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Lok Sabha TV Insights: Greek Crisis

Lok Sabha TV Insights: Greek Crisis

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24/07/2015

Greek parliament has approved the second set of reforms which among other things include structural changes in Judicial and Banking systems. Under this bill pension and tax reforms are not included as they will be discussed later with troika negotiators. Greece is in desperate need of Euro 86 Billion out of which it about 20 billion will be repaid immediately to various lenders. This, if agreed by Troika, will be 3rd bailout; first one was given in 2008. With current state of affairs it appears that crisis has just been delayed rather that prevented.

Current Tax to GDP ratio of Greece is 177%, this itself is result of last two bailout packages. In 2008, it was found that Greek government, since its entry in European economic union was fudging its accounts. This was unearthed by new government in Greece as by that time repayments based on fudged accounts had become impossible. This was perhaps due to Sub Prime crisis. This was followed by first bailout package worth Euro 200 billion out of which 100 billion came from Germany and France. Part of this bailout is due for repayment now.

Dr. Amartya Sen draws parallel among current approach of troika towards Greek and post-world war 1 Treaty of Versailles. Treaty of Versailles was imposed by allied victorious nations mainly Britain and France on defeated Germany. It was very harsh on Germany, which caused immense hostility in Germans toward allies. In turn this all culminated into rise of Hitler and disastrous World War 2.

Austerity measure and their effectiveness is the raging debate all over the world. To repay its loan without harming its economy further, Greeks need tax revenues, which will only come if people spend some money. Private and Public expenditure ignites demand for goods and services in the economy. Under austerity measures public expenditure is rolled back which harms the demand in economy as people have to spend on new items more from their own pockets. This results in shrinkage of their total consumption.

With austerity measures it is unlikely that tax revenues will rise. When US was in Great Depression in 1930’s what did they do? They surely didn’t followed austerity, rather quite opposite of it. President Roosevelt’s New Deal, following theory given by John Keynes, aimed at enhancing public spending in a big way. Soon demand picked up (due to govt. expenditure – quite opposite of austerity), in turn manufacturing rose and then employment too jumped. However, US’s decision was a sovereign one; it was not dictated by outsiders as in case of Greece.

It should be noted that problem of US was domestic one, while Greek problem is domestic as well as external. In current scenario, Greece even if left of its own, is unlikely to get out of the crisis. Reason is Greece has almost no manufacturing or service industry base, where its human resource could engage productively. Greek’s tourism industry needs serious revival. Greece has one of the best qualities of Olive Oil, but most of it is sold to Italy in raw form, where it is reprocessed and exported on huge markup.

To get out of this stagnancy, we can’t expect Greeks will have savings, investment and capital formation rates to be sufficient enough for revival. What it will need is foreign direct Investment. But again, Greece scores low on almost all important parameters of Ease of Doing business. There’s political instability and lack of trust in political institutions. Corruption is rampant.

To the core of this crisis are structural problems of European Economic Union which consists of 19 countries. This union gives monetary policy of these countries in hand of European Central Bank. For fiscal policy it leaves each country on its own. Weak countries are main losers in this arrangement. One reason that FDI will stay away from Greece is that it’s not viable to invest in Greece with current rate of Euro. It’s like paying cashews for peanuts. For the same reason Greece’s export will be quite expensive and uncompetitive. It appears that Greece deserves help from stronger European countries.