France and Germany have assured to support continued membership of Greece in the eurozone with the Greek Prime Minister vowing to persist with austere cuts in the struggling country's budget. In spite of this assurance, it remains to be seen whether it is the right decision to keep Greece within the eurozone.
French President Nicolas Sarkozy and German Chancellor Angela Merkel issued a statement following a telephone conversation with Greek Prime Minister George Papandreou. Sarkozy and Merkel are convinced that the future of Greece is in the eurozone, a statement from the French government said. At the same time, it will have to be keenly watched if this will turn out to be a decision which they will regret to have taken.
Earlier this week, a new set of severe measures were announced by Greece for meeting deficit reduction targets and stamping out any speculations that it will be expelled from the European single-currency zone. A two-year property tax was included in the measures which are targeted for making up the revenue shortfalls that has touched level of $3 billion this year alone. However, it is unclear whether the new measures will ease creditors' concerns further, raising doubts about Greece's continuing inclusion in the eurozone.
Prime Minister George Papandreou vowed last Saturday the country would meet its budget targets. In a nationally televised address, Papandreou also said the government's first priority was to save the country from default. Despite of this, it will be natural for anyone to question the decision to keep Greece in eurozone.
The problem that has affected the economy of Greece has to a large extent observed as being created within the home. Fiscal extravagance and the diminishing ratio of the private savings are considered to be critical reasons. These two aspects reflect the fact that for Greece the rate of consumption has been much higher than the rate of earning.
As a result, from the time it entered into the eurozone the fiscal deficit can be found to be continuously increasing. As of now, Greece is in a position in which it will have to find means of deflating so that it can come out of the debts. The present facts show that the debts are crossing limits of 300 billion Euros. Along with that there is severe unemployment problem which is touching 16 percent.
The important political parties of Greece have stressed the problems faced by the country. They have noted that the foundation of the problems lies in the manner in which the state is functioning. It is ridden with corruption, favors for special interest groups, robust presence of trade unions in public sector and, above all, lack of transparency in the financial processes. All these aspects have resulted in creating a huge imbalance in the fiscal domain. In addition, these practices have strongly weakened the private sector as well. These have caused major problems for Greece to keep up with the existing business demands.
Many of the actions of the government with respect to the country's economy have backfired. Some of them are as below:
- The debt of many private sectors companies was socialized.
- The military expenses were increased manifold.
- The management of Olympic Games was conducted in an extravagant manner.
•The private sector banks were given huge supports after the economic crisis.
These are only a fraction of the procedures which have resulted in the deepening of the economic problem of Greece. The problems started right from 2001 with the liberal economy of the country not able to provide the expected results. The concerns of corruption as well as clientelism have to a large extent become necessary aspects of the economy. As far as Greece is concerned, it is the decrease in the revenues of the country which has caused the present situation. The relaxed manner in which taxes where collected, in the recent years, is evident of the reason for such decrease in revenues.
For a country which is facing similar problems, one immediate step possible could have been to devalue the currency. This could have resulted in an increase of export rates and growth of industries such as tourism. But this is not possible in the case of Greece since its currency is Euro.
Thus, as of now, Greece is facing great dilemma. On one side, there are positives on staying within Euro and, on the other hand, it is facing many negatives as well. On one side, it needs to increase revenue by raising taxes but on the other side, it needs to encourage the private sector which will be difficult to attain with increased taxation.
Pulling out of the Euro currency can be extremely tough for Greece. There will be many practical issues to be handled as well. The banks as well as the ATMS have to be closed down for a few days. The economy will be literally shut down for days. It has to be seen whether Greece can withstand such a drastic measure.
Another approach will be to nationalize the banks. But for this to be made possible, Greece needs the support of the EU. As of now, the government of the country is not seeing this as an option since the banks are already ridden with debts. In addition, if there is a new currency, there can be problems in trade as well. The expected outcome of such an approach will be the devaluation of the new currency to strengthen the trading activities. But special measures are required for a country with no reserve of its own currency to sustain trade.
All these point to the complexities of the problem faced by Greece. Naturally, nobody is able to give a clear-cut path to bring Greece out of the crisis. So the question of whether there is any way out for Greece or whether it is going to face bankruptcy is certainly a pertinent aspect to be understood in depth.