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Macroeconomic Policy of Greece

Introduction
Greece is the 27th biggest economy in the world in terms of gross domestic product(GDP) and the 33rd largest by purchasing power parity. Greece is a member of different organizations like OECD, World Trade Organization, the Black Sea Economic Cooperation, European Union and the Euro Zone. With the twenty second highest standard of living in the world, the Greece economy is a developed economy. The public sector represents about 40% of GDP. The service sector accounts for about 75.8%, industry 20.8% and agriculture 3.4%. Greece is the twenty-fourth most globalized nation in the world and is delegated as a high-income economy.
To get a future outlook of the Greece economy, we need to analyze the past and present economic performance and trends. This report will study the economic performance and growth of the Greece economy by examining some of the key economic performance indicators over the past 10 years. Being one of the most affected countries from the global financial crisis, government and central bank adopted different policies and measures in order to stabilize the economy.
This report analyses some of the economic problems faced by the Greek economy and offers a recommendation on how to counter and improve their economy by implementing the monetary policies or the fiscal policies effectively.
Discussion
An evaluation of how the Global Financial Crises (GFC) impacted on the Greece country’s economy:
Chronology of crisis: Timeline
August 2007: A snap election is called by the New Democracy Party on the grounds that public finances are getting out of control and a new consolidation policy is needed. Shortly after government pledges compensations and a relief fund for the victims of wildfires which claimed dozens of lives
September 2007: Elections are won by the NDP, albeit its majority is slashed.
January 2008: Global financial environment deteriorates, but the government fails to identify the impact on Greece’s economy.
September 2008: The global financial crisis erupts, but Greece does not suffer any serious recession at first. Greek banks are capitalized by Euro 5 billion as a part of the precautionary measure.
January 2009: Government reshuffled due to clashes between the civilians and police force which lasted for 2 weeks, however, it was covered by media as a result of the financial crisis
May 2009: In the EU elections, the incumbent party loses by landslide and opts for yet another snap general election. While all this power acquisition game continues, the economic policies get highly ignored and public deficit gets out of control
Oct 2009: Socialist party wins the election by majority. Public deficit was running above 15.4% of GDP versus an initial target of 3.7%
Dec 2009: Rating agencies Fitch, Moody’s and Standard & Poor downgraded Greece, but the Government was hesitant inn coping with the crisis
Jan 2010: Government insists on issuing bonds with long maturities instead of short-terms ones
May 2010: Greece seeks a bailout. Following the request – joint IMP/Eurozone/ECO mission visits Greece and the First Memorandum of Economic and Financial Policies is signed. A package of Euro 110 Billion is disbursed.
June 2011: Extension of Memorandum aiming at primary surpluses and privatizations of up to Euro 50 Billion to control the dynamics of debt
Feb 2012: The second memorandum is ratified by Greek Parliament. It provides for financial assistance of Euro 165.5 Billion until the end of 2014
Part A: Economic performance indicators (EPI)

  1. Growth in Real Gross Domestic Product:


In 10 years before the crisis, Greece’s GDP grew by an average of 4.0% per year. Government’s spending rose notably, and it was recording persistent deficits at more than 3.0% allotted by the Maastricht Treaty. 2008 was the period of great recession for the entire world and Greece’s economy was not an exception especially with such a huge amount of deficit. Gradually, the borrowing costs increased and revenues plummeted. Despite receiving a large bailout package in 2010, the economic condition of Greece worsened and dropped from 6.6% in 2012 to 3.9% in 2013.
Since 2008, private consumption which was one of the primary drivers of Greece’s economic growth has nosedived creating a significant contraction in Greece’s GDP. It dropped to an average of 6.9% between 2010 and 2013. The investment was the second largest component of Greece’s economy prior to 2009, however, it took a hard hit after the economic crisis and contracted to an average of 18.5% in 2013.
Currently, the services sector has become the main driver for Greece’s economy. It is contributing nearly 80% to the country’s GDP. The major sub-divisions in service sector include tourism and telecommunications. Manufacturing contributes up to 10% of the GDP. The mining sector hardly has any contribution to the GDP albeit Greece has a huge amount of mineral resources.

