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Impact Of The Financial Crisis On Greece Economics Essay

The report outlines the impact of the financial crisis on Greece which is the current issue in the world economy facing financial crisis and economic downfall. Hence the impact of the crisis on the following topics is outlined.
GDP growth
Inflation
Unemployment
International trade
Currency
Monetary Policy
Fiscal Policy
The period of information from year 2008 – 2010 and the impact on the years is explained. And through the deep knowledge and understanding of economics we have been successful in completion of the report.
Greece is the current interesting issue in the world and the downfall of its economy has been discussed. The financial crisis affected the entire economy, thus the topics are interrelated to each other. Hence the crisis affects all the sectors in the country. Thus the reasons for the crisis and its impact have been outlined in the report.
INTRODUCTION Greece is a developed country with a high human development index situated in southern Europe. Athens is the capital of Greece. The current President of Greece is Karolos Papoulias and the Prime Minister is George Papandreou.
Greece became the tenth member of the European Union in 1981 which ushered the period of remarkable sustainable growth in the country.
The country aimed to raise their standard of living to unprecedented levels which would be achieved by widespread investments in industries, growing revenues from tourism and shipping.
The country then adopted the Euro in 2001. In 2004 Greece hosted the Olympics games.
The country is one of the most mountainous regions in Europe attracting many tourists which is their effective source of income adding to 73% of the total GDP.
In 2001 the government fully encouraged foreign investment which was particularly in its infrastructure projects of highways and Athens Metro subway system. Greece receives help from European Unions financial assistance for agricultural and industrial sectors.
In the late 19th century the Greek economy began with the adoption of social and industrial legislation in order to protect the tariffs, and the creation of industrial enterprises.
At the turn of the 20th century, industry was mainly concentrated on food processing, shipbuilding, and the manufacturing of textile and simple consumer products.
During the period of 1960s, Greece achieved its high rates of economic growth due to large foreign investments. However by 1970s, its GDP growth rate and the ratio of investment to GDP declined, which caused labor costs and oil prices to rise. The government pursued aggressive and strict economic policies which resulted in rise of inflation and heavy debt.
To stop the rising public sector deficits and heavy debt payments, the government had to borrow money heavily from external sources. Then In 1985, it was supported by a US$1.7 billion European Currency Unit (ECU) loan from the European Union.
The government began a 2-year stabilization program which was at moderate success. However Inefficiency and corruption in the public sector and excessive government spending caused the government to multiple borrowings.
By 1992 government debt exceeded to about 100 percent of Greece’s GDP which was unhealthy for the nation and hence caused the crisis. Greece became very much dependent on foreign borrowing to pay for its deficits. at 1998, public sector external debt was at US$32 billion, with overall government debt at US$119 billion (105.5 percent of its GDP) which was very high for the economy to be stable. High interest rates remain the misery despite fall in treasury bills and bank rates for savings and loans institutions.
However today the major problems faced by the Greek economy is rising unemployment levels, inefficient Government reforms and widespread corruption. Cause of which the country suffers from high levels of the political corruption and low global competitiveness related to the European Union countries.
GROSS DOMESTIC PRODUCT (GDP) Economic growth is measured by an increase in the size of a nation’s economy. GDP is the market value of the goods and services in the country.
Greece economy stands as the 27th largest economy in the world. According to the International Monetary Fund for the year 2008 it is 33rd largest by purchasing power parity.
Its GDP per capita is the 26th highest in the world. GDP PPP per capita is the 25th. Standard of living of Greece stands 22nd highest in the world. The public sector accounting is 40% of GDP. The service sector contributes 75.7% of the total GDP, industry 20.6% and agriculture 3.7%.
Greece is the twenty-fourth globalized country in the world and is classified as a high income economy. GDP per inhabitant in purchasing power standards (PPS) stood at 95% of the EU average in 2008.
The Gross Domestic Product (GDP) of Greece was contracted as an annual rate of 0.80 % in the last quarter. Gross Domestic Product of Greece is 357 billion dollars worth or 0.58% of the world economy. Prior to the global financial crisis of 2008-2009,
Greece had managed to achieve a fast-growing economy after the implementation of stabilization policies in recent years. Greece has a majority service economy, which (including tourism) accounts for over 73% of GDP.
Graph showing the GDP growth rate adjusted by Inflation Year Mar Jun Sep Dec Average 2009
-1.00
-1.90
-2.50
-2.50
-1.98
2008
2.70
2.70
1.90
0.70
2.00
According to the report on the Greek Stability and Growth Program, the GDP will drop by 0.3-0.8 % in 2010.
Greek economy contracted by 2% in the same period of 2008.An encouraging sign is that the public revenues in the first two months of 2010 increased by 13.1%, higher than the 10.8% target set for the year by the government. Public expenses in the same period dropped by 9.6%, far exceeding the 2.8 % target set in the government budget.
Unemployment reached 10.2 % last December, slightly down from 10.6% in November, but even the Greek Labour Minister Andreas Loverdos has expressed fears that it could climb higher during 2010.
