards will be allowed to return to their domestic currencies again. This case can highlight the efforts such as to create a union in the unity in the EU. The EU can continue its being in the form of internal and external circles in a few zones (USAK 2011, 42-43).
Conclusion In an atmosphere like the EU where economic, political and social relationships were interrelated, it seems natural that the member states are more open to the effects of spreading crisis than the other national economies. The union project seated on these notions of a single market, a single currency and a single sovereignty gives a limited chance to the incompatibility among the decision makers. It was seen that the social, political and especially economic incompatibilities between the central decision makers and domestic bureaucrats/politicians caused not only to the domestic problems but also to the problems affecting the all the Eurozone and the EU. Even such a case can cause to the complete bankruptcy of the Union because the crisis happening in Greece that has the most limited effect on the EU created a deep effect throughout the Union. If the EU and the Eurozone cannot produce the solutions compatible with the scenario seated on restructuring explained by us in the last division, then it can be thought that the other scenarios could be possible for the EU.
Within the framework of the process experienced during the European Debt crisis by looking at the Greek example, the solution of the crisis, aside from creation of financial and economic measures, is seen in harmonization of the member countries’ policies and in reaching to the consensus in their politic issues.
Aside from the problems between the politic leaders and public on solving the crisis in the countries affected by the crisis, It was observed that the leaders in some countries which were expected to bring important solution to the crisis such as Germany, France and Netherlands could not explain the seriousness of the situation to their public by fearing loss of votes and acted slowly for economic and politic solution and were late for taking urgent measures.
Without regard to the delays, the public union reactions and the inadequate ECB interferences, the countries having higher debt ratios and deep macroeconomic imbalances such as Greece, Portugal, Italy, Spain and Ireland should be provided quick and effective debt restructuring and macroeconomic and politic measures
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should be taken in this context. If this does not happen, it should be thought that some countries such as Belgium, Poland, Cyprus and even France will be affected by the spiral of the crisis and that Greece will be out of the Euro and thus, will face with the negative results of this case and finally that the bed scenarios which were dealt with in this work will be realized.
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R. Baldwin, D. Gros and L. Laeven, London: VoxEU.org Publication.
Barlett, David. 2011. “Fallout of the Euro Crisis”, RMS International Talking Points, November 29.
Boll, Theodore and Robert O’Quinn. 2010. “Lessons from the Euro Crisis: Euro Crisis and America #2”, Joint Economic Committee - Republicans, Accessed March 15, 2011 http://www.house.gov/jec/news/EuroCrisisandAmericaII.pdf Boone, Peter. and Simon Johnson. 2011. “Europe on the Brink” Peterson Institute for International Economics Policy Brief, Number PB11-13, July.
Bryson, Jay H. and Tyler B. Kruse. 2011. “Is the Greek Debt Problem (Solved)?” Wells Fargo Securities Economics Group Special Commentary, July 25.
Buiter, Willem. and Ebrahim Rahbari. 2010. “Greece and the Fiscal Crisis in the Eurozone”, CEPR Policy Insight. No.51, October.