  1. Public Debt as percentage of GDP


The rate of Greece debts to its GDP before 2010 was one of the highest in Europe. It increased after the year 2000 and crossed 160% by 2010 and went beyond the Maastricht criterion of 60%. As we can clearly see in the graph the net debt for Greece was worse than the other member countries of European Union. The Greece government has a very lose approach towards the economic policies and reforms which resulted in worsening the public deficit to such an extent.

Source: Serdar Ozturk and Ali Sozdemir  /  Procedia Economics and Finance   23  ( 2015 )  568 – 575
The public deficit was at 12.6% in 2009, worse than the 6% of GDP that had been announced earlier. This led the investors to think that Greece is not creditworthy and it resulted in an increased interest rates on Greek bonds in 2010. This is the beginning of euro crisis.
 

  1. Rate of Inflation:

 

During the 90’s to satisfy the Maastricht treaty Greece brought down the inflation sharply. But between 1999 and 2010 the inflation figures crossed 4% only twice.  It adopted euro in 2002. The inflation increased from 2.5% in 2007 to 4.8% in 2008. It then again dropped to 0.9% in 2009 and hiked again to 5% in 2010. According to Greek Statistical services report an increase in the price of major categories of goods and services especially when the household income is decreasing, further limited the purchasing power. The household income decreased by 27% during the period of 2009-2012. The decline in income was 8.1% during 2009-2010 and then an increase of additional 8% between 2010-2011. Post 2012 the income saw a further decrease of 11%. All the above reasons have limited the consumer spending behaviour for certain goods.
The scenario was different in 2013 and Greece for the first time slipped into a Deflation phase in nearly half a century due to a sharp drop in prices of services and goods. The average annual inflation rate was 1%. One strong factor for deflation could be a persistent rise in value added tax along with excise tax on fuel and other commodities to coverup the shot-fall in revenue from direct taxation. Bringing down the wages got the entire economy with it. Lower wages and increased tax resulted in consumer not spending due to unaffordability and ultimately the prices dropped leading to further deflation in 2014. In 2014, the average inflation rate in was at -1.39 % compared to 2013.

In 2015 deflation was -1.10% and in 2016 it was -0.1%. Currently, the inflation rate is at 0.6%
 
Interest rates:
 
                             
 
Greece reaped a huge dividend in terms of highly reduced interest rates when it entered the Euro area in 2001. Interest rate on 10- Year Greek government bonds was 20 percent in the year 1994, however, the decision to enter the Euro zone in 2001 resulted in a decline of interest rate to 3.5 percent in early 2005. This stable interest rate did not last long due to the eruption of Greek financial crisis in late 2009 and the rates have shot upward, with the 10-year government bond yield increasing to almost 12 per cent at the end of 201.
European Financial Stability Facility Greek programme had a different approach towards Greece. Greece was financed by disbursements in kind with nearly 87% of the disbursements was aligned to the Euribor rated for initial 6 months. Due to such format the rates were relatively low, however, slowly rose upwards through November 2012. Late 2012 Eurogroup decided to lighten the pressure on Greece for repayment. It deferred Greece’s interest payment until December 2022 and cancelled the initial guarantee commission fees of 10 basis points. Owing to this the rates remained lower than those of Ireland and Portugal, mostly due to the funding structure: some loans for bank recapitalisation to Greece continued to be financed in kind whereas loans to Ireland and Portugal were only pool funded through longer duration fixed-rate funding instruments. In 2014 and 2015, the lending rates for Greece remained relatively stable, in line with minor movements in the cost of the EFSF funding rate.
 