Graph showing the GDP annual growth rate Year Mar Jun Sep Dec Average 2009
-1.00
-1.90
-2.50
-2.50
-1.98
2008
2.70
2.70
1.90
0.70
2.00
Greek GDP declines 2.5 percent in 4th quarter of 2009. As shown in the graph the Greek gross domestic product (GDP) declined by 2.5 percent during the forth quarter of 2009.
The budget shortage in the first two months of 2010 declined by 77.4%, while the target was set at 27%.
Goods and services which were imported was declined by 18 % in the last quarter of 2009 year-on-year and the trend continues this year.
It expected the Greek economy to shrink by at least 2.25% in 2010. However, the country’s sternness measures are sufficient to safeguard its budget targets. It added that the country has done enough to meet its promise of cutting budget deficit to 8.7% of GDP this year from 12.7% of GDP in 2009.
INFLATION Greece adopted the euro as its new common currency in 2002. The adoption of the euro provided Greece which was formerly a high inflation risk country under the drachma with access to competitive loan rates and also to low rates of the Eurobond market.
This led to a dramatic increase in consumer spending and has given a significant boost to economic growth of the country.
Key economic problems with which the government is currently dealing with include a burdening government deficit and increasing public debt.
The most important sector is tourism which indicates 73% of the total GDP and is a major source of foreign exchange earnings.
Greece current currency is Euro. Greece went through its worst inflation in they year 1944, the overall impact caused hyperinflation which means inflation which is out of control and very high.
Greece has a mixed capitalist economy with a large public sector accounting for the GDP. Greece is an agricultural country having 20% employed in it and 60% employed in service sector and 20% in the industry.
The economy of Greece went into recession in 2009, and the growth in the economy contracted to 2.5 % as a result of the financial crisis, the tightening government policies and increased Government expenditure.
Graph showing Annual change in consumer price index Year Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 2010
2.40
2.80
3.90
2009
1.80
1.60
1.30
1.00
0.50
0.50
0.60
0.80
0.70
1.20
2.00
2.60
2008
3.90
4.40
4.40
4.40
4.90
4.90
4.90
4.70
4.60
3.90
2.90
2.00
According to the above data the inflation rate in Greece is currently 3.90%. In greece the inflation rate was normal in the year 2008. However it has decreased by the year 2009 where the lowest rate was recorded being 0.50%. Greece is a developed country having high human development index and a high standard of living.
According to the Philips curve, when inflation rises the unemployment decreases and Vice versa. Thus falling unemployment causes higher inflation. However in Greece, the rate of unemployment has increases massively as the rate of inflation has decreased down to 2.80
Hence the graph shows the decrease in inflation rate at the start of the year 2010. However this causes the rate of unemployment to increase rapidly. In Greece the cost of production is high due to low productivity.
Unemployment As financial crisis around the world worsen, the situation is no better in the EU countries, especially Greece.
Unemployment rates have raised once again back from 9.3-10.6 which is believed to be the highest for Greece since March 2005, according to the National Statistics Service (NSS).
Most cases are of young people or fresh graduates looking for employment. Moreover a lot of them, as not many companies willing to employ them, are willing to choose to do something different which is incompatible with their studies and hence they are usually underpaid.
There is a 27.8 percent of 15-24 years old unemployed in the country.
Signs of an improvement in Greece’s economy are diminishing as strikes are being seen almost every week by angry protestors.
Greece’s runaway budget deficit is currently more than four times the European Union limit of 3%.
It currently has the highest debt of the 16-member bloc and its economy is considered to be the euro zone’s weakest. Here is a graph comparing the unemployment rates of different countries and EU.
Unemployment rates – September 2008-February2010 From the graph we can see that Greece is currently facing the highest unemployment rate after Ireland and Spain.
There is surely a high raise in cyclical unemployment as demand has fallen which has resulted in less work and therefore fewer workers.
Frictional and structural unemployment also exist as many are looking to work in jobs they are not qualified for but have experience in as it pays better.
Moreover, in these financial downturns, people are willing to work in any position for any amount of pay to survive or to remain employed.
Alpha Bank’s Maroulis said he expected unemployment to stabilize in 2010 and then start falling again when investments in the private and public sector pick up.
But Diego Iscaro of IHS Global Insight struck a grimmer tone. He says that the outlook for the labor market is extremely challenging and he believes that higher unemployment, combined with significantly tighter fiscal conditions, will hit private consumption, which represents around 70 percent of the GDP. “The outlook for the labor market is extremely challenging,” he said. “We believe that higher unemployment, combined with significantly tighter fiscal conditions, will hit private consumption, which represents around 70 percent of GDP.”
