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Understanding Macroeconomics of Greece

The year 2008 marked the beginning of the crisis for Greek Economy, from then the economy has been through serious economic problems. Unemployment is the country’s major economic problem. As per a report in Forbes (2017), IMF has projected unpleasant numbers for employment and population out to 2060. According to IMF, there would be a decline of 10% by 2060 in the working age population as suggested by the demographic conditions. The struggle relating to unemployment shall continue for Greece for decades to come. The unemployment rate is nearing 25% making it highest in OECD. The structural component after seven years of recession is around 20%. For unemployment to come down significant time will be required. In scenario of Greek economy growing, and creditors agreeing to relief debt still it will be taking 44 years for unemployment to reduce and approach normal (Coppola, 2017). However, if no sustainable growth is seen in the economy then the unemployment is going to stay long for an unknown period in double digits. If we search the truth behind unemployment in Greek economy, it can be found in recession for period as long as seven years. The economy failed to generate jobs which can employ its population. As per IMF’s estimation, 20% percent adults would still remain unemployed even in the good times. For generating jobs there has to be vast number of new industries and business which requires substantial investment and time. Certainly, Greece is not one of the most attractive hubs for attracting investment (Litigation et al., 2017).

Key Macroeconomics problem faced by the country

Unemployment

As per Population Census, Greece’s resident population is 10,816, 286. As shown in figure below, it was the year 2009 when the unemployment rate started increasing and rose in 2013 to an alarming 27.5% However from 2014 it came to 26.5% and thereon it started decreasing. It is important to note that the unemployment rate in October, 2016 was 23.4% while unemployment average was 8.3 in European Union of nearly 28 countries. Among the highest was the unemployment rate of Greece, second highest being that of Spain (19.2%), and then Croatia (12.7%). 

            

 (Source: Hellenic Statistical Authority, 2016)

 As shown in the figure below the status of employment for population above 15 years old. In 2011, 35% of total population was economically non active. 

   (Source: Hellenic Statistical Authority, 2016)

Another major problem was long term unemployed status which was total population’s one million in 2014. Long term unemployed here is that percentage of population seeking job for one year or more than that in labour force.

Unemployment

        

Figure: Long Term unemployed (thousands)

(Source: Hellenic Statistical Authority, 2016)

Another area of unemployment was households that are jobless, since one and half million of the population in total were unemployed.

Figure: Jobless households (thousands)

(Source: Hellenic Statistical Authority, 2016)

As per data hosted on OECD’s website we get the following data relating to job conditions in Greece.

(Source: Greece - OECD Data, 2017)

Greece is a capitalist economy with 40% GDP accounted by public sector and per capita GDP amounting to two third of leading economies of euro zone. 18% GDP is provided by tourism. Work force’s one fifth consists of immigrants in unskilled and agricultural jobs. Being EU major beneficiary Greece equals 3.3% annual GDP. The recession knocked in 2009 due to financial crisis in the world, tight credit conditions, and failure of Athens to address deficit of growing budget. The economy contracted to 26% in 2013. The deficit reached 15% of GDP when Greece violated EU Growth and Stability Pact. 

 

 (Source: Forbes, 2017)

The financial crisis was led by public finances that deteriorated, misreported and inaccurate statistics, and underperformance consistently on reforms. Major Credit rating agencies were prompted by this to downgrade Greece’s international debt rating in 2009. With building pressure, government called Athens to cut spending by the government, decrease evasion of tax, health care, overhaul civil service, and reform public and labour markets. However in 2014, the economy began to turn recession’s corner and achieved three milestones that were significant being issuing in financial market its govt. debts, not including repayments of debt, and GDP growth generation of 0.7% - marking first expansion of economy since year 2007. The economic turmoil did not lead the GDP to contract as sharply as it was expected.

Annual Inflation rate was accelerated to Greece’s highest level in five years tenure due to economy making exit from weak price growth and three years deflation. It was in line with inflation upsurge seen across euro zone in last few months. It was pushed upwards by rising cost of alcohol, food and housing at year start. Higher Inflation can be a problem for the economy after surprise contraction during last year’s end. Rising prices for essentials like drinks and food are threatening to crimp consumers in an economy boosting 25% unemployment rate. 

            

(Source: Statbureau.org, 2017)

In 2000, Greece’s debt to GDP ratio had hit 100%. In the latter part of decade it began heading up. In 2009 the ratio was 127% when it was finally notice by the creditors. Today the ratio stands at 174% roughly and $320 million is owed by Greece. It is worth thinking how is Greece going to pay this debt despite GDP and manufacturing dropping by 30% (Worstall, 2017).

Gross Domestic Product

The latest Debt Sustainability Analysis released by IMF for Greece makes grim readings. Accordingly, it is very hard for Greece to grow its way out of its debts. Banks will be in need of Euro 10 billion as per IMF. Sale of assets would be a lost cause mainly due to banks being asset’s large proportion up for sale would not be worth anything for the future that is foreseeable. Debt relief is very crucial for the economy; in case it goes unaddressed then in 2060 the debt service will soar to 60% of government spending. The situation would become worse in case Greece defaults long before. The interest rates have also soared for the Greek debt.

