Wednesday, 1 June 2016

CivilsDially:: What's Happening With Greece & Why Should I Care?

Is Greece in a depression? They are most certainly experiencing some form of “Great Contraction” or “Great Recession.” But is it a “Great Depression” like in the 1930s? Can we read anything more into the EU situation?

Key Points on the Greek Tragedy for UPSC Mains

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Greek Crisis and instability in Eurozone. Here’s what you need to know for probable question in IAS Mains:

  1. Greece is one of the Balkan states which is part of the European Union and also the Schengen area.
  2. Greece is a member of European Union since 1981.
  3. Greece was one of the growing economies during the period of 2002-2008 with growth rates of 3.9% when compared with the other members of the EU.
What’s the current situation in Greece?
  1. The country has 400 billion dollars in debt.
  2. The debt burden is equal to 170% of annual GDP.
  3. Unemployment rate is around 25% and the unemployment rate under age 25 is 50%.
  4. 30% of the population living in poverty.
Okay, Can you help me with some high level causes?
These key points may come in handy for UPSC Mains questions specifically asked on the debt crisis.
  1. High fiscal deficit and lack of political will.
  2. Excessive government spending on public administration.
  3. Overstaffed,unproductive and expensive bureaucracy.
  4. Corruption and tax evasion.
  5. Aging population and rising health and pension costs.
  6. No financial discipline followed by the government.
  7. Unproductive spending of deficit generated.
  8. Recycling of debts and increasing cost of debt.
  9. Low collection of taxes.
Woah, How did that happen?
  1. The labour costs increased in the country after the introduction of the common currency euro in 1999.
  2. This resulted in the rise of CAD (Current Account Deficit) led to high imports.
  3. That increased Fiscal Deficit, which led to increase in debt.
  4. The country started to spend more and also started to borrow from the French and German banks and also other financial supporters like the IMF.
  5. Due to the membership in EU its economic condition was good for some point of time, but the expenditure increased which led the government to seek funds.
  6. During the recession period of 2007-09 the funds to EU dried up.
  7. Inflation started in Greece.
It is important to link the events up to the current meltdown. UPSC won't ask just the present day situation but would want to know if you can link them all.
Bring me upto speed, please? What happened post 2009?
  1. In 2009 when the new  government was formed in Greece, the government revealed that the economy was going down and there were false representations on facts about the debt posted by the previous government.
  2. This led to a situation where every investors started to withdraw.
  3. The country’s backbone is the agriculture, tourism,trade and shipping which started to decline.
  4. Money supply decreased and debt was increasing and the GDP also started to decrease.
  5. Debt to GDP was 12.7%
  6. Debts were expensive and the recession struck the country.
  7. The government did not have a proper Fiscal Policy and also the Monetary Policy.
  8. As Greece was under the European Union those policies were to be made by EU.
  9. EU did not monitor the situation in Greece as the other countries were stable.
  10. Interest rates and exchange rates were too low.So the country could not recover.
  11. Debt increased,GDP went down and so the unemployment.
  12. Defaulting started!
Everything that you need to know about the Bailouts:
  • EC,ECB,IMF agreed for bailout payments of 120 billion and 130 billion.
Conditions for bailout?
  • Austerity conditions were imposed on Greece.
  • This led to the reduction in government pensions and salaries, reduction in expenditure on government services.
The first two bailouts failed as the debt persisted.
  • The bailout was set to expire by 25th of June.
  • The government had left with only choice to stay within EU and develop its economic condition.
  • The Greece government signed a new deal with the EU and will continue with its effort to restore the economic condition.
What’s the buzzword Grexit? Many suggested that Greece should exit from EU (GREXIT) and revive its own currency Drachma.
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Key News and Op-eds::

Greece demands IMF explanation over leaked transcript

  1. Context: Greece demanded an explanation from the IMF after an apparent leaked transcript
  2. Transcript: Suggested the IMF may threaten to pull out of the country’s bailout as a tactic to force European lenders to offer more debt relief
  3. Background: EU/ IMF lenders will resume talks on Greece’s fiscal and reform progress in Athens this month
  4. Aim: To conclude a bailout review that will unlock further loans and pave the way for negotiations on long-desired debt restructuring

Syriza wins again in Greece

  1. The Syriza party won the polls yet again and Alexis Tsipras will be back as the Prime Minister of Greece for the next 4 years.
  2. The newly elected government has to take measures to overcome the debt crisis and to develop the economy of Greece which is down for few years.
  3. The government also has a tough task to take measures for the Refugee crisis with most of the population from war torn countries moving towards Europe.