 
 
 
 
 
 
 
 
 
 
 
 
Current account surplus/deficit as a per cent of GDP
 
                          
 
Greece is one such country which has added all elements which will lead to worse current account balances – there was a domestic boom, fiscal deficit soaring, declining transfers and growing net income payments. With declining transfers, reduced spending and increased borrowing there was a persistent failure to adjust the imbalances. The export performance remained stable, however, the trade balance deteriorated somewhat as expectations for higher growth and large fiscal deficit for a long term led to a spike in domestic demand and rise in imports. The current account deteriorated to a deficit of 14.5 % of GDP by 2007. As an additional blow, the decline in transfers and increase in income payments accounted for current account deterioration of more than 8.5 % of GDP
Exchange rate:
Greece was the 10th member of European Economic Community for political reasons. It adopted Euro in 2002 and was expected to coin a new success story by 2009. However, the USA economic crisis of 2007-08 spread like wildfire around the globe and Europe was not an exception to it. Greek was engulfed in that crisis by late 2009 – 2010. The countries like Greece would have had to make big fiscal adjustments to cope with the crisis. A situation like this could have been avoided if Euro had been devalued since its introduction. However, this was not an option for Greek government since Euro was overvalued.

The nominal euro exchange rate is the same for all countries but the real rate does differ because of differences in domestic prices.
The pattern observed against the United States dollar – the euro appreciated on an avg. by 7.6 % per year during the period 2006–2008. Thereafter, a gentle but less regular depreciation was observed through to 2014 (-2.1 % per year), followed by a considerably sharper depreciation (-19.7 %) in 2015 and almost no change in 2016 (-0.2 %), such that the euro was worth 11.8 % less against the dollar in 2016 than it had been in 2006
Between the years 2006 – 2009 the appreciation of Euro was quite strong against the pound sterling, however, it subsequently depreciated in 2014, 2015 and in the first half of 2016. Although this pattern was reversed during the second half of 2016 following the Brexit vote and the euro once again appreciated against Sterling.
A weaker euro can be potentially beneficial to the eurozone economy since it is currently suffering from deflation. The depreciation in exchange rate tends to induce inflation, which can be harmful if excessive, but this is not the case in the eurozone. A weaker euro also increases the competitiveness of the region’s exports, which as a result causes them to rise in value and encourages economic growth. This, in turn, could go some way to increasing tax revenues for the eurozone and solving the budget deficits.
 
Unemployment:

In the span of 6 years (2007-2013), the unemployment rates shot over by 19 percentage points. Other countries experienced such a steep rise over a span of 40 years although not of the same magnitude as Greece.
An explosive unemployment wave triggered after 2008 with the Global financial crises as it resulted in a huge contraction of Greece’s real GDP. Before the crisis, Greece had the second highest youth unemployment rate in European Union countries. There was a high concentration of youths ready to be employed in the cyclically-sensitive industries like construction. The economic downturn, lack of funds for infrastructure, lack of job-specific experience was few but strong barriers to the entry of young workers to the Job market and it ultimately contributed the unemployment rates.
The year 2014 has been marked as the descending phase of the unemployment rate for Greece.
In February 2017 unemployment rate fell to 23.2 percent compared with 23.9 percent in February 2016. The jobless rate touched the lowest level since September 2016. Still, Greek unemployment rate remains more than double the Eurozone’s average.
The number of unemployed persons fell by 3.8 percent while employment rose by only 0.2 percent. Greek depression of 2007‐2013 has actually increased the responsiveness of unemployment rate to changes in real economic activity. Although the unemployment rate in Greece seems to have peaked in September 2013 (27.7%) and has been on a downward trend thereafter (26.6% 2014 Eurostat), the extremely high rate of unemployment remains one of the main challenges for the Greek economy.
 
 
 
 
 
