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Economic and social crisis in Greece

Published on September 8, 2011 by: in: Economy

In spring 2010 Greece, unable to pay the debt off, turned for help to the European Union and the International Monetary Fund and received 110 billion Euros in installments spread over 3 years. A year after the negotiations in Greece – instead of reforms –came hard times, and the country is still plunged into crisis and recession. Greece did not meet the savings programme and is in danger of bankruptcy. This country has got troubles with collecting taxes and privatization. This year in May profitability of the Greek five- year bonds fell again. Many experts claim that the only chance is restructuring of the Greek debt. However, it would lead the owners of Greek bonds to losses. The European Commission predicts that Greek public finance deficit will reach this year 9,5% GDP and not, as previously expected, 7,6%. Greek economy will probably shrink about 3,5 % and not, as forecasted, 3%. According to the European Commission public debt is going to amount to 157,7 GDP. What is more, strikes, which  are directed against government’s savings programme, come about regularly in Greece, and the government probably will have to ask for help for the third time. If Greece does not receive soon the next tranche of financial assistance from the European Union and the International Monetary Fund in the amount of 12 billion Euros, this country will not be able to continue regulating its financial commitments. In May 2011 the government is going to accept a new, strict savings programme. It is expected to reduce spending by additional 6 billion Euros in 2011 and another 22 billion Euros till the end of 2015.

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The reason for this is a long- term application of a creative attitude towards bookkeeping and statistics in Greece. Financial difficulties are the result of too loose fiscal policy and structural problems. The economy had been losing its competitiveness for many years, which was accompanied by a big remunerations increase and a loss in efficiency. That is why the evaluation of Greek’s economy condition does not entirely correspond to reality. In accordance with a generally prevailing opinion it is a country with a carefree financial policy. Moreover, the Greek public debt was rapidly increasing up to  130 %, due to huge budget deficit, which in 2009 reached 12,7 GDP (it has exceeded the limit allowed by the European Commission more than four times). Greece lost investors’ trust. Profitability of the bonds issued by Greek banks became lower than the government stocks.

The unit costs of work, dynamically growing in the recent years, favoured the development of a grey area, which is estimated to have exceeded in Greece 30% GDP.

Many economists claim that the situation in Greece would be better if the country was not a participant of the Eurozone. According to them, if the Greek had their national currency (drachma), they would resolve the crisis much more quickly. It cannot be concealed that the Greek did not admit to the amount of their deficit when applying for the introduction of Euro.

What is more, the Greek had been using for many years the so- called “swaps” (periodic pledging currency transactions), which allowed for a theoretical decrease in the country’s debt level. It was especially helpful when reducing on paper the deficit to the level below 3% GDP for the introduction of Euro. From that moment Greece, using credit reliability, was constantly overdrawn. For years Greece had been giving false statistics as well as not keeping promises concerning reforms.

One of the reasons of the Greek crisis was also the fact that bribes were widespread in all areas of life.

The Greek crisis is for the European politicians the most difficult exam from the introduction of a common currency. There are being revealed differences in views and interests. One of the possible effects of the crisis spreading to other countries could be a collapse of Euro, while main investors of maintaining prestige of the currency were Germany and France

Everything is brought to the standstill

Year 2010 began with a strike of Greek farmers. They mainly blocked roads in Greece, demanding higher farm subsidies. From the beginning of 2010 there were also protests of custom officers, finance ministry officials, taxi drivers. In February custom officers and tax collectors, who are to be responsible for fighting with a grey area, began a two-day strike as well.

On the 9th of February 2010 the private sector workers began a general strike. Flights were cancelled, many schools were closed, the public transport did not work. Hospitals worked only in the emergency system. It was the answer to wages freeze, taxes increase and pension reform.

On the 24th of February 2010 two biggest Greek union headquarters organized a 24-hour general strike. Air transport, maritime and railways were brought to a standstill. There were strikes of journalists, teachers, bank employees, museum employees and health service. Hospitals were taking patients only in life- threatening situations.

On the 25th of February 2010 the Greek for the second time announced a general strike. Public transport and the underground were brought to a standstill. Ferry services and railways were suspended. Airports in Athens and on the islands, as well as tax offices, were closed. Classes in the universities and lessons at schools were not held. Neither public administration nor health service functioned. Newspapers were not published, and the protestants blocked the stock exchange. It was a response to the wage freeze in the public sector. In the course of demonstration the police officers answered with gas for an attack of a juvenile group throwing stones and plastic bottles in their direction. There were several injured. In street protests in Thessaloniki participated 7 thousand people, in Athens around 30 thousand.