Greece can be an example of how capitalism impoverishes. In poverty Greece ranks at the third place with Eurostat data which showed that in 2015, population’s 22.5% were severely materially deprived. More than population’s one third  was at risk of being socially excluded or poverty (35.7%) (People at risk of poverty or social exclusion - Statistics Explained, 2017) The living standards in Greece has plummeted as inequality, poverty, unemployment and harsh austerity measures are continuing to rip away (Worstall, 2017).

Back in 2004, Greece was in world’s top 29 most developed countries. Today it is burdened with debt. The reasons behind the economy taking a catastrophic turnaround can be seen in number of reasons –

The economic crisis has its roots back in 2009. It is agreed by many that this was a derivation of mismanagement of the economy, by Greece’s two main political parties of that time (PASOK, centre-left party and Neo Demokratia, the conservative). Also one of the main causes seen in debt crisis of Greece is the amount expended in 2004 Olympic Games. To meet the infrastructural needs of the event billions were spent by Greece. In 1981 massive recruitment was done into the public sector where party members started recruiting state’s public servant on mass scale. The wrong policies are related to insufficiency and financial extravaganza of Greece Government, infertile and unfair tax system, low competitive power and populist practices by political parties (Heath, 2017).

Last three decades have witnessed colossal headlines relating to political corruption scandals and number of ministers being dismissed. Number of scams have come into light, in 2008 Siemens, a German company, was alleged to pay large sum as bribery to government to win contract. The same money was used to campaign for elections by Pasok. Another scam related to land deals cropped up involving taxpayers 100 million Euros used to finance land deals (Smith, 2017).

Inflation

There has been massive evasion of fiscal levies since inception coming from entrepreneurs, business class, and professionals. One main reason seen behind this is debt repayment; around 82% of monthly income reported is spent on servicing of debt. The chart shows how self employed people are expending more than their earnings on repayment of debt. Untaxed Euro has been used to create offshore companies. Also million of Euros was received by the construction companies on the projects which are yet to finish and the amount finding its way in individual’s pockets. 

          

(Source: Bird, 2017)

There had been uncontrollable bank borrowings. After credit card was introduces to the masses, Greeks have been overspending wildly becoming consumer frenzy’s hapless victims, result being cars, homes and other chattels being repossessed due to loans becoming overdue and unpaid.

Shadow economy is seen when individuals and business engage in inappropriate practices. As per IMF, shadow economies result from heavily regulated economy administered weakly. According to Institute for Applied Economic Research at the University of Tübingen in Germany study published the shadow economy is averaging GDP’s 21.5% (McCarthy, 2017). 

        

(Source: McCarthy, 2017)

The association between exacerbation of suicides and mental disorders and macroeconomic instability has been established long back.

The suicide incidences increased significantly with economic crisis of Greece in 2008. Between the years 2007 before crisis and year 2011 when measures related to severe austerity was exercised in the public sector of health, suicide mortality was observed by 55.8% (Economou, et.al, 2016). The risk attributable to psychiatric factors for suicide are imperative to be borne in mind. Individuals vulnerable in developing mood disorders and being out of the work force have a greater risk of committing suicide. The serious austerity measures introduced in Greece hit the people less economically advantaged and then they have a detrimental and profound influence on mental health that exhibits suicidal behaviour and major depression (Madianos et.al, 2017).

The International Agencies for Credit Rating have rated downgrades to Greece. The measures taken by Greek Government have failed to regain market’s trust and have provoked people’s reaction. This has also resulted into increase of borrowing costs as the country lost its prestige in markets internationally due to such downgraded ratings. The recession’s depth and duration is such that World Bank compares it to eastern European countries slump in early 1990.

Under the financial crisis pressure, spending on education is reduced by 45% and since 2011 there has been closing of schools exceeding 1000. This has forced the teachers to stay out of work. The students have been forced to travel further distance to schools and pushed into classrooms that are overcrowded (psicangreece.org, 2017).

Debt Crisis

After the beginning of the crisis half a million of Greeks migrated owing to unemployment and shedding in past six years of one third of total output. The fear of economy getting locked in a death spiral was further given credence when Euro bank analysts made announcement that exports and consumption had fallen to 7.2% and 6.4% respectively for the year’s second quarter. As per associate professor, law and economics, Athens University, Aristides Hatzis he sees no progress, the private sector is devastated, the economy is stagnant, public administration is ineffective and underfunded and at the tunnel’s end there is specter of Grexit (Smith, 2017).

Owing to large number of cases related to tax evasion and collection, Government implemented tax reform in 2010. The Finance Minister urged people to pay their dues or find their names getting published in the black list. The Greek police to deal with tax offences set up a special unit. New code of tax procedure and income tax code was enforced in 2013 which provided a simplified framework. To combat tax evasion the tax authorities can now access private individual’s bank transactions. The government is also contemplating to establish, “electronic movable and immovable property registry”, which will give details regarding tax payer’s movable and immovable property (Artavanis, et.al, 2015). 