PART B
Economic overview of Greece
Beginning stage of Greek’s economy
The progressive improvement of industry and further advancement of shipping resulted in an average rate of per capita GDP growth in between 1833 and 1911 which was marginally lower than that of Western European countries. The per capita Income (in purchasing power terms) of Greece was 65% that of France in 1850, 56% in 1890, 62% in 1938, 75% in 1980, 90% in 2007, 96.4% in 2008, 97.9% in 2009 and bigger than countries, for example, South Korea, Italy, and Israel. The nation’s post-World War II development to a great extent been associated with the Greek economic miracle. As indicated by Euro-stat information, GDP per inhabitant in terms of purchasing power standards(PPS) remained at 95% of the EU average in 2008.The Greek economy grew by almost 4.0% per year between 2003 and 2007.Greece has got a “high” Human Development Index, positioning 25th in the world in 2007, and 22nd on The Economist’s 2005 worldwide quality of life index. Greece’s fundamental industries are tourism, shipping, food and tobacco preparing, industrial products, textiles, chemicals, metal items, mining and petroleum oil. Greece’s GDP growth has been higher than EU average since the early 1990s.
Entry in European Union(EU)
European union was formed in 1957 by uniting six countries (West Germany, France, Italy, Belgium, Luxembourg, Netherlands). The main purpose behind forming EU was to remove regional disparity, inflate trading and to improve economies. Greece joined EU in 1981 and made his entry to European Economy and the Monetary Union in 2001.As a result, Greece switched from Dratchma and adopted Euro currency. A single market with a standardized system of rules and laws that applicable to all member countries came into existence. Greece, Ireland and Portugal started borrowing money from other European countries like Germany and International Monetary Fund. They used that borrowed money to fund government budget and current account deficits. It resulted in accumulated high level of debt during the decade before the crisis, when capital markets were highly liquid. So, government expenditures raised by 87% when revenues grew by only 31 %. Greece’s spending on public services and events was enormous. The Greek economy confronted several problems, including rising unemployment levels, inefficient bureaucracy, tax avoidance, evasion and corruption.
Change in Economy: Financial and Debt crisis
The economy went into recession by the end of 2009, as a result of a combination of international factors (financial crisis), local factors (uncontrolled spending prior to the October 2009 national elections) and Athen’s failure to address a growing budget deficit. The economy contracted by 2% in 2009, and 4.8% in 2010.
The economic growth handed negative in 2009 for the first time since 1993. A sign of the pattern of over-borrowing as of late is the fact that the proportion of loans to spending surpassed 100% amid the first half of the year. The Greek economy confronted its most extreme emergency after 1993. The second highest budget deficit in addition to the second most debt to GDP ratio in the EU. The 2009 budget deficit remained at 13.6% of GDP and rising debt levels (115% of GDP in 2009) prompted rising borrowing costs, bringing about a serious economic crisis. This resulted because of the huge update of the 2009 budget deficit forecast by the new Socialist government chosen in October 2009, from “6-8%” to 12.7% (later re-examined to 13.6%). This amendment has genuinely undermined Greece’s credibility and led to rising borrowing costs for Greece. In 2009, Greece had the EU’s second most minimal Index of Economic Freedom (after Poland), positioning 81st in the world. The nation experienced abnormal amounts of political and economic corruption and low global competitiveness comparing to its EU partners. Greece faced the threat of total collapse of large financial institutions, the bailout of banks by national governments and downturns in stock markets.
 
Why is Greece in trouble?
Greece’s accounted budget deficits averaged 5% per year, compared to a Eurozone average of 2%, and current account deficits arrived at 9% per year, compared to a Eurozone average of 1%. Between 2001 and 2008, Greece’s government borrowed intensely from abroad to support generous government spending plan and current account deficits. Greece financed these twin deficits by borrowing in international capital markets, abandoning it with a chronically high external debt (179% of GDP in 2012). The Greek economy ended up noticeably involved in a huge debt crisis in the result of the global financial crisis from 2007 onwards. As an immediate outcome of the Global Financial Crisis, most of Greece’s main trading partners went into a deep recession – cutting exports. There was a 2% fall in world output, however, more awful, a 12% fall in global trade. Greece endured severely in light of the fact that her economy was vigorously reliant on tourism and construction, two sectors badly hit by the sharp fall in demand and production.
Greece’s present economic problems have been brought on by a blend of domestic and international factors. Greece was facing sovereign debt crisis at that time.
Reasons- Country’s structural problem

  • Democratic government and socialist population: High Government Spending and Weak Government Revenues. The government spent 49 % of GDP which is approximately 104 billion Euros in 2009.  Government revenue’s 20% was used for long term investment expenditure. Increase in government employee’s salary, hiring of more government employees, welfare and pension schemes and large spending on interest payment resulted in high deficit. Continuous over-staffing and poor productivity in the public sector was found. when the government expenditures increased by 87%, revenues grew only by 31%.
    • Structural Policies, unregulated labour market and declining International Competitiveness: Since the time Greece adopted Euro, wages showed increase rate of 5% while exports to its major trading partners have raised only by 3.8% during the same period.
    • Increased Access to Capital at Low Interest Rates
    • Tax evasion:  tax rates lead to high tax evasion which resulted in losing 30 billion Euros per year that accounts 36.6 % of the gross government revenue.
    • Obsolete pension system: Greece’s ageing population is expected to rise from 19% in 2007 to 31% in 2060.This could place additional burdens on public spending. It’s pension system is widely considered as one of Europe most generous pension systems, as entitlement to a full pension requires only 35 years of contribution, compared to 40 in many other countries.
    • Fraudulent government and fiscal indiscipline: Government secretly borrowed from private and foreign investors to hide deficits in the budget.