On the 1st of March 2010 25 thousand people demonstrated in Athens against government actions, aiming at the introduction of savings, which would enable rescuing the Greek economy. The march had a peaceful nature, but despite this there happened clashes with police. Tear gas was used and police arrested 3 persons smashing shop windows. Air space over Greece was closed, trains and ferries stopped working and monuments remained closed for the visitors. Public schools, ministries and offices were closed. Only the indispensable staff worked in hospitals.

On the 5th of March 2010 in front the parliament building in Athens gathered few thousands of people to protest against savings. The police used tear gas and deafening grenades to disperse people throwing stones in their direction. They arrested five demonstrators; seven policemen got injured.

On the 10th of March 2010 more than 20 thousand demonstrators passed through Athens. A general strike organized by two biggest trade unions led the country to almost total paralysis. A 24- hour general strike was organized by the  trade groups representing in total 2,5 million workers. There were clashes with police, tear gas was used. The Greeks were strongly opposed to cuts, which are to save their public finance from crash. Bus, trolleybus, tram and underground drivers, as well as doctors, teachers, some policemen and journalists were protesting, which is the reason for not broadcasting the news for the whole day. There was a shortage of trains and ferries; planes were closed in  hangars. Only the necessary staff was on duty in hospitals; airports, schools, offices and big companies of the public sector around the country were closed. Banks also worked in a limited scope. Groups of anarchists were throwing bottles with petrol, smashing shop windows and destroying cars, setting fire to rubbish bins and throwing in police pieces of marble torn out from the stairs of Bank of Greece. Manifestations of many thousands took place in the remaining agglomerations, too, especially in Thessaloniki.

On the 18th of March 2010 the strikers were accompanied by taxi drivers, petrol stations owners and radio workers. Doctors’ strike began on the 17th of March.

In April 2010 workers, taxi drivers and teachers went on strike. Also in April 2010 in Athens, during the biggest since 3 years anti- government riots, died 3 people.

Forced savings

In the end of January there were plans in Greece to reduce the expenses for partial wage freeze in the public sector, reduction of the social benefits, closing 1/3 of travel agencies abroad and defense. Country’s income was supposed to increase among others thanks to curbing tax abuse, imposing additional taxes on alcohol and cigarettes. Cuts were thought to eliminate most of the concessions, social spending and tax reform. Next they were thought to be frozen in the public sector, so that by 2012 Greece began to obey the European cohesion criterion.

One of the first decisions of the new government was to establish in the early February of last year a statistical agency, completely independent from the government. It was indispensible to restore credibility of the Greek statistical data and the whole Greek economy. Government accepted the programme of public finance consolidation including cuts in the deficit by 10 percentage points over 3 years. The programme consisted of 3 elements: an increase on collecting taxes, cuts in expenditures and a selective taxe raise, especially among the rich.

A plan for public finances, accepted by the European Commission  in the beginning of last year’s February, included wages freezing, a higher excise on petrol, raising retirement age to 67 years, increasing expenses in the public sector and the price rise for petrol. The plan included also cutting budgets of all ministries by 1/10, freezing or lowering public sector workers’ pays (by 4-6 %), stop employing new administration workers. Moreover, the Ministry of Finance promised to prosecute those, who evade paying taxes. There was also taken a decision to assess the income of luxury houses owners on the basis of their fixed property. Thanks to these actions the budget deficit is thought to be reduced to 2.8% in 2012.

On the 3rd of February 2010 the plans of Greek government had been approved by Brussels. For the first time budget of the European Union’s participant was under a close watch of the European Commission. Such a solution is not provided for Lisbon Treaty. Greece committed itself to submit regular reports from the progress in savings programme. The first was filed on the 16th of March 2010, next one in May 2010 and then it should be done every 3 months. The European Commission also launched an inquiry against Greece for submitting false statistical reports to Brussels.

In the early last year’s March the Greek Parliament passed savings programme, which assumed a reduction by 30% the salaries fund for the public sector workers, including deleting bonuses, freezing public pensions and VAT increase by 2 percentage points – to 21%, as well as tax increase on petrol, tobacco and alcohol . The Greek are to pay a luxury tax from 10 to 30%. The control of revenue office is going to exacerbate.

