The Greek Dimension

Are the problems of the Greek economy a sign of a deeper malaise in world economics and the lack of regulatory control that first appeared in the ‘credit crunch’?
John Birchall discusses...

For those students and possibly teachers not familiar with the Convergence Criteria of the European Monetary Union they might like to ponder on the following:

The amount of money owed by a government - known as the budget deficit, has to be below 3% of Gross Domestic Product (GDP) - the total output of the economy.
The total amount of money owed by a government, known as the public debt, has to be less than 60% of GDP. The public debt is the cumulative total of each year's budget deficit.
Countries should have an inflation rate within 1.5% of the three EU countries with the lowest rate. This was supposed to push down inflation rates and lead to more stable prices.
Long-term interest rates must be within 2% of the three lowest interest rates in EU.

Exchange rates must be kept within "normal" fluctuation margins of Europe's exchange-rate mechanism.

The Central Bank must be independent and outside any immediate control of