http://4.bp.blogspot.com/_8FfaAuR9NbQ/THmvb6RtaaI/AAAAAAAABQ0/6XxdpsMkY6g/s1600/04.gif
 
 
 
 
Hosting the 2004 Olympics:
Many elements were behind the devastating debt crisis, the 2004 Summer Olympics in Athens has drawn specific consideration. The 2004 Athens Olympics cost almost $15 billion. The tab for security alone was more than $1.2 billion. Beginning proposed spending plan was of 1.6 Billion.
Steps towards reconstruction:
The big bailout: It was saved from bankruptcy when other European union countries and the International Monetary Fund stepped in with two massive bailouts. In return, Athens has needed to make harsh spending cuts and tax increases to get control over the runaway deficits. Its economy has been put under strict supervision from the IMF, European Commission and European Central Bank, known collectively as the “troika”. To start with bailout package of $147 billion in May 2010 counteracted insolvency. The second arrangement of $174 billion in October 2011 pardons around half of Greece general debt. Greece’s public debt remained at 305.3 billion euros, or 160.5 percent of GDP, in the primary quarter of the respective year.
Impacts:
Rating decline:
The Greek debt rating was diminished to BB+ by Standard and Poor in April 2010. According to Standard and Poor’s estimates, on the occasion of default investors would not receive 30–50% of their cash back.
Effects of declined rating:

  • Stock market and Euro currency declined.
  •  The euro value fell by 1.6 % to $1.3175.
  •  The dollar jumped 1% on a trade-weighted basis.
  •  The yield on the Greek two-year bond touched 15.3%.


Industrial production went down:
Industrial Production declined by 11%. Mining dropped by 6.4%. Manufacturing diminished by 11.3%. Electricity production decreased 12.2%.
Impact on the public: The most evident way would be through tax bills, as Europe consents to ride to the safeguard and help Greece to manage its mounting public and foreign debt. Any help to Greece will include some significant downfalls that will eventually be borne by taxpayers in the countries that contribute. So, tax rates increased to follow the bail out plans.
C:UsersH.PDesktopenronApril 10_chart.jpgGreek banking sector was also in trouble:
Banks stocks were the worst affected because of crises.
Since November 2009 bank stock prices decreased by 47%.
Greek bank deposits have dropped to 8.4 billion Euros.
 
 
C:UsersH.PDesktopenrongreece-unemployment-rate.pngUnemployment increased:
The industrial production was very low.
Unemployment rate raised to 15.9% in 2011.
Impact on European Union:

  • The crisis affected the confidence of other European economies negatively.
  •  Financing needs for the euro zone in 2010 reached a total of €1.6 trillion.
  •  Ireland, with a government deficit of 32.4% of GDP in 2010, Spain with 9.2%, and Portugal at 9.1% are most at risk.

Impact on Euro Zone:

  • High interest rates on bonds
  • Increasing unemployment
  • Foreign trade adversely affected
  • Exchange rate of Euro was badly affected
  • Downgrading of rating of euro zone nations
  • Low confidence of global investors
  • The financial crisis caused slowdown in euro zone and global economy

C:UsersH.PDesktopenronGreece Debt-Systemic Risk.jpg
Impact on US:

  • U.S. exports to the EU could be affected if the crisis slows down growth in the EU and makes the euro to deteriorate against the dollar.
  •  As the crisis proceeds, expanded perceptions of risk are impacting U.S financial markets.
  • CDT DOW dropped more than 992 points.
  • The situation in Greece created one of the most turbulent days ever on Wall Street. In a matter of minutes, stocks dove 900 points.
  • The Dow figured out how to recover but yet ended in negative territory. The Dow shut down 347 points.

