Rashid, a daily wage earner from a village called Hailakandi in Assam knows it very well that although it is a season time and he is earning three times more than his regular income but spending lavishly will lead him and his family to trouble. Last year during holiday season he earned a lot but his spending trebled as a result he had to take loans which he is still paying. Thus, this season he has to work and pay for his past luxuries. This is a hypothetical case which is taken to draw an analogy with the Euro debt crisis for simplicity. Europe now for long has been living lavishly irrespective of productivity and income, apart from Germany and France most of the other member countries has a poor progress report to show when it comes to productivity and income. But when you are in Europe the spending habits and standard of living does not change whether you are in Paris or in Lisbon. Greece along with Ireland, Italy, Portugal and Spain known as PIIGS are in trouble for their overspending habits.
Greece who is considered to be in worst condition among other countries of PIIGS has somehow acted like Rashid in her glory days. The inception of Greek crisis started on 19 June 2000, the day when Greece joined EU. Although the decision was taken with a perspect of Greece’s prosperity but being a member nation Greece always have to follow monetary union guidelines. This are
1. Inflation rates: No more than 1.5 percentage points higher than the average of the three best performing member states of the EU.
2. Government finance:
Annual government deficit:
The ratio of the annual government deficit to gross domestic product (GDP) must not exceed 3% at the end of the preceding fiscal year. If not it is at least required to reach a level close to 3%. Only exceptional and temporary excesses would be granted for exceptional cases.
Government debt:
The ratio of gross government debt to GDP must not exceed 60% at the end of the preceding fiscal year. Even if the target cannot be achieved due to the specific conditions, the ratio must have sufficiently diminished and must be approaching the reference value at a satisfactory pace.
3. Exchange rate: Applicant countries should have joined the exchange-rate mechanism (ERM II) under the European Monetary System (EMS) for two consecutive years and should not have devalued its currency during the period.
4. Long-term interest rates: The nominal long-term interest rate must not be more than 2 percentage points higher than in the three lowest inflation member states.
Greece whose economy is not that strong and the country’s productivity merely depends on shipping and Tourism couldn’t keep up the pace with other more advanced European countries. By the end of 2009 the Greek economy faced its most severe crisis since the restoration of democracy in 1974 as the Greek government revised its deficit from an estimated 6% to 12.7% of gross domestic product (GDP). In early 2010, it was revealed that successive Greek governments had been found to have consistently and deliberately misreported the country's official economic statistics to keep within the monetary union guidelines. This had enabled Greek governments to spend beyond their means, while hiding the actual deficit from the EU overseers. In May 2010, the Greek government deficit was again revised and estimated to be 13.6% which was one of the highest in the world relative to GDP and public debt was forecast, according to some estimates, to hit 120% of GDP during 2010, one of the highest rates in the world. Thus all other weak members who couldn’t keep up with the guidelines and also misreported their fiscal deficit came into the picture. Why these countries deliberately misreported their economic statistics? – The answer although is simple, the various advantage of being a member of EU.
Rashid, whom we know already under severe loan, couldn’t earn enough to pay back. Thus confess in front of gram panchayat that he is bankrupt and cannot pay back the loan. Gram panchayat decided to bail out Rashid and asked everybody to contribute some amount; Gram panchayat also gave strict order to Rashid to control his spending. Thus Rashid was saved but question is did he learn his lesson, is there a guarantee that he will not again repeat the same mistake. This is again an analogy that we can draw on how EU or ECB has decided to bail out Greece. Greece declared that they need a bailout package as a consequence there was a crisis in international confidence in Greece's ability to repay its sovereign debt. In order to avert such a default, in May 2010 the other Euro zone countries, and the IMF, agreed to a rescue package which involved giving Greece an immediate €45 billion in bail-out loans, with more funds to follow, totaling €110 billion on the ground that Greece has to adopt the austerity plan**. Although IMF-drafted austerity plans also feel like a breach of contract for many ordinary Greeks, even those repelled when violence claims lives in Athens. Cutting civil-service pay seems unfair to officials who earn a pittance. There is anger in Brussels that it took until May 2nd for the euro-zone countries to put real money on the table: €80 billion ($105 billion) to meet Greece’s borrowing needs, topped up by €30 billion from the IMF. Senior officials blame Germany for the delay. They concede that Angela Merkel, Germany’s chancellor, has a defense: Greece would never have agreed to such an ambitious austerity plan if the bail-out had come sooner. Although many consider Germany of being selfish here but if you want an overall solution some strong steps need to be taken so that no other country repeats the same mistake that Greece did.
The proposal now being made by many in Europe to finance national government borrowing with Eurobonds rather than individual countries issuing sovereign debt and paying the risk premium the market demands for their particular situation, they would borrow through an EU wide institution, such as the European Financial Stabilization Fund (EFSF). Greece would sell its bonds to the EFSF, which would pay for them with funds raised by issuing its own Euro denominated bonds. EFSF bonds would be backed by the financial resources of the EU (all European member countries collectively) and would thus enjoy the credit rating of the EU rather than of Greece.
But no matter how many steps EU take to bail out Greece it would not pay off unless and until Greece takes some strong measures in terms of strong fiscal and monetary policies, sound financial budgeting and strengthening earning avenues. In the final analysis, Greece can only restore its credit worthiness and redevelop the trust and name in the world economy.
Krishanu Naug
Krishanu.naug@gmail.com
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