Two Views 1 It's been proven now that the crisis is not a Greek - - PowerPoint PPT Presentation

Two Views

 “It's been proven now that the crisis is not a Greek crisis. The

crisis is a European crisis. So now is the time that we as Europeans need to act decisively and effectively." Greek Prime Minister George Papandreou

 “The future is very much dependent on political will. The

crisis has its origins in grave defects in the Greek political system over decades. Recovery requires much more than wise economic management. In fact it requires the remaking

• f Greece’s whole political and institutional system.”

Greek Interlocutors

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Outline of Presentation

 Greece Enters the European Community  The Greek Memorandum I / II  Development within the EC – European Structural

Funds

 Entering the Eurozone  Greece in the European Community / Union  The Greek Crisis – the IMF/EU Memorandum  Impact of EU Programmes  The Euro and the Eurozone  Dealing with the Crisis

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Greece Enters European Community

 Greece first applied for EEC membership as early as 1959  Association Agreement signed in 1961; suspended when

the military dictatorship took power in 1967.

 Restoration of democracy in 1974; new application for

full membership in 1975

 Opinion on Greek Application, January 1976.

Negotiations opened.

 Accession Agreement in 1979; entry on 1 January 1981.  Spain and Portugal applied for membership in 1977 after

end of Franco and Salazar regimes

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The Greek Memorandum - 1

 In 1981 Greek General Election, PASOK elected on pledge to leave both NATO and

the EC.

 Commissioner Richard Burke, asked by Commission President to find “a political

solution to the stated intention of the Greek Government to negotiate with the EC with a view to abandoning their electoral pledge to leave the EC.”

 Greek Government submitted Memorandum on Greece’s Relations with the

European Communities.

 Commissioner Burke conducted negotiations with the Greek authorities over an 18

month period during which some 200 special missions from the EC Institutions visited Athens.

 Agreement, at European Council in March 1984 to address Greece’s concerns within

in the terms of the so-called Integrated Mediterranean Programmes which covered Greece and parts of France and Italy while paving the way for the accession of Spain and Portugal in 1985.

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The Greek Memorandum - 2



“The economy of Greece differs markedly from that of the Community as regards both its level of development and its structures.”



“The structural defects of the Greek economy are briefly the following:



an over-developed tertiary sector, a widespread black economy and a pronounced degree of

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parasitism;

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agricultural production accounts for only17.2% of GNP whereas the agricultural population



is 30% of the total population;

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the limited contribution (19.6%) of processing industries to GNP.



85% of industrial companies employ fewer than five persons;

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underemployment of a large part of the active population which cannot be absorbed into other

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sectors of the economy

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very great social and regional inequalities, and great disparities in incomes, along with the distorted



• verdevelopment of the Athens area.”

“The Greek Government considers that recognition by the Community of the need to deal with the particular problems of Greece, in conjunction with progress towards a more general reform of Community policies, constitute the minimum possible for creating conditions for Greek membership

• f the European Communities which will not be in conflict with basic Greek national interests.”

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Development within the European Community/ Union

 Greece achieved economic progress and enjoyed EU’s second

highest rate of growth between 1995 and 2009, moving up to a standard of living equivalent to 100% of the EU average.

 European Structural Funds and the Integrated Mediterranean

Programme provided significant support for economic development

 These funds represented on average about 4% of GDP until 2005

when EU programmes were refocused on new Member States in

• 2004. The build-up to the 2004 Athens Olympics involved a high

level of infrastructural investment supported by the EU funds.

 After 2005 the level of payments to Greece fell to about 1.5% of

• GDP. Overall, Greece has received some €240 billion in EU

funding in its thirty years of membership.

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Entering the Eurozone



Greece was excluded in 1998 from the initial list of (eleven) EU Member States selected take part in the launch of the Euro on 1 January 1999. The four convergence criteria for Euro membership had not been fulfilled and Greece was covered by a derogation provided for in Treaty Article 122.



In March 2000, Greece requested abrogation of its derogation as it now fulfilled the convergence criteria. In May 2000, Commission Convergence Report 2000 concluded that “in the light of its assessment ....the Commission considers that Greece has achieved a high degree

• f sustainable convergence.”



In June 2000, the European Council confirmed that, as Greece fulfilled the convergence criteria, it was appropriate to abrogate the Greek derogation in order to allow for the introduction of the Euro as the currency in Greece with effect from 1 January 2001. Greece entered the single currency on that date.



In November 2004, Eurostat reported that the government deficit reported by Greece in the critical years of 1998 and 1999 was significantly understated - the 1998 deficit was 4.1% of GDP compared with the 2.5% reported; the 1999 figure was 3.4% compared with the 1.8% reported.