 
Impact on India:

  • Greek imports from India include cotton, iron, steel, fruit, synthetic fibres, fabrics and vehicles.
  • Exports to India include fibres, fertilizers, organic chemicals,

pharmaceutical, leather goods, metal processing machinery.

  • Only 0.05% of India’s exports go to Greece and Indian banks have no direct exposure   to Greece.
  •  There will be some additional capital flows coming in and a small drop in exports.
  •  Euro which was quoting at around Rs.67 before crisis came to Rs.55.92.

Spread to other countries:

What level of debt is sustainable – 60-85% of GDP
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REFORMS:

  • Pension reforms including increasing the official retirement age.
  • Privatization of state assets in order to generate revenue and to raise competition.
  • National minimum wage needs to be reduced.
  • Measures to cut down the entry barriers to specific occupations.
  • Cutting taxes on employing workers to boost employment.
  • Making the Greek judicial system more efficient.
  • Stringent steps to tackle tax evasion by individuals and businesses.

The cruise industry:
Tourism is Greece’s main industry, representing 15% of GDP. Greece ought to be one of the world’s foremost destination for cruise ships. Be that as it may, exceptionally prohibitive laws have discouraged foreign tour operators. In 2010, under requests from the troika, the Greek government sanctioned another law that guaranteed change, yet failed to implement practically. It required cruise lines to sign a three-year contract ensuring visits to Greek ports. Not a single cruise line entered the market under that law. The new government has vowed to sanction a measure that expels both the tax and the contract prerequisite for non-EU carriers.
The truck Industry:
The shockingly high cost of road transport is socking both Greek exports and domestic production. To work a trucking fleet, organizations require a permit for each truck, and no new ones have been allowed since the 1970s. Thus, trucks are hard to come by, so producers need to pay inflated prices to move stock inside Greece, or to foreign markets. In 2010, the parliament passed a law empowering the government to issue new licenses at negligible cost. But the reform was postponed for a long time – prompting inquiries about whether it would truly happen. In 2012, the parliament wiped out the transition period and completely opened the trucking market as of January.
Pharmaceuticals:
The government ensured drug stores a 35% markup on all medications. So, a licensed, $200 a month heart medicine got $70 attached to the retail cost. The motivation to over-endorse was enormous. It clarifies why Greece has the most abnormal amount of pharmaceutical utilization per capita in the EU. Under the new law, drug stores are constrained to forcing a margin of 15% on modest medications and far less on costly treatments. By and large, the markups ought to tumble from the old 35% to well under 15%, a noteworthy victory for consumers.
Resort development:
In Greece, zones outside of cities don’t have zoning laws. That doesn’t mean you can manufacture openly on islands or in rural territories. Advancement is extremely confined. Only a single law allows for master plan development, and it requires that the villas and homes be constructed around a major hotel. The law additionally keeps the developer from selling homes or villas; just rentals are permitted. New law gives two changes. To begin with, it diminishes the prerequisite of two environmental impact explanations to only one, cutting the endorsement time down the middle, from two years to somewhat more than twelve months. Second, it now enables developers to sell a significant number of homes in their resorts, rather than only leasing them out. That change alone could make Greece a prime goal for retirees.
The labor market:
In 2012, the government and the unions arranged a new “minimum wage” every year, commanding that the least paid workers get a raise of, say, 5%. The second round of negotiations would happen for every industry, with the 5% as a minimum rise. Therefore, the department store workers may get an additional 2%. That made Greek merchandise turn out to be more overrated than competing items from Germany, which kept wages under check. The unemployment in Greece remains at 21%. Wages are still so high that employers paid workers cash, off the books, to evade social security taxes. The new law passed has a 22% decrease in the lowest pay for most labourers and a 32% drop from employees less than 24 years old. Greek youth unemployment transcended 60 percent in that year.
 