[cd explains] Greece-waale Bailout Le Jayenge

A Bollywood take on the crisis!
Here is the ultimate block buster in Economics. Isme action hain, drama hain, austerity hain, reforms hain, growth hain, depression hain, there are scams galore and bro-mance to boot! How could Bollywood not move in to create a movie?

Germany rules out debt relief

  1. Germany made it clear that no part of Greek debt would be forgiven. However, Berlin was open for a flexible repayment plan.
  2. IMF had earlier criticized the Greek bailout proposals and urged the creditors to give some kind of upfront debt relief.

German Bundestag passes the resolution to initiate talks with Greece

  1. A day after Greece agreed on the austerity measures, German Lawmakers agreed to initiate talks regarding the Euro 86 Billion bailout package.
  2. Germany is one of several EU countries whose Parliaments must sign off any debt deal for Greece.
  3. This German vote was only about resuming official talks — a final deal with Greece will also need the assembly’s approval.


Europe set to restore funding to Greece

  1. Satisfied with the Greek Parliament’s approval to austerity measures, Europe is ready to provide the next bailout package.
  2. However, the Parliamentary approval resulted in a revolt in the ruling Syriza party which could lead to snap elections in the next few months.

Greece bill on bailout deal goes to Parliament

  1. Around 30 hard-line Syriza party lawmakers threatened to oppose as the Greek govt. submitted tough bailout terms demanded by Eurozone creditors to Parliament.
  2. Bailout terms include sweeping changes to labour laws, pensions, VAT and taxes.

‘Grexit’ will be extremely costly, says IMF chief economist

  1. IMF ruled out further funding for Greece until old arrears are cleared.
  2. Greece defaulted on a loan repayment of €1.55 billion due to the IMF on June 30.
  3. According to the IMF economist, reforms were needed in tax administration, collective bargaining, the judicial system, pensions and reducing barriers to entry for professions, and these were not undertaken to a sufficient degree.

Athens accepts harsh austerity measures

  1. Reforms like tax raises, pension reforms, economic liberalization were included in the package Greece sent to the Eurozone creditors for fund to avert bankruptcy.
  2. The reform package will amount to Euro 12billion over next two years.

Thomas Piketty on European Crisis

Since his successful book, Capital in the Twenty-First Century, the Frenchman Thomas Piketty has been considered one of the most influential economists in the world.
Germany Has Never Repaid its Debts. It Has No Right to Lecture Greece.

So you’re telling us that the German Wirtschaftswunder [“economic miracle”] was based on the same kind of debt relief that we deny Greece today?
Exactly. After the war ended in 1945, Germany’s debt amounted to over 200% of its GDP. Ten years later, little of that remained: public debt was less than 20% of GDP. Around the same time, France managed a similarly artful turnaround. We never would have managed this unbelievably fast reduction in debt through the fiscal discipline that we today recommend to Greece.

[op-ed snap] Political implications of the Greek crisis


The Greeks have voted resoundingly against the economic policies that its creditors in the European Union want it to pursue.
But what next?
  1. Other weak European countries such as Spain could be tempted to follow the Greek strategy.
  2. The impact of a Spanish or Italian default will be far more severe because of the size of their outstanding public debt.
There is one principal economic lesson from the Greek crisis: a monetary union cannot work well unless there is a fiscal union as well.
The Grand European Project : Genesis
At the end of World War II, visionaries such as Jean Monnet convinced Adenauer of Germany and Robert Schuman of France—that deeper economic engagement between European countries would be the best way to prevent a repeat of the mistakes that led to so much bloodshed in Europe between 1914 and 1945.
Brief Timeline –
  1. 1951 – Setting up a common system for coal & steel
  2. 1957 – European Economic Community was set up
  3. 1992 – The Maastricht Treaty led to the creation of the European Union
  4. 1999 – Euro made its debut
A few Trivia questions –
  1. What is the difference between the European Union and Euro Zone?
  2. Latest country to join them respectively?

Finance Minister resigns to smoothen talks with creditors

  1. After Greece’s astounding ‘No’ in referendum, FM resignation has removed a major obstacle to any deal to keep Athens in the euro zone.
  2. Greek PM said that Greece would bring a proposal for a cash-for-reforms deal to an emergency summit of euro zone leaders.

