Greece, IMF, and Europe

Greece

Greece’s GDP constitutes only 1.9% of the whole Euro zone economies, yet its sovereign debt crisis has caused deep concerns of contagion to the EU joint economies, and threatens the whole stability of the world economy.

The problem was instigated due to poor handling of policy makers in Greece and taking advantage of their membership in the EU – lower interest rates for the Euro currency facilitated Greece’s borrowings. The easy access to money that Greece enjoyed, thanks to the privilege of being an EU member, contributed to Greece’s economical instability. Tax evasion is a culture in Greece, this significantly decreased tax revenues. The Greek government relied heavily on borrowings, that’s not a problem in itself, several countries are already indebted; the distinct difference is, these indebted countries borrow to invest, while Greece borrow to spend on higher wages of private and government sector, unemployment benefits, and expenses that won’t generate returns.

Had the Greeks not joined the EU, the credit ratings for Greece would have gone down, Greece would have had to go to commercial banks to borrow money instead of European governments, and banks would have charged higher interest rates. The implications in this assumption would have been higher inflation rate; its currency would have depreciated against other currencies, hence boosting Greece’s exports. However, since the Greeks are tied to the EU zone, they have to bear the burden of its currency being exactly parallel with its Euro counterparts.

Nonetheless, even if Greece was still using the Drachma – its former currency, approximately 160% debt to GDP ratio is still too high; the problem is bigger than that. Greece needs radical structural reforms in order to spin back the wheel of its economy.

The IMF proposal

The International Monetary Fund proposal includes, among others, imposing higher taxes, privatization of government’s assets, and cuts in pensions, wages, and unemployment benefits.

Yanis Varoufakis, a professor of economics at the University of Athens, describes the proposal as if someone is already in debt and you would recommend him to get an expensive credit card to pay back his existent debt! Which basically will only delay the apparent inevitable default of the Greek government, but won’t solve the problem.

Furthermore, Karen Young, a professor of political science at the America University in Sharjah, suggests that monetizing some state assets would function and benefit both parties much more as an alternative to complete privatization. Because once the privatization is done, that is it, the assets are sold and there is no way of getting them back. And this is why most of the Greek people are furious.

The Greek government already passed the austerity measures. The IMF alongside other European countries will finance these austerity measures. Rumors of a potential  political meltdown within the Euro zone loom large, especially in Germany since a huge proportion of the financing will be from German taxpayers. People in Athens are extremely unhappy, and if history proved anything, it would be Greeks’ intolerance when it comes to austerity measures. And If Greece defaults, the domino effect will definitely kick in and utterly mess Europe’s economy.

So far the problem seems very complex on papers, I personally wonder how the implementation part will go given the massive riots in Athens. Only time will tell!

The figures were derived from The Economist.

Note: I’m still an undergraduate, in case any of the analysis is flawed.