 
Measures taken:
Internal measures:
Austerity package: First Austerity Package which is announced on 9th Feb 2010 aimed to reduce government budget deficit to 3% of GDP by 2014. The Greek Parliament votes 155-138 in favor of $40 billion in painful budget cuts and tax increases over the next few years.
Tax Increased:
Income Tax-

  • People will now pay tax on income over €8,000 a year, down from €12,000
  • This basic rate of tax will be set at 10%
  • 1% for earning between €12,000 (£10,800) and €20,000 a year
  • 2% for earning between €20,000 and €50,000
  • 3% for earning between €50,000 to €100,000
  • 4% for earning €100,000 or more
  • Lawmakers and public office holders will pay a 5% rate

Sales Tax-
VAT rate for restaurants and bars is being hiked from 13% to the new rate of 23%. This rate already covers many products in the shops, including clothing, alcohol, electronics goods and some professional services.
Wealth Tax-
Tougher luxury levies will be introduced on yachts, cars and swimming pools, along with higher property taxes. The changes should bring €2.32bn this year, rising to €3.38bn in 2012, €152mn in 2013 and €699mn in 2014.
Spending Cuts:

  • 10% cut in Bonuses & payment of overtime work.
  • 8% cut in public sector allowances.
  • Public Sector wages: Freeze in the salaries of all govt. employees.
  • Social benefits and pension
  • Social contribution
  • Public investment

The austerity program stated that €7bn will be raised in 2013, €13bn in 2014 and €15bn in 2015.
Privatization:
Stakes in various state assets will be placed on the auction block, in an effort to raise €50bn by 2015.
2011-Stake in Hellenic Telecom to Deutsche Telecom:
Greece decided to sell 10% stake in Hellenic telecom which is state owned to German telecom company Deutsche Telecom for €400m. Deutsche Telekom had already owned a 30 percent stake in O.T.E. that it bought in 2008.
Hellenic Post bank and Thessaloniki Water are also scheduled for sale:
Hellenic post bank is a retail bank of Greece which owned by the Hellenic Republic. It’s a state-owned company. Thessaloniki Water Supply and Sewerage Company SA is a Greece owned company that supplies water to the Thessaloniki urban complex.
Stakes in betting monopoly OPAP: – Stakes in Greek Organization of Football PrognosticsandTwo port operators, Piraeus Port and Thessaloniki Port, will also be sold partially.
Revised austerity package:
Introduced new Austerity package on 2 May 2010. Greece and its international lenders have agreed to revise the country’s five-year austerity plan to include more tax increases and less spending cuts.

  • The revised 2011-2015 fiscal plan is the key to unlocking further EU-IMF loans for the debt-laden country.
  • It includes a total €28.4bn (£25.3bn) of fiscal measures, €155m more than in an initial version of the plan.
  • The revised plan foresees a total €14.32bn of spending cuts, about €490m less than in the previous version. It also calls for €14.09bn of tax measures, €649m more than in the initial version.

Tax increase

  • Taxes will increase by €2.32bn this year, with additional taxes of €3.38bn euros in 2012, €152m in 2013 and €699m in 2014.
  • Increases in VAT [10%] – 23%(goods & Services), 11%(Food) and 5.5%(stationery).
  • Return of a special tax on high pensions

Cutting public sector wage

  • By €770m in 2011, and €600m in 2012, €448m in 2013, €300m in 2014 and €71m in 2015.
  • 30% cut in Christmas & leave for absence.
  • Further 12% cut in Bonuses & 7% cut in public and private employee.
  • Equalization of men’s and women’s pension age limits.
  • A financial stability fund has been created.
  • The average retirement age for public sector workers has increased from 61 to 65.

Cuts in social benefits

  • By €1.09bn this year, €1.28bn in 2012, €1.03bn in 2013, €1.01bn in 2014 and €700m in 2015.

