Once upon a time in Greece

Battered Greece witnessed  its budget deficit fall to 9.1% of GDP in 2011. When George Papandreou took charge of office in 2006, the budget deficit was around 13% of GDP, way higher than the falsified figure of 5% stated by Karamanlis's government. The country currently has a debt of around USD 485 bn. There is immense pressure on the government to raise finance to pay off the debt which seems never-lasting (looking at the figure! but hope lives).

To continue to remain a member of the Euro Zone, members are required to maintain a budget deficit of no more than 3% of GDP and the debt to GDP must not exceed 60%. The current budget deficit is more than 9% of GDP and the debt is more than 120% of GDP!!! Greece is an unusual member of the Euro Zone which in the past had a two digit budget deficit and continues to have a three digit debt to GDP%.

The new coalition government, under Lucas Papademos, like the previous government plans to cut deficits, but we need to analyze how realistic these plans are fiscally and politically. The government is bound to raise taxes and cut spending on pensions, healthcare and welfare of the public. This comes at the expense of the turmoils in the form of protests and strikes campaigned by the strong labor unions in Greece. Any government in Greece is closely linked to the trade unions for political reasons and hence these unions are in a strong position to force governments to satisfy their expectations and demands. Any changes in the austerity measures will have both economic and political repercussions.

So what is the way out ? What options do we have ? Will Greece be forced out of the Euro Zone or will Greece be bailed out by the fellow EU members (mainly Germany and France). Let's analyze both the scenarios.

In the first case, we need to understand that there was no exit clause at the time of setting/joining the Euro Zone. Greece might approach the IMF like Hungary, but additional austerity measures will be required. The costs involved in switching back to the drachma from the Euro will be excessively high. The drachma would depreciate and the debt would surge as it is denominated in Euros. Hence, this is not a feasible option. Now, we are left with the second option, i.e. Plan: Bailout Greece!. It can be depicted from the chart above that France and Germany (the two leading Euro Zone countries) are most exposed to the Greek debt, hence if Greece falls, it will definitely have a knock-on effect and these countries will use all their muscles to save it. We have observed the significance of the Greek debt issue in the politics of France and Germany. The French and German banks have held significant amounts of the Greek debt and hence are a big support to its survival. 

Conclusively, I believe that the Greeks will be bailed out by their fellow EU members. We have to wait for the elections to get over in France and see the approach of the newly elected government towards this highly critical issue.

An Insight: The UK recession in historical perspective

UK gross domestic product is predicted to grow 1.1% in 2011, down from the 1.5% forecast in the IMF's previous World Economic Outlook report in June.

The growth forecast for 2012 has been slashed from 2.3% to 1.6%.

In order to interpret the current recession we need to analyse the earlier recessionary periods.

Interwar period (1918-1939)

UK was a dominant player in the international gold-standard system during the 1870-1914 period. The end of the first world war was followed by an international restocking boom which went into reverse swiftly. This impacted the UK exports and hence the GDP, leading to high levels of unemployment.

The recession was short lived and the recovery was weaker than that experienced by USA and Germany. 

Great Depression - 1929

During the Great Depression, the UK exports declined by 32%, but the GDP fell only by 4.8% which was less severe than the contractions faced by USA and Germany. The decline in world demand resulted in lower prices of primary products and this boosted the consumerism in the UK which was a major support to the GDP, however UK exports lost their competitiveness in the international markets resulting in high levels of unemployment

Recovery Again!

Sterling was departed from the gold standard and was depreciated to competitive levels. The BoE adopted a more lenient monetary policy which resulted in increase public spending and investments in house building. The exports, however remained less in demand due to recession in the US.  

Post-war recessions

After the second world war, consumerism played a greater role than investments and exports in running the business cycle.

1970s

This was a completely new era. The fiscal and monetary policies adopted were expansionary in nature and the banking system was deregulated. However, the oil crisis in 1973 resulted in cost-push inflation which pushed the economy into recession.

1980s

The 1979 or second oil crisis caused due to the Iranian revolution. UK experienced an appreciation in the sterling due to it becoming an oil producer. This again made UK less competitive in international markets resulting in high levels of unemployment (due to decline in productivity) and inflation caused by high oil prices. On top of all this, the fiscal policy was tightened by the Thatcher government.

1990s

Deregulation of financial institutions and consumer optimism led to growth. The consumer optimism was depleted due to the tightening of the monetary policy to support the sterling to remain in the European ERM (Exchange Rate Mechanism). 

Recovery was possible again when the sterling was withdrawn from the ERM. This resulted in the fall of interest rates which again led to consumer and business optimism. 

Current Recession

The economic growth achieved prior to 2007/2008 was mainly due to favorable demand side policies. This resulted in over-heating of the economy. The debt to GDP ratio increased rapidly, amid consistent balance of payments deficit. Credit was being easily provided and the financial institutions were not exercising self-regulation. Savings were diminishing underpinning the consumption and investment. Huge budgets were being allocated to non-productive segments, such as defense. It has to be noted, the monetary policies yet remain expansionary in nature.


Conclusion
-Depreciate of sterling to achieve competitiveness and export led growth
-Cut public debt and set priorities in budget and its allocation
-UK has good spending in Education and Health care as a percentage of GDP. It can be anticipated that the productive capacity of the UK will grow in the long run.
-Switch focus from demand management to supply-side policies, or rather both (hand in hand).


Note: The above views are personal and can be debated upon due to them being subjective and judgmental.