 

(Source: Katsios, 2017)

Various laws have been enacted to fight against corruption. Accordingly a person or a company is required to record all the payments and expenses failing of which would be regarded as fictitious transactions which could be evaluated from view of corruption and money laundering. Transactions that cannot be justified under scope of financial market or activity are suspicious. The bribery provisions apply to every official serving the municipal and state entities and also apply to bank officials. The same is also applicable to international organizations and its representing members, member of court and parliament, arbitrators and judges.

Conclusion

It is hard not standing in awe seeing the present challenges of Greece. Athens “Golden Age” is long past but the history of the country still resonates. It is evident how important it is for Greece for recovering strongly economically and creating more and more jobs so that cases of suicides and deteriorating health issues can be addressed. Corruption has to be decreased in order to bring the economy to the right path. The tax reforms should be taken in a more efficient way so that tax evasion can be taken to a low level. Government decisions to cut spending on education are also not healthy because this would drive the future generations out of the competition.  

References

Artavanis, N., Morse, A., & Tsoutsoura, M. (2015). Tax evasion across industries: soft credit evidence from Greece (No. w21552). National Bureau of Economic Research.

Coppola, F. (2017). IMF predicts employment in Greece will fall to 12 percent by 2040. Forbes.com. Retrieved 7 July 2017, from https://www.forbes.com/sites/francescoppola/2016/05/23/imf-predicts-unemployment-in-greece-will-fall-to-12-percent-by-2040/#7ea1d1c173d9

Economou, M., Angelopoulos, E., Peppou, L. E., Souliotis, K., Tzavara, C., Kontoangelos, K., ... & Stefanis, C. (2016). Enduring financial crisis in Greece: prevalence and correlates of major depression and suicidality. Social psychiatry and psychiatric epidemiology, 51(7), 1015-1024.

Forbes. (2017). Forbes.com. Retrieved 7 July 2017, from https://www.forbes.com/places/greece/

Greece - OECD Data. (2017). theOECD. Retrieved 7 July 2017, from https://data.oecd.org/greece.htm#profile-jobs

Heath, A. (2017). Britain could so nearly have suffered the same fate as Greece. Telegraph.co.uk. Retrieved 8 July 2017, from

https://www.telegraph.co.uk/finance/comment/11682361/Britain-could-so-nearly-have-suffered-the-same-fate-as-Greece.html

Katsios, S. (2017). The shadow economy and corruption in Greece. South-Eastern Europe Journal Of Economics, 61-80.

Litigation, A., Fortsakis, T., Firm, I., Office, S., Office, S., & Firm, C. et al. (2017). Anticorruption Laws - Greek Law Digest The Ultimate guide to Investing in Greece. Greeklawdigest.gr. Retrieved 7 July 2017, from

https://www.greeklawdigest.gr/topics/tax/item/124-anti-corruption-laws

Madianos, M., Alexiou, T., Patelakis, A., & Economou, M. (2017). Suicide, unemployment and other socioeconomic factors: evidence from the economic crisis in Greece. Retrieved 7 July 2017, from

McCarthy, N. (2017). The Countries With The Largest Shadow Economies. Forbes.com. Retrieved 7 July 2017, from https://www.forbes.com/sites/niallmccarthy/2017/02/09/where-the-worlds-shadow-economies-are-firmly-established-infographic/#577f2088742c

People at risk of poverty or social exclusion - Statistics Explained. (2017). Ec.europa.eu. Retrieved 7 July 2017, from https://ec.europa.eu/eurostat/statistics-explained/index.php/People_at_risk_of_poverty_or_social_exclusion

Smith, H. (2017). A year after the crisis was declared over, Greece is still spiralling down. the Guardian. Retrieved 7 July 2017, from https://www.theguardian.com/business/2016/aug/13/greek-economy-still-spiralling-down-year-after-crisis-declared-over

Smith, H. (2017). Corruption still alive and well in post-bailout Greece. the Guardian. Retrieved 8 July 2017, from https://www.theguardian.com/world/2014/dec/03/greece-corruption-alive-and-well

Statbureau.org. (2017). Inflation Rate in Greece, 2017. Statbureau.org. Retrieved 7 July 2017, from

https://www.statbureau.org/en/greece/inflation

The Impact of Greece’s Economic Crisis on Education is Real | PSI CAN Greece. (2017). Psi-can-greece.org. Retrieved 7 July 2017, from https://www.psi-can-greece.org/news/impact-greece%E2%80%99s-economic-crisis-education-real

Worstall, T. (2017). Greek Debt Crisis still not solved. Forbes.com. Retrieved 7 July 2017, from

https://www.forbes.com/sites/timworstall/2017/05/23/greek-debt-crisis-still-not-solved-same-old-same-old-problem/2/#63385669640d

Worstall, T. (2017). Congratulations To Greece - Venezuela Is Now Reporting On Greek Poverty And Economic Depression. Forbes.com. Retrieved 7 July 2017, from

https://www.forbes.com/sites/timworstall/2017/02/21/congratulations-to-greece-venezuela-is-now-reporting-on-greek-poverty-and-economic-depression/#606c8b3d51dd

Κ?τσιος, Σ. (2015). The shadow economy and corruption in Greece. South-Eastern Europe Journal of Economics, 4(1).

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