3rd austerity measure: [Jan2011]:
Further, cut in salaries by 8% for the public employee. The 13th and 14th salaries paid to civil servants and public utility employees were abolished & flat-rate vacation allowances totaling €1,000 a year were introduced for public sector workers earning less than €3,000 per month. Limit of €800 per month to 13th and 14th month pension installments; abolished for pensioners receiving over €2,500 a month.10% rise made in luxury taxes and taxes on alcohol, cigarettes, and fuel.
External measures:
Bail out:

  • Rescue package
  • European Stability Mechanism: Short term debt relief measures for Greece
  • European Commercial Bank

The country required bailout loans in 2010, 2012, and 2015 from the International Monetary FundEurogroup, and European Central Bank, and negotiated a 50% “haircut” on debt owed to private banks in 2011.
The first round of crisis response (May 2010):3 years package of €110 billion, Contributed by IMF (€ 30 billion) and Euro zone (€ 80 billion).
ECB provided substantial liquidity support to Greek’s private banks [b/w Jan 2010 to May 2011– €51 billion.
Again, Euro zone provided loan – July 2011 € 109 billion.
ECB starts buying govt. debt from secondary market to reduce the bond spread and to increase the confidence of investor. Between May 2010 to June 2011 ECB purchased €78 billion bonds, out of which €45 billion from Greece govt.
EFSF (European Financial Stability Fund): The EFSF is intended to consist of a fund of €750 billion, which would be made up as follows:
(a) €440 billion would be made available in loan guarantees from Euro Zone Member States;
(b) €60 billion would consist of emergency funds made available by the European Union itself; and
(c) €250 billion would be provided under arrangements with the International Monetary Fund.
EU also made a proposal to make a single authority responsible for tax policy and govt. spending.
Economic Outlook and conclusion:
The biggest restructuring in the history of Greece happened in the first quarter of the year 2012 after negotiating with the private sector, the debt burden was reduced to Euro 280 Billion (137% of GDP from 172% of GDP). Financial services company MSCI and S&P Dow Jones Indices reclassified Greece as the emerging market. The anger and protests about the austerity measures still did go well with the citizens of Greece leading to anger and pretests, to coincide with an audit by the inspectors of IMF, EU and European Central Bank before the decision of the second bailout was made for 1 Billion Euros. By the second quarter of 2014, Greece exited the six-year recession, but the challenges of securing political stability and sustainability still remain. Recovery in private consumption and external sectors were the saviors for Greece’s economic growth in 2014 for the first time after six years. However, there was a great level of uncertainty pertaining to the future of Greece’s economy. Greece was on the brink of economic collapse and bankruptcy and desperately needs additional financing from the EU lenders.
On 27th March, Prime Minister Alexis Tspiras presented new reform plans to review the Greece economy. It included measured to reduce corruption and tax evasion. Tspiras concluded to retain an unpopular property tax and an increase in the Value-added tax for Greek islands, albeit the proposal did not include the reforms related to pension system or labor laws.
Greece’s economy got some breather however, it was deteriorating rapidly again. The government has to balance anti-austerity campaign promises and satisfy creditors’ demands for reforms. The policy makers were to enact new austerity measures, including pension cuts and structural reforms, it was designed to pave way for next disbursement of over 7 Billion as part of the bailout program.
The agreement for new austerity measures comes amid a mixed economic outlook: the industrial production growth hiked in February, but the unemployment rate soared in January. The primary surplus for Government came in at 4.2% of GDP in 2016 which was more than the bailout program target. As for the fiscal issues, the reduction by the General Government of the expenditures on interest is expected to lead to a budget deficit limitation of around 2.7% of GDP, in 2016. For 2017 and 2018 the expected primary budget surplus is estimated to be 1.75% of the GDP and 3.5% respectively. The commendable increase of growth in GDP from 2017 onwards, coupled with the reduction of fiscal expenditures on interest, is estimated to deliver some positive effects on the debt/GDP ratio.
Although the economy is recovering from the crisis, the social cost persists and it is in the form of high unemployment rate, at 25% it is still high despite a moderate decline since 2013. The income inequality is on the rise and has pushed many people into poverty. Public debt is high; however, the tax and benefit reforms have materially improved the budget position. Full recovery will take some time even though the GDP is showing an upward trend.
Although significant structural reforms have been suggested and legislated, the implementation was uneven. Greece implemented several labor reforms, however, lack of bank finance and exiting structural blocks are holding back the modernization of the Greek economy
Greece needs to increase the exports as it is the key to sustained recovery going forward. Additionally, the fiscal policy needs to be reviewed and strengthened to boost growth as expected and achieve sustained and inclusive recovery.
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