(Wrote this article for an event... posting it here...)
Rising debts
and a loss of competitiveness are the main challenges facing Greece Economy.
Presently, it does not have any options which can be proved to be good for all.
Problems of Greece increased with the adoption of Euro. In February
1992, European leaders signed the Maastricht Treaty, laying the foundation for
monetary union and adoption of the euro. Greece qualified in 2000 and was admitted on 1 January 2001. Prior to the adoption of euro, Annual inflation in
Greece was one of the highest in the region and GDP growth was the slowest in
Europe.
Adoption of the Euro led to a drop in inflation from an average of 18
percent from 1980–1995 to just above 3 percent from 2000–2007. After averaging
annual GDP growth of 1.1 percent from 1980 through 1997, Greece’s economy
expanded at an average rate of 4.1 percent over the next ten years, the fourth
fastest rate in the Euro area. Per capita GDP rose from 39 percent of that of
Germany in 1995 to 71 percent in 2008. It quickly became an attractive
destination for foreign capital.
But, this fuelled the domestic demand. Domestic demand growth drove up
prices in Greece increasing domestic labor costs and eroding Greek
competitiveness. If we have a look at numbers, since 1997, consumer prices have
risen by 47 percent and since 2000, per capita employee compensation has grown
by over 80 percent. Competitiveness was hurt further by a shift away from
manufacturing sectors in favor of the expansion of service and non-tradable
sectors. Increase in Revenues increased government spending especially in
social transfers and public sector wages.
Reflecting the economy’s rapid growth, public sector deficits averaged 5
percent of GDP from 2000 to 2007. The scenario changed markedly with the
financial crisis and when markets realized Greece’s chronic failure to report
accurate statistics. GDP expanded by only 2 percent in 2008 and contracted by 2
percent in 2009, pushing down tax revenues and driving up the restated deficit
to 7.7 percent in 2008 and 13.6 in 2009.
With debt levels rising and the IMF projecting it to reach nearly 150
percent by 2012, borrowing costs of Greece skyrocketed. Attempts are being made
by EU and IMF to restore the economy of Greece and other EU nations(PIIGS)
Bailing out Greece
There are different views and solutions to restore the economy of Greece
and other EU nations in danger. There are three different viable options possible
in the existing situation
1.
Greece voluntarily leaving Eurozone
2.
Other EU nations forcing the Greece out
of the EMU
3.
Greece undergoing a massive debt
restructuring plan and with the aid of IMF and other EU nations, it stabilizes
itself
Let us analyze each of these cases in detail in order to understand the
best possible option available for Greece.