[op-ed snap] Lessons from a Greek tragedy


The Greek episode has exposed fundamental assumptions about the role of the state and its capacity for reform to a searing examination.

Two key takeaways:
  1. The idea that nations in different stages of development could be yoked harmoniously under a common currency without sufficient fiscal oversight might never truly be a sustainable one.
  2. From a comparative Indian perspective, there are long term challenges looming for the NDA government too.
In this year’s budget, the government pushed back by a year, to 2017-18, a deadline for cutting the fiscal deficit to 3% of the gross domestic product. For now, the government has largely chosen to focus on disinvestment as a means of deficit reduction but ultimately it will need to tackle the revenue deficit and unfunded welfare subsidies.

Greece to move ahead with referendum

  1. Greek PM has urged the people to vote ‘No’ in the referendum due on July 5.
  2. He says that a ‘No’ vote does not signify a rupture with Europe, but a return to the Europe of values.
  3. Crisis has also opened another rift in Europe with France in favor of an immediate agreement with Greece and Germany stern on its stand of no agreement before the referendum.

Greek crisis: India fears capital outflows

  1. Acc. to the Finance Secretary Rajiv Mehrishi, The Greek crisis could trigger some capital outflows from India.
  2. How? If yields on euro bonds go up, then it might impact inflows and outflows from India.
  3. It is feared that cash-strapped Greece would miss the deadline for repaying its debt leading to other European countries suspending the credit lifeline to it.

Greece proposes a 3rd bailout!



  1. The Greek government has proposed a new Two-Year bailout programme, according to news breaking in Athens.
  2. This two-year programme would be supplied under the European Stability Mechanism (Europe’s bailout fund).
  3. And – crucially – would run alongside a debt restructuring.
  4. And it wouldn’t include the International Monetary Fund!

Greece situation at a point of no return?

  1. The situation in Greece seems to reach at a point of no return, as banks are temporarily closed and the government has imposed capital controls, i.e. limiting movement of funds out of the country.
  2. It seems that govt. will soon have to start paying pensions and wages in scrip, in effect creating a parallel currency.
  3. Most of the stories about Greek extravagance and irresponsibility, that Greek govt. has not controlled its spending since the crisis are not true.
  4. The country will have little impact, in case of Grexit as Athens is already under financial chaos.
  5. Some say that the Greek economy collapsed, largely as a result of those austerity measures, dragging revenues down with it.

Greece to hold referendum on debt deal


The Greek Prime Minister has declared that the country will hold a referendum on July 5 on whether or not to accept the debt deal that has been proposed by its international creditors.
  1. Greece has refused to accept cuts to pension payments or public sector wages.
  2. The IMF is pushing for deeper spending cuts, not just more tax rises
  3. A key point of friction is a special benefit paid to some low-income pensioners, which creditors want scrapped.
  4. Creditors also want a wider VAT base; Greece says it will not allow extra VAT on medicines or electricity bills, and has also resisted calls for VAT hikes on hotels and restaurants.
  5. Athens wants a concrete commitment to debt relief, something its creditors are not offering


Greece Is in a Worse Spot Than America Was in 1933

  1. Using the second definition of depression, most economists refer to the Great Depression as the period between 1929 and 1941.
  2. Economic depression is highly subjective and includes the depth of contraction with the chronic nature of a given slowdown.
  3. What is certain is the plunge in output qualifies Athens to scream: “depression.”

Greece yields, world hopes

Greece’s creditors suggested for the first time that a deal to avert bankruptcy is in sight after a proposal by Athens made significant concession on pension cuts. They will be coming to the table for discussions on tax cuts & EU + IMF might just unlock an aid.
But first things first, Greece makes up just 2% of the euro zone economy, so should you even care about what finally happens?
Yes.
Above and beyond the economics of the Greek crisis, however, what is clear is that the political implications of a default and possible euro exit would be huge and largely negative.

If Greece melts down, who really cares?

  1. Athens is facing another deadline to repay its debts, putting Greece again in spotlight.
  2. Greek default does not imply Greek exit from the EU or euro.
  3. But the political implications would be huge and largely negative.
    Governments in the other countries on the receiving end of EU-mandated austerity having been closely following events there. Debt relief offered to Athens might inflame their own opponents of austerity. Should Greece exit the euro and perform relatively well, such pressures would increase!
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