Germany Warns Greece on Economic Reforms

31st wealthiest state in the world (in terms of GDP), one of the highest in Human Development Index, per capita income of Euro 23,000 per annum, yet Greece is almost bankrupt. At stake is Euro 130Bn (additional Euro 10Bn may be necessary) to pay for bonds maturing in March 2012.Currently, Greek Premier Papademos is leading a team of negotiators to obtain concessions from international lenders (also known as the “troika”). Lenders have threatened to cut off funding should Greece fail to agree on harsh conditions and fiscal reforms.

 

Greek officials have emerged increasingly worried complaining that the European Central Bank (ECB), European Union (EU) and International Monetary Fund (IMF), jointly referred to as the troika, were refusing to cut the minimum wage level, terminate holiday bonuses and dismiss public sector workers. Extensive negotiations have earned strict comments from French President and German Chancellor.
The terms and conditions of a bailout package to rescue sovereign debt default include measures to cut wages and non-labour costs to make the Greek economy more competitive. Spending cuts worth 1.5 per cent of gross domestic product this year aim at reducing the public sector work force by nearly 200,000. Currently there are 750,000 public employees. As of writing, Greek negotiators agreed to a plan to initially axe about 15,000 jobs, more will follow.

 

Things are not getting any better either. Greece needs money before Bonds mature in March. In April, there will also be general elections. Agreeing to harsh conditions to get the bailout package will also lead to massive unpopularity for political leadership which will get reflected in the elections. On a no choice basis bailout is the only way to avoid national default, at the risk of rising communist political threat to power.

 

Greece is a welfare state. Around Euro 23Bn, 24% of all state expenses (excluding Education) are given to Pension and Universal Health Care services. Germany and France provide 27% and 28% of their respective GDP to welfare sector (excluding Education). Greece’s GDP per capita is however lower than Germany and France. Many argue that social welfare spending was not the problem, therefore, it should not get penalized either.

 

Shipping has traditionally been the key economic sector. Greece has the world’s largest merchant navy, with 186million dwt. Japan comes close 183million dwt, while China is in third position with 104 million dwt. The downside to this is that the economy is heavily concentrated with a high risk factor during recessions. Tourism, which is second to shipping in importance, was also badly hit due to global economic downturn.

 

Additionally, Greece built up a high Debt to GDP ratio, which went up from 94% in 1999 to 143% in 2010. The EU average for Debt to GDP ranged from 72% to 85% in that corresponding period. Media also reported that Greece may have hidden its actual debt situation from international creditors in the past to get more loans, which would be a serious violation of integrity at the state level.

 

Defaulting on Sovereign Bond will have ramifications for both Greece and the EU. Troika (ECB, EU and IMF) wants spending cuts from social welfare projects, which will further deteriorate national unemployment. Decreased government spending will reduce new job creation as well as slow down demand for services from the public sector, further dampening economic activity. Curtailing government projects that touch retired, disabled and poor people will be perceived in the most negative way. However, these are the options for Greece for the moment from its international creditors. Either they agree to harsh reforms or risk becoming the first defaulter state in the Eurozone.

 

Germany has a most influential role as Europe’s main paymaster.”We want Greece to stay in the euro,” says Angela Merkel. “But I want to make clear once again that there can be no deal if the troika proposals are not implemented. They are on the table, time is of the essence. Something needs to happen quickly.” Angela Merkel warned her Greek friends. They will have to listen to her every word, very carefully, if they want to remain in the single currency euro zone.

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One thought on “Germany Warns Greece on Economic Reforms

  1. Pingback: Germany Warns Greece on Economic Reforms « The Revivers | What is High Debt Ratio ?

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