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Greece in the Eurozone

 Entry to the Eurozone saw serious fiscal ‘softening’ with a Budget surplus of 4.5% in

1999 declining to a deficit of 15.5% GDP in 2009 with 130 % Debt-GDP ratio (Government Debt totalling €300 billion against a GDP of €235 billion). Deterioration continued in 2010 and 2011.

 As EU structural funds became reduced, with a considerable amount diverted to the

ten new Member States, Greece’s central government debt reached enormous proportions: standing at a rather modest 34% of GDP in 1981 but currently projected to rise to over 160% this year (2011).

 The general world recession hit hard in Greece. Growth from Euro entry in 2001

until 2008 averaged 4% per annum but GDP fell by 2% in 2009; by 4.5% in 2010 and will fall by 4.5% in 2011. 2012 will see further negative GDP figures.

 Exposure of Greek banks to government debt is higher than in Ireland (at 25%+)

and represents a threat to what has been a largely well-run and conservative banking sector.

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The Greek Crisis - the IMF/EU Memorandum



The EU-IMF Memorandum and Programme involve a steep fiscal adjustment programme with 2014 as the target date for achievement of the 3% deficit target. 2010 saw a remarkable reduction in the deficit from 15.5% to 10% but there has been some slippage and overall performance has been uncertain.



The Memorandum requires more than fiscal adjustment.



Its reform requirements cover the scale and cost of the huge public sector, large scale privatisation of state assets, reduction in Greece’s abnormally high defence budget (4%GDP), complete overhaul of the tax and tax collection system, greater labour market flexibility, major changes in the education system, liberalisation of key economic sectors (energy, environment etc.), simplification of regulatory and licensing systems.



The IMF argue that successful programmes are those adopted by the local population.



The only lasting solution to the current crisis is to bring about genuine Greek ‘ownership’ of the reform programme. This must involve the government, the opposition New Democracy party and the relevant civil society actors such as the trade unions and employers.

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Impact of EU Programmes

 “A major source of financing fiscal imprudence had been the vast amounts

• f funding provided by Brussels in the form of Community Support

Framework (CSF) programmes. While a big part of those funds was used for infrastructure-building and other growth-encouraging projects, another significant part was lost to minor projects and subsidies.......when credit rating agencies downgraded Greek Government debt to ‘junk’ status, the cost of borrowing reached such high levels that, lest it declare bankruptcy, the country was forced to turn to the EU and the IMF requesting a bailout package.......”

 Monetary Union has been described as, ‘in practice a sleeping pill’ resulting

in continuing failure to undertake essential reforms. Growth was demand-driven, non-equilibrium, too easy. Low interest rates were not matched by stabilisation measures, bubbles in some sectors were facilitated and public deficits were allowed to increase as the Stability and Growth Pact lacked embedded penalties after German and French non-compliance went unpunished.

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The Euro and the Eurozone



Understanding the history of the Euro is important.



The Euro was a political project and a natural culmination of the effort to build a single market. It was based on the nominal convergence of its Member States through the Maastricht criteria. The hypothesis was that convergence would naturally take place once EMU was formed in an environment of open borders and free competition.



Entering the Euro requires a search for competitiveness and requires obligatory, but difficult, reforms.



Measures to absorb shocks were not developed and a fiscal transfer mechanism was not installed since it required deeper political integration. No mechanism was created to control systemic imbalances and issues such as competitiveness of labour markets and uniformity of tax rates were not addressed.



The Stability and Growth Pact did not work and there was an absence of market discipline, allowing low interest rates to stimulate private and public debt and permitting the emergence of a competitive North and uncompetitive South in the Eurozone.

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Dealing with the Crisis

 Everything depends on the capacity of the Greek political, governmental and

administrative systems to deliver both fiscal adjustment and real reform.

 Public opinion is critical. While there is understandable anger, there is a silent

majority – perhaps as much as 70% - which accepts the need for hard decisions but the government is not listening to the voice of society and is not explaining the situation clearly and honestly.

 The Greek political class is not handling the crisis well. Acceptance of the EU-IMF

Memorandum is shrinking dramatically as the depth of the recession hits home. The style of Greek politics is based on a culture of protest. “The country has a cosmopolitan elite - which tends to live and work abroad and which keeps aloof from national politics - and a third world government and civil service.”

 “ If everything goes well we’re going to have a very modern country – if the political

system doesn’t respond to the needs of the times, we will be bankrupt, worse than Argentina.”

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