On the 15th of April 2010 had been passed a new law providing for a reduced possibility of dealing cash transactions by the entrepreneurs. Moreover, yachts’, private planes’, swimming pools’ and other luxury goods’ owners are going to be obliged to submit a declaration about their financial status and reveal the source of their income. The Eastern Orthodox Church’s fixed properties were taxed. The act abolished tax concessions for taxi drivers, engineers, doctors and sportsmen. A regulation which obliged customers to keep receipts turned out to be controversial. It is thought to help in the fight with a grey area and bolster the finances. According to the economists new taxes are to increase budget revenues by 5-10 billion Euros per year.

A selfless assistance

A substantial part of Greek national debt is in the hands of banks from the biggest European Union’s countries (70%). The biggest part in the Greek debt have France, Switzerland and Germany (according to Bank for International Settlements: France – 75,5 billion dollars; Switzerland – 64 billion dollars; Germany – 43,2 billion dollars).

A considerable part of German banks in Italy, Spain, Portugal and Greece played a significant role in impelling the German government to  actions supporting Greece. German government cares about Euro and European Union’s stability, they also want to protect the native banks against another losses.

In last year’s February Nicolas Sarkozy introduced an outline of a rescue package. Its authors were France and Germany. It included a commitment to settle the costs of Greek debt and borrow money from member countries. In return, Athens committed itself to rigorous conservation and financial regime.

In the spring of 2010 Greece practically could not borrow money on the international markets, because Greek budget would not bear such a high interest rate that was expected by the potential investors on the account of  the risk of bankruptcy. The financial aid plan from IMF and the Euro area countries is spread out on preferential conditions over 3 years and is worth 110 billion Euros, so as to remove the threat of insolvency.

On the 11th of April 2010 the finance ministers of the Euro area established a package aid for the Greek government. It is worth 30 billion Euros. The credit was granted for a year and is going to be paid on the basis of bilateral agreements with EU’s countries. The amount of their contribution will depend on the share in the capitol of the European Central Bank, which will deal with paying out this money. 3-year loans will be charged interest at about 5%. It means that the interest will be lower than the market. The International Monetary Fund will also help Greece and will additionally make 15 billion Euros available. Greece will be allowed to use this support only if it does not have any other possibility to amass capital. The government in Berlin agreed to grant the Greek a loan on favourable conditions. The Greek debt on the markets had been charged interest at more than 8 %.

On the 7th of May 2010 the heads of countries and governments of Euro area commenced in Brussels a meeting devoted to the crisis in Greece. During this gathering they accepted a plan for financial aid for Greece which amounts to 110 billion Euros. It is spread out on preferential conditions over 3 years to reduce a threat of bankruptcy. In return, Greece committed itself to drastic budget cuts.

On the 17th of May 2010 Greece received the first part of loan form Euroland countries and the International Monetary Fund. The sum of 14,5 billion Euros was transferred by the European Commission through the European Central Bank. This sum will be spent on the most urgent needs, among others on buyout of the government bonds.

On the 14th of July 2010 Greece found buyers for securities for billion six hundred million Euros. In mid- November 2010 the problems returned. Due to the increasing national debt, which is now 140% GDP,  there is a threat that Greece will loose part of the international aid.

Domino effect

In the monetary union a bankruptcy of one member amounts to problems for the rest; in the worst case it leads to disintegration of the Euro area, and in the best to the necessity to help the needy. If Greece had not been saved thanks to the help of the others, it would threaten the domino effect, because countries such as Italy, Spain or Portugal could follow in Greece’s footsteps. Those states had been called by London bankers PIGS (Portugal, Italy, Greece. Spain). Their higher indebtedness and the way of dealing with the debt could threaten stability of the whole Euro area. Those countries are situated in southern Europe and suffer from a chronic lack of fiscal discipline, high unemployment and low competitiveness, which means smaller ability of those economies to achieve tax revenues. They wrestle with a quick increase of fiscal deficit and a downturn in the economy. They are responsible for 15% of GDP in the Euro area. Last year’s deficits in Spain and Portugal reached 9,3 and 11,4% GDP, respectively.

Greece’s catastrophe could provoke a slump in demand of the investors for bonds of Italy, Spain, Portugal and Greece. Cut off from the external funding sources and the possibility of the debt service, they would be condemned for insolvency, which would lead to the collapse of the Euro area. The bankruptcy of whichever of those countries would have serious consequences for banks of the remaining Euroland members, which earlier were buying high- interest Treasury securities.

Island’s selling out?

In last year’s March the German politicians and media advised the Greek to put some of their islands out for sale, saving themselves from bankruptcy. According to them the Greek budget could be recuperated by a mass sale of deserted islands of the Aegean Sea. Only 87 out of 3054 islands are inhabited. Many of them are for years private properties, and there is no problem to purchase them.

Translation: Anna Brzezińska  

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