The Greek Crisis: Tragedy or Opportunity

The Greek Crisis: Tragedy or Opportunity

1. What is the context of the Euro crisis ?
2. What happened with Greece ?
3. What does that mean for french companies ?

[pic 1]

1. What is the context of the euro crisis?  

In 1992 the EC members, numbering twelve, signed the Maastricht treaty forming a more comprehensive European Union (EU) and calling for a common currency. On paper, the Maastricht criteria for a country to join the currency union were strict:

• Budget deficit had to be less than 3 of GDP,
• National debt had to be less than 60% of GDP,
• Inflation had to be no more than 1.5% higher, and
• Long-term interest rates no more than 2% higher than in the three lowest inflation members.  

In passing under the single currency of the euro, Greece was able to take advantage of a rate of advantageous rate on financial market and thus begin to get into debt to finance his growth. But in 2004, the Minister of Finance, Georges had report to the European parliament that figures announced up to the Eurozone group, were all false.

Four years later, the new 1st Secretary of the socialist party Georges. P, reveal then in turn that some of the figures announced since 2004, were also falsified. The Greek debt amount reached 274 billion euros that is 115 % of its GDP. Europe discovers then a country which large-scale loan, mined by the tax fraud and the massive underground economy (25 % of the GDP).

However, at the time to choose their future partners, political criteria prevailed over the figure that is why, according Rebecca M. Nelson: “By 2010, 25 of the 27 EU members state exceeded either deficit or debt limits”. Along these lines, we can state that the European Union was not established on a solid premise and, started with a burden, which can partly explain the European sovereign debt crisis.  

 The European crisis can be also explained by a combination of factors. Indeed, according to Investopedia, the European sovereign debt crisis occurred during a period of time in which several European countries faced the collapse of financial institutions, high government debt and rapidly rising bond yield spreads in government securities.

This crisis began in 2008, with the collapse of Iceland’s banking system, and spread to firstly to Greece, Ireland and Portugal during 2009. This crisis has affected, first of all, countries with weak initial economic position, and led to a crisis of confidence for European businesses and economies.  

1. What happened with Greece ?

History of Greece

In 1990 Greece, keeping in mind the end goal to join the European Union had gained tremendous ground. Without a doubt, they cut shortfalls, controlled the money supply, stabilized the exchange rate, and generally began liberating the economy.  

 By this way, on May 3, 2000, the European Commission declared that the Greece fiscal deficit, including interest, was only 1, 6% of GDP; inflation was only 2/0%; and Greece met all Maastricht requirements expect for its total government debt.3 Greece joined the euro area on January 1, 2001. From 2001 to 2008, Greek economic growth rate averaged 3.9%, almost twice the euro-area average of 2.0%4. Moreover, Greek inflation converged toward the low levels of the euro area. In others words, Greek succeeded stabilizing its economy.  

 However, Greece faced deep economic problems. Indeed, the most important one was its public-sector deficit; which passed to 3.1% of GDP in 1999, to reach 15.5% of GDP in 2009 and, 7.2% in 20155. This increase was mostly due to high government employee compensations, pension system which was called: «complex, inequitable inefficient and ripe for fraud” and, the tax evasion which might have avoided deficit problem.  

To fight against these problems and reduce the deficit, Greek government decided installing an austerity program.  However, the country sees its debt increase day after day. On 23 April 2010, the Greek Prime Minister, George Papandreou asks to the European Union and the International Monetary Fund for a bailout package.6 The IMF answered favorably to their demand and gave them a loan package of 45 billion of euros, which covered around 8, 5 billion of Greek bonds that became due for payment.  

 After several days, standard & Poor’s made Greece the lower-rated country in Europe by cutting his credit rating to BB- because they estimated that, in the event of default, investors would lose 30 or 50% of their money. As results of this announcement, worldwide stock markets and Euro currency declined.  