Graph showing percentage of the labor force unemployed Country Interest Rate Growth Rate Inflation Rate Jobless Rate Current Account Exchange Rate Greece
1.00%
-0.80%
3.90%
10.20%
-3701
1.3510
Year Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 2009
8.80
8.80
8.80
9.20
9.20
9.20
9.80
9.80
9.80
10.20
10.20
10.20
2008
7.80
7.80
7.80
7.50
7.50
7.50
7.50
7.50
7.50
7.90
7.90
7.90
2007
8.60
8.60
8.60
8.40
8.40
8.40
8.20
8.20
8.20
8.00
8.00
8.00
Having a look at another graph and a table showing the unemployment of Greece from the year January 2007 – January 2010, we can clearly see that unemployment was decreasing in 2007 and from 2008 it kept increasing until it reached 10.6 in 2010.
This is a relatively high increase and has created fears and worries in the Greek economy. It is believed by economists that unemployment will be on the rise throughout the year 2010 until its debt-crisis are solved.
With little hope of things getting better, people in Greece are still working harder every day to ensure they are employed and just pass through the current financial crisis.
International Trade Policy As we know Greece is part of European Union (EU) since 1981, this has helped Greece improve imports and exports. European Union helps trading between the members of EU, Greece eliminated tariffs and quotas on imports from EU countries, by 1986 and aligned its own tariffs on imports from other countries with other EU members.
Imports from non EU countries are charged and Quotas are set to protect local business also domestic products and setting of tariffs is a good source of revenue to the government.
Most of the raw materials enter to Greece for free, manufactured have rates set from 5% to 7% such as electronics, textiles etc.
Other goods like motor vehicles have special duties Greece impose value added tax 8% to 18%.Main export of Greece is Food and Beverages, Manufactured Goods Petroleum Products

Specialisation And Benefit Of Free Trade Economics Essay

Free trade is considered to be raising the global level of production as it allows specialization between nations, as claimed by the classical economic analysis. Specialization allows correct allocation of a country’s resources, focusing on the industry it has a comparative advantage in. The benefits of specialization in combination with economy of scales, increase global borders of the PPF. The absolute quantity of goods and services in the highest under the condition of free trade and is supported by the increase of the PPF.
Free trade is also having some side effects for countries, therefore the population as well as the government has to react. In some developing countries, if big multinational companies are allowed to enter the market, they may have too much influence, as they are rich and have a lot of disposable money. As there is an increase in free trade, the power balance changes in favour of companies with regard to the government. Due to this fact corruption may also arise. Governments usually have to ban the ability to trade on their market, because the population usually holds acts of protest against it.
Another reason for the existence of the protectionism is that as the companies are over-seas based, the country has an outflow of funds as profits are sent back to the company’s country of basement, instead of having money inflows. While creating protection for the local producers, favours the government, as companies have to pay an income tax as well, as a result, the country’s budged will increase. Big companies try to influence the local government in their own interest and exploit the labour force. Countries that are still growing and want to increase their power in a certain industry or sector will use protectionism, in order to allow the industry to grow at highest rates, therefore imposing taxes and quotes to protect the local manufacturer from foreign competitors. Protecting local industries will as well create new jobs for the local workers, and the other way round – free trade means that part of the working force will go to other countries in order to work there. Subsidising local industries and negating free trade, gives the subsidised companies international competiveness, as they can sell their goods at prices lower than the production costs, as they are paid by the government.
Free trade also causes environmental damage, with later reflects as economic. Allowing free trade between countries means that some laws can be evaded, by the company producing in other country, and therefore cause damage to their environment. As an example, 1st world EU based companies , cannot produce as profitably in their country, but can easily move to another third world EU country like the Baltic countries, Romania, Bulgaria, etc. And pollute their air and waters, and afterward money from the country’s budget will have to be spending in order to clean the environment.
Free trade allows companies the possibility of outsourcing the manufacture of the goods for sale in home market. The ecological and labour standards entered on these companies can be less in foreign production. A labour safety and surrounding lawyers assert that free trade in that creates conditions which allow the companies to bypass internal rules, making in other places. As free trade increases, balance of forces of shifts in favor of the companies and from the government. It is considered that it poses threat for democratic self-determination of antiglobalists and authoritative management the totalitarian states. He also asserted that free trade harms the developed countries, as it causes tasks from these countries to pass to other countries, and accelerates “races on a survival”. And also reduction of the rich countries of gross national product, loss of workplaces, strengthening of competitive pressure will be undermine democracy, creating pressure upon a salary, more low, and measures of protection, as ecological standards and safety standards. “Races on a survival” accuse of the international competition on attraction bargain-manufacture the goods which, with free trade, can be located anywhere
Delivering food produced on the other side of the world to a supermarket has an environmental impact because it requires the use of fossil fuel in delivery from overseas, as compared to local delivery. In a perfectly efficient market, the costs of the fossil fuel would include the externalities associated with their consumption. Thus the full impact of their transportation costs would be reflected in the market price of the good. In the real world, there are no perfectly efficient markets. Much of the true costs of transporting goods around the world and consuming fossil fuel must be paid in the future dealing with the health and environmental effects of pollution. It is also likely that economic disruptions will be caused by future shortages of fossil fuel energy and spikes in fuel prices since it is a finite resource that is being depleted.
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