The Greek crisis, tragedy or opportunity?

The Greek crisis: tragedy or opportunity?

The Greek crisis, or the euro crisis, or the Europe crisis… All of these crises are the consequences of each other. The close links between currency problems, Greek political and economic problems and the lack of supervision from Europe led to a general crisis in Europe. The resulting study will highlight first the context of the euro crisis, through the following main issues: from the creation of Europe, of the currency and the impact of the US crisis. Then, we will study how Greece ended up in this situation, starting from its history before entering the European Union until its set of problems of economic structure, public sector, politics and finance. To conclude, we are going to see the impacts this crisis has or would have on France for French companies, in terms of trade, politics and finance.

Table of contents

The context of the euro crisis        2

European countries        2

Currency        2

The impact of the US crisis        2

How did Greece end up in this situation?        3

Greece before entering in Europe        3

Economic structure        4

Public sector and government unreliability        4

European response        6

How does it impact French companies, now and in the future?        7

Financial impact        8

Economic impact        8

Political influence        8

The context of the euro crisis

EUROPEAN COUNTRIES

The European Union was officially created in 1992 with the treaty of Maastricht. The country members were willing to not live the war again, so the EU was to eradicate this idea to rebuild Europe and put resources together. The treaty of Maastricht established some “strict” requirements to meet to be able to enter into Europe: the budget deficit must be less than 3% of GDP, the national debt less than 60% of GDP, the inflation no more than 1.5% higher than in the three lowest-inflation members and the long-term interest rates no more than 2% higher than in the three lowest-inflation members. The final decision to let a country enter or not came from politics, so these figures were not really important because all of these criteria were not actually met.

In 2010, 25 countries out of 27 were exceeding either deficit or debt limits and no action was taken from Europe. The Stability Growth Pact was created to keep complying these criteria, but it was shown as malleable in practice. The Maastricht treaty was not respected by several countries such as Greece, Spain or Portugal. The European Commission gave access to Europe to financially underdeveloped countries like Greece, showing high inequality with other European countries such as Germany in terms of deficit for example, but also disarray fiscal procedures, epidemic tax evasion and extensive corruption that was happening in Greece. The sovereign crises in several countries in Europe due to their economic and political problems led other European countries to a crisis because they had to help them in order to avoid the death of Europe and/or the euro. The huge imbalances between surplus countries such as Germany, Holland, Finland and deficit countries like Spain, Portugal, Italy, Greece was one of the causes of the euro crisis.

CURRENCY

The treaty of Maastricht established the European Union to create a common currency. After the ECU, the euro appeared in 1999 and the first coins went in circulation in 2002. The Monetary Union was now composed of some of the European countries, but not all of them. Great Britain for example was against and stay against the euro. Thus, European countries are not as unified as Europe wants to be. The Monetary Union is led by the European Central Bank (ECB) that imposes a price stability target: the inflation rate does not have to exceed 2%. There is still a lack of institutional architecture in the Eurozone.

The euro deleted virtually currency exchange rates between European countries, allowing easier trade. However, the USD/EUR exchange rate was not in favor of the euro. The appreciation bias of the euro make Europe lose in competitiveness. “The Euro, probably more than any other currency, represents the mutual confidence at the heart of our community. It is the first currency that has not only severed its link to gold, but also its link to the nation state” Wim Duisenberg, President of the European Central Bank, 2002.

On the other hand, the euro can be a part of the crisis because states are not able to print their own currency anymore so that they cannot control the value of the currency to then control inflation. In the financial sector, there was a lack of pan-European debt market that would have helped countries in difficulty by buying bonds together regarding the level of debt of each one. There was a lack of anticipation of indebt countries but also a lack of regulation in rating agencies.

THE IMPACT OF THE US CRISIS

The 2008 crisis was caused by the US financial markets. Banks owned toxic assets and very risky real estate loans, leading to a financial crisis in the USA. This crisis came also into Europe because the fed rate cuts led to more appreciation of the euro. As well as American banks, European ones held toxic assets too.

On a trade point of view, the US consumers retrenched and firms imported less from Europe because of bad financial situation. Also, the emerging markets and their place in the world trade hit Europe. The Subprime crisis slowed down the European economic growth while governments increased public spending. Thus, the debt of most of European countries kept increasing. There is no supervision in the levels of private debts: the European Central Bank lacked a macroeconomic coordination.

How did Greece end up in this situation?

What causes the euro crisis in Europe was a mix of issues within the structure of Europe and the fluctuations of the euro. Europe was not able to give a quick response to that crisis because there is no common centralized budget to overcome asymmetric shocks. On the other hand, derivative markets were not regulated, which allowed Greece to hide some of its debt in opaque derivatives, leading to lose trust of other European countries and to refinance much more than initially thought: €53billion instead of €20billion. The decline of Greece will be explained through a quick remind of Greece’s past, its economic structure, the reliability of the public sector and the government and finally the European response to the Greek crisis.  

GREECE BEFORE ENTERING IN EUROPE

Greece is an independent country since 1832, when a parliamentary monarchy set up to be instable during the 19th century. Greece knew frequent currency depreciation and 4 defaults during this century. At these times, the economy was based on agriculture and shipping. In the early 20th century, Greece started developing the industry with the creation of manufactures of consumer goods, representing 16% of GDP. The post-war period was prosper, as for all European countries because war destroyed Europe and it had then to rebuild. In the 1950s’, governments adopted conservative fiscal and monetary policies because they needed to finance trade and high-value-add industries but also infrastructure. Banks were regulated: they had to hold 18% of their deposits in low-yielding treasury bills. This way, Greece was able to develop its tourism industry. The country was economically in good health, with a GDP growth of 6% per year from 1950 to 1970. In 1967, after tensions between left and right, (left was governing the country) the junta did a military coup. They made growth went up to 8% this year. However, due to the collapse of Bretton Woods that regulated exchange rates and the first oil crisis, inflation soared 29.9% in 1974, then GDP growth decreased to 6.4%. After this bad political situation, Greece came back to a transition government: now a democracy was set up under the name of Karamanlis: the New Democracy party. The government nationalized some large companies, especially in the shipping industry and reduced public investment. The development of infrastructure was stopped while the spending in military raised.