Greece and the International Financial Crisis: Past, Present and Future

1. Greece and the International Financial Crisis:Past, Present and Future How did Greece get in this mess? What were the forces bringing the big bang of October-December 2009? • Greece is a very old country. Elements such as the language have been continuously present for thousands of years. • The Hellenic world Roman Empire Byzantine Empire and Christianity. • The end of the Byzantine Empire came with Greece’s occupation by the Ottoman Empire in 1453 and for more than 400 years. • 1821: Greece stood up to the Turks and by the 1830s became a modern state.

2. Greece and the International Financial Crisis:Past, Present and Future Greece in the 20th century: a period of poor evolution of the state • 1912-13: Balkan Wars • 1914-1918: World War I • 1921: A Greek expedition to Asia Minor, • 1940-1945: World War II and German occupation of Greece • 1944-1950: a civil war with devastating human loss • 1967-1974: a dictatorship followed by a war in Cyprus • 1974 to present: restoration of democracy • 1981: Greece becomes a full member of the E.U.

3. Greece and the International Financial Crisis:Past, Present and Future As a result… • a German civil code, a French commercial code and a French land code. • Every time a problem was dealt, a parallel system was created resulting in numerous overlapping laws. • For many years Greece had one of the highest emigration rates to the U.S. and Australia. The largest part of GDP was remittances from abroad. • Provision of promotions and salaries to stop increases in inflation. The thirteenth and fourteenth salaries were created because of war-stricken generations.

4. Greece and the International Financial Crisis:Past, Present and Future And then came the E.U…. • The E.U. is the first-ever exercise of non-homogeneous entities getting together on a vision that was unclear. Politics / peace / economics / fiscal policy / crisis management • Dutch disease: With European transfers we stopped producing: no agriculture, textiles, fish or shipping • The economic crisis made us realize that we need a common fiscal policy The underlining principle should be predictable processes.

5. Greece and the International Financial Crisis:Past, Present and Future History of the Crisis 2006 in the US: • a downward adjustment of the overheated new-economy (internet) stock market • The FED keeps interest rates low as they follow traditional economic thinking (low r – higher I), creating a disincentive in investing in Stock Market products • Investment in Up and Coming neighborhoods housing was the next Market Hit. This leads to more housing construction in the US and a follow-up internationally

6. Greece and the International Financial Crisis:Past, Present and Future 2008 in the US and abroad • Broken property rights system in the US does not guarantee the quality of the asset (mortgage); coupled with super badly regulated financial markets lead to the BUST • Those who invested to what used to be solid low risk assets based derivatives now suffered and continue to suffer • A continuation of the Traditional Thinking in Finance and Economics is not allowing the correct regulatory reform • Super sensitive Financial Markets especially rating agencies • A panic attack on the side of the Banks in EU that Lehmann Brothers scenario may be repeated led to Hungary’s downfall • EU followed a FISCAL EXPANSION reducing the ECB rates of borrowing to the private banks. This increased Fiscal Deficits further among all EU members and held back any pressures for real reforms in the Member countries regarding their sustainable economic growth and development models

7. Greece and the International Financial Crisis:Past, Present and Future EU in 2009 • High Fiscal Deficits (2020 projections for EU area debt = 120%) • High Aging population • GDP projections (2008: 0.7, 2009: -4.2, 2010: 1.0, 2011: 1.7) • Informality is rather large • No Fiscal Consolidation • The EU followed a Short Term Expansionary CREATING A HUGE OUTPUT GAP • The EU has been basing its economic model of growth and development in a rather outgrown post WWII model – one full of INPUT rigidities and High Transactions Costs – in addition the EU has not yet managed to have a Fiscal Consolidation

8. EZ: “Till debt do us part?” Source: New York Times Europe’s Web of Debt

9. European Union: Shares of 2009 EU GDP (%)Big & Small

10. Greece and the International Financial Crisis:Past, Present and Future 2009 Greece • A crisis is mounting in Greece about its ability to service its sovereign debt. • High Fiscal Deficits (2008: -7.7, 2009:-13.6) • High Debt/GDP over 100% (2009: 115,1%, 2010: 122,9%) • Weak growth Nominal GDP growth (2009: -0.7; 2010: -2.8) • Real GDP growth (2009: -2.0; 2010:-2.6) latest data 2010 2nd Q -3.7 • Unemployment (2009: 9.4; 2010: 11.8) latest data June 2010 11.6 • Weak competitiveness Current Account BLC is in deficit (2009: -11.2; 2010: -8.4) (primary 2009: -5.4; 2010: -1.1) • High level of informality (now in process of mapping and measuring considered close to 50%) • High level of aging population

11. Unsustainable Debt

12. Greece and the International Financial Crisis:Past, Present and Future Therefore, how has the Financial Crisis affected Greece? Greece was caught with deep routed vulnerabilities: • Rigidities in Entry and Exit of Entrepreneurial Activities; Employment; Labor Market; Sticky Wages and a less functional Public Sector that kept growing and creating a larger and larger DEAD WEIGHT LOSS • The 2008 fiscal expansion followed by the EU easing lending with lower ECB interest rates • A fiscal policy and Foreign Debt financing keeping all vulnerabilities under the carpet before 2010 • An over-sensitive International Market

13. Greece and the International Financial Crisis:Past, Present and Future The key challenge has been to fight with its original sin to convince the markets and its counterparts that it can seriously and sustainably restore: • Confidence • Fiscal sustainability • Competitiveness • Safeguard financial sector stability • Create a functional Pubic Sector • Create a Friendly and Attractive Investment Environment • Formalize the informal sector (reducing transactions costs – secure property rights) The Transfers of EU created the common problems of Dutch Disease • THUS WE MUST BUILD AN ECONOMIC MODEL FOR A LARGER ECONOMY – larger number of transactions and volume of transactions • Strengthening of data reporting – reorganization of National Statistical Office • Improvement of tax administration – progress in revenue collections • Pension reform

14. Greece and the International Financial Crisis:Past, Present and Future The reform package and the growing pains of the EU- Have they lead to a safe “Program for Greece and the EURO?” • The program is front-loaded with Fiscal Measures that are SUPER heavy and recessionary • The structural reforms are outlined in the program but their implementation is very much based on the country • Institutional reforms fall under the same treatment THIS IS OUR OPPORTUNITY!!! This is Europe’s Opportunity! Let us not miss the Opportunity to miss the Opportunity

15. Greece and the International Financial Crisis:Past, Present and Future Already implemented structural reforms to restore competitiveness and growth: • “Kallikratis program” = reorganization of public sector • Income policy (minimum wage, retirement age, ease of entry & exit in the job market) • Business environment and competition (one-stop shops for start-ups, open closed professions, better absorption of EU funds) • Pensions system reform: New system consists of a contributory pension to top-up a non-contributory means tested pension limiting early retirement, increase normal retirement age to reduce pension spending. • Greek banks : Crucial to manage carefully the current tight liquidity conditions • Additional safety net by the creation of the Financial Stability Fund

16. Greece and the International Financial Crisis:Past, Present and Future Greece needs to be given the time to implement the program, the time to try to reverse the trend Wake-up call for the EU and the world • The sovereign dept crisis of Greece may be looked at as a “blessing in disguise”: to warn countries about the need to keep the fiscal house in order. This gives the rest of the world ample warning to make the necessary adjustments and policies to prevent similar crises from occurring.