 Despite austerity measures and the fact that the European Union has given 240 billion to Greece, its GDP was still decreasing; from 237.42 billion at the end of 2012, to 178.8 billion at the end of the third quarter of 2014. A 25% drop, since the beginning of the financial crisis in the European zone. By this way, the nation needed to pay for its bad debt management, and saw its income; health policies and unemployment rate deteriorate.  

 Since the beginning Greece was a bad European member. Indeed, after several research and examination, European commission found that Greece had never complied with the Maastricht criteria and, was falsifying data. By this way, we can say that Eurozone was a smart thought, however, they have to better controlled their membership; not only according the political situation but, the financial one, in order to be sustainable.  

Geographic situation of the Greece

The key position of Greece between 3 mainland’s Europe, Asia and Africa, has resulted from Antiquity to become an important cultural and commercial center.

This strategic position was also the cause of many wars that Greece had to face many conquerors during its 3000 years of history, beginning with the Persian Wars, the Romans and later the Venetians and by Ottomans. Surrounded by the Mediterranean Sea in 3 parts Greece has as a result a mild climate with dry summers and mild winters.

Greece in general is not dense inhabited, with a total area of 132,000 square km, Greece has a population of about 11 million inhabitants. The reason is that most of the Greek mainland is mountainous with a few plateaus in Thessaly, Macedonia and Thrace and a large part of the country consists of islands.

This is why most of the population of Greece is concentrated in the major urban centers of Athens and its greater area and Piraeus to have a third of the Greek population followed by Thessaloniki, Patras, Heraklion and Larissa.

 For me, Greece was not a good European candidate since the beginning. Indeed, they started lying concerning the Maastricht criteria in order to enter easier in the European Union ; behavior which penalized the entire union and, is still putting to the test the European unity.    

Demographic situation of the Greece

In 2010, Greece had 11,319,048 inhabitants. The average density of 82 inhabitants per km² mask a very unequal distribution. The urban population (61 %) focuses mainly around Athens (one third of the total population) and in the western Peloponnese.

The demographic dynamism of Greece is low with a fertility rate of 1.35 children per woman, annual growth was 0.16% in 2007. The share of under 15 in the total population was estimated at 14.3 % that of individuals aged 65 and over, 19 %. 100. Despite the relative balance between youth and the elderly, the population is marked by aging, and a non-renewal of generations since the mortality rate reached 10.30 percent and is higher than the birth rate, of 9.60 per cent. The average life expectancy is 79.4 years.

The Greek population is about 98 %. The main minorities are the Turks, Albanians and Armenians. Greece has long been a high-migration country, and an important Greek Diaspora was formed around the world (estimated at 4.3 million people), especially in Australia, North America (US and Canada) and Germany.

The country is now faced with the arrival of Southeast Asia and Central European immigrants and the situation of the Albanian minority, whose numbers are difficult to estimate (around 500,000 people) is a subject of considerable tension between Athens and Tirana.

The subprime mortgage crisis  

 “The subprime mortgage crisis of 2007 stemmed from an earlier expansion of mortgage credit, including borrowers who previously would have had difficulty getting mortgages, which both contributed to and was facilitated by rapidly rising home prices.” John V.Duca8. Therefore, the housing crisis provided a huge help for the recession of 2007 by affecting the entire economy through four major ways. It lowered construction, reduce wealth and so consumer spending, reduced financial firm ability to lend, and decreased the ability to firms to raise funds from securities markets.  

The collapse of Lehman Brothers

 The financial crisis happened because banks were able to create too much money, too quickly, and use it to push up house prices and speculate on financial markets. Indeed, every time a bank makes a loan, new money is created. Here, in seven years, banks doubled the amount of money and debt the economy.

 As consequences, on September 2008, the fourth-largest U.S. investment bank Lehman Brothers filed for bankruptcy. With $6339 billion in assets and $619 billion in debt, the Lehman Brother’s drop was the largest in history, taking with it more than 25,000 employees worldwide. As this fall was not be saved by the United States, the crisis began to affect European Banks and, forced the European Central Bank to release around 125 billion of euros in a week in order to refinancing European Banks’ operations.