2. • Eurozone is an economic and monetary union
(EMU) of 17 European Union(EU) member states
that have adopted the euro (€) as their common
currency.
• Convergence criteria for joining the Euro –
Stable prices
Stable exchange rate
Sound government finances
Low interest rates
• Greece was accepted into the Economic and
Monetary Union by the European Council on 19th
June 2000.
3. Greece has a capitalist economy with the public sector
accounting for about 40% of GDP and with per capita
GDP about two-thirds that of the leading euro-zone
economies.
The Greek economy grew by nearly 4.0% per year
between 2003 and 2007.
The economy went into recession in 2009 as a result of
the world financial crisis, tightening credit conditions,
and Athens' failure to address a growing budget
deficit.
The economy contracted by 2% in 2009, and 4.8% in
2010.
4. Between 2001 and 2008, Greece’s government
borrowed heavily from abroad to fund substantial
government budget and current account deficits.
Greece’s reported budget deficits averaged 5% per
year, compared to a Eurozone average of 2%, and
current account deficits averaged 9% per year,
compared to a Eurozone average of 1%.
Greece funded these twin deficits by borrowing in
international capital markets, leaving it with a
chronically high external debt (116% of GDP in 2009).
5. Government spending increased by 87% whereas
revenues increased by 31%.
Public spending soared and public sector wages
practically doubled in the past decade. It has more than
340bn euros of debt - for a country of 11 million people,
about 31,000 euros per person.
Whilst money has flowed out of the government's
coffers, its income has been hit by widespread tax
evasion.
It was given 110bn euros of bailout loans in May 2010
to help it get through the crisis - and then in July 2011
6. Greece is facing sovereign debt crisis since it accumulated
high levels of debt during the decade before the financial
crisis when the market was highly liquid.
As the crisis got deepened, there was a liquidity crunch in
the world economy thereby making borrowings difficult as
well as expensive and thereby improper debt repayments on
time.
Reasons
High Government Spending and Weak Government
Revenues
Structural Policies and Declining International
Competitiveness
Increased Access to Capital at Low Interest Rates
7. Greece has a GDP of US$ 310.365 billion (2010 estimate).
12. Larger foreign investments during 60s and 70s
higher growth rates.
In mid 70s higher labour costs and oil prices
poor GDP growth rate and productivity.
After joining EU, intially inflation rose because
of removal of removal of protective barriers
and expansionary policies .
However, later it decreased dur to fiscal
consolidation, wage restriction and strict
Drachma policies .
13. Increasing government debt Increase in
government spending(G) Increase in aggregate
demand and shift of IS curve to the right.
Shift of IS curve to the right Increase in i* and
Y*.
Increase in i* Crowding out effect if G is not
accompanied by increasing tax rate (t).
Crowding out effect can be reduced if LM curve is
relatively flat.
Thus IS-LM analysis shows the flaw in increase in
G alone as a way to stimulate the economy.
14. Further rise in i Increase in 10 yr bond
yield spread of Greece .
High bond spread decline in investor
confidence in greek economy.
This is because higher i high perceived
riskiness by investors demand for higher
yields higher borrowing costs for
government further fiscal strain on the
economy. This forms a vicious circle.
15. Greece reported a current account deficit equivalent to
1097 Million EUR in September of 2011. Greece
remains a net importer of industrial and capital
goods, foodstuffs and petroleum. The trade with
European Union countries ( Germany, Italy, U.K. )
accounts for 65% of Greek trade.
16.
17. Total (gross) inflows of foreign investment
capital increased in 2010 by 4.96%.
Net inflows of foreign investment capitals
during the same year decreased by 5.82%.
Inflows fell in 2009-10 but were higher than
during 2003-05.
In 2010, ratio of FDI in productive categories to
that in M&A improved significantly.
18. This inflow in the form of loans reflects the
confidence of foreign investors for investment
in Greece.
There exists a difference between total and net
FDI inflows in 2010 because of repayment of
loans to parent companies and expansion
capital. This indicates the countries role as an
investment springboard.
Reforms and reduction of cost of production
due to crisis created investment opportunities.
19. The debt-GDP ratio – 144%
Plans to cut spending further without imposing
new taxes.
Salaries and pensions have been slashed.
First bailout package of $147 billion in May
2010 prevented bankruptcy.
Second deal of $174 billion in October 2011
forgives about about 50% of greece overall
debt.
20. Deep cuts in public spending.
Raised VAT from 19% to 23%.
Increased taxes on fuel, tobacco, liquor and
luxury goods.
Structural reforms.
21. US economy
Scenario 1: Mild eurozone recession
would lower US GDP growth by .1 to .2 %
point in first half of 2012.
Scenario 2: Financial meltdown
would lower US GDP growth by 2.05% points
in 2012 and by 2.77% points In 2013 and cause
deflation and rise in unemployment figures.
22. Indian economy
Negative impact on foreign trade
Loss of revenue and jobs in export oriented
industries.
If European contagion leads to global
slowdown it will impact India’s trade with
other nation also.
This can translate into lower domestic demand.
23. CONS
Default can expose French and German banks
to huge debt causing credit lockdown.
The Eurozone partners would be reluctant to
fund the Greece debt.
Further, the contagion effect can spread the
crisis to other peripheral economies. Hence the
need to contain it.
Higher prices for imported goods and lower
wages are likely to drive people out of the
country.
24. PROS
If Greece fails to pay its debt, it would also impact
other Eurozone economies and the whole global
economy.
There is additional burden on other Eurozone
nations to prevent Greek default.
For Greeks, this would save them from the severe
austerity measures.
This would liberate from Eurozone fixed exchange
rate allowing it to become more competitive
exporter and even more attractive tourist
destination.
25. Fiscal Union across Eurozone.
Joint issue of Euro bonds.
European stability mechanism.
Raise country’s level of savings.
