Greek economy close to collapse

The economic proposals of the International Monetary Fund (IMF) and European Central Bank (ECB) are “absurd”, according to Greek Prime Minister Alexis Tsipras.

After five months of negotiations, Tsipras has slammed the EU, ECB and IMF for being uncompromising with their demands.

In an article for Le Monde, the Greek Prime Minister said that the stalemate in negotiations “is due to the insistence of certain institutional actors on submitting absurd proposals and displaying a total indifference to the recent democratic choice of the Greek people.”

The news comes as the Greek economy continues to near collapse, with officials in both Brussels and Athens conceding that, without their help, Greece can only support itself for another couple of weeks.

Alexis Tspiras has been in power for three months now, and the situation looks just as bleak as it did before the election; Greece is €320bn in debt, with the European bailout of €240bn, they still owe €80bn. In light of this, they have attempted to renegotiate the terms of their repayments.

However, the IMF has stood firm, saying that the Greek governments bailout programme is too vague, and thus, the repayments cannot be scheduled.

Alexis Tsipras had promised to renegotiate the austerity measures put into place by Europe.

Speaking on Greek TV, Finance Minister Nikos Voutsis said that “The four instalments for the IMF in June are €1.6bn, this money will not be given and is not there to be given… some parts of out program could be pushed back by six months or maybe by a year, so that there is some balance.”

In order to keep Greece within the Eurozone, the IMF and the ECB negotiated with Prime Minister Alexis Tsipras, leader of the Syriza Party. Advocating anti-austerity measures that would kick-start the Greek economy, Mr Tsipras arranged to pay the IMF in instalments, so that they could pay off their national debt.

However, this revelation that they do not have the financial capacity to pay the next instalment shows that they are struggling more than they may like to admit.

Unemployment in Greece is over 30%, with youth unemployment being twice as high (Eurostat)

On 5th June, the Greek government will pay €304m to the IMF; but many experts are wondering whether Greece will completely default on it’s debt.

There is still talk of Greece switching over to its own autonomous currency, in a move known as a ‘Grexit. Whilst this is still considered to be an unlikely outcome, something needs to change. Officials in both Brussels and Athens have conceded that, without their help, Greece can only support itself until the middle of June.

But how has this economic collapse come about?

The snowball began to roll when Greek inflation rates rose to 4% in 2000, and national debt started to spiral out of control. By joining the EU (and thus entering the Eurozone) Greece was able to stabilise it’s economy, by borrowing money at an easier rate.

However, this money was spent on increasing public sector wages and sustaining the Greek pension scheme (one of the most lavish in the world). This, in combination with an ageing population, tax evasion and hosting a €5.4bn Olympic Games in 2004, left Greece with a national debt which was higher than their GDP.

Alexis Tsipras promised much when he brought the Syriza Party into government; an end to austerity measures, a transition to an independent currency, and tougher attitudes towards Europe.

However, it would seem that his radical ideas need to be taken back to the drawing board, with Greece’s economic fate currently hanging on a knife edge.

What’s going on in Greece?

With the election of Alexis Tsipras on 25th January, the economic situation in Greece became a matter of international importance, particularly within the European Union.

Prime Minister Tsipras is the leader of the left-wing Syriza Party, who are aiming to remove the austerity measures put into place on the Greek economy by the EU.

Alexis Tsipras, leader of the Syriza Party

History

The ‘Greek Depression’ which is actually still ongoing, came about after their economy collapsed in 2009. This happened because the country was in a level of debt 200% greater than the rest of the EU.

Consequently, the state folded, and European Union member states were forced to bail them out in May 2010, with the help of the European Central Bank (ECB) and the International Monetary Fund (IMF). This came in the form of a €110 billion loan.

The result of this was that austerity measures and structural adjustment policies (SAPs) were enforced, and government assets were privatised – all in the hope that the economy would recover.

What does this all mean?

Austerity measures are the same policies which have been put into place in the United Kingdom under the Conservative-Lib Dem coalition; they largely involve cuts to various public services (education, defence etc), in a bid to lower public spending and therefore pay off the debt.

Structural Adjustment Policies (SAPs) are used by the IMF to overcome deficiencies that are counter-productive to economic growth. These are long-term guidelines which aim to firmly re-establish a struggling state, however tend to ignore the imminent needs of local people.

The privatisation of government assets means that nationalised services (banks, health service and the like) are sold off on the stock market. This is designed to create market competition within these sectors, as well as create new jobs. Unfortunately, it doesn’t necessarily lead to economic growth.

Could Tsipras become a problem?

The election of Alexis Tsipras came about under rather strange circumstances. In Greece, Parliament has to elect a ‘President of State’. The deadline for this election was 29th December 2014; however, since nobody was elected, Parliament had no option but to dissolve, leading to a Snap Election.

The Syriza Party won a minority vote with 26.6%, and formed a coalition with the right-wing Independent Greeks Party.

The new government’s anti-austerity policy makes many investors uneasy; the reason for this is that, by going against the measures placed upon them, they threaten the long-term plan for economic recovery.

Alexis Tsipras has vowed to bring about change within what is now known as ‘Troika’ (ECB, IMF & EU). He believes that, due an improved outlook on economic growth, the measures are now inadequate.

Negotiations are ongoing between Tsipras, the ECB, IMF and EU states. Germany is the country most involved here, with Chancellor Angela Merkel leading the debate.

This cartoon accurately describes what the Greek economy could do to the rest of the world

The main issue is clear; if these austerity measures are lifted, it is possible that Greece will fall back into an economic recession. This is largely due to the fact that, without the SAPs, government spending would increase in an attempt to grow the economy more quickly.

However, the danger is that the state fall into debt yet again, which would have ramifications across the European Union (as they would have to be bailed out again).

In addition, the formation of a coalition with Greece’s most right-wing party means that all governmental decisions have to be passed by both parties; not only does this mean that they lack legitimacy in power, but we’ve seen with the UK coalition government that this is far from an effective solution. Imagine the difficulty when the two parties have utterly contrasting ideologies!

Conclusion

With the Greek economy starting to recover, it is clear that the measures currently in place are inadequate. That being said, it would be foolish to remove them altogether, purely because Greece is still a highly fragile economy.

The ideal solution here is to reform the Structural Adjustment Policies, so that the Greek economy continues to be protected, but can grow at a sustainable rate. It is hoped that the talked between Syriza and Troika reach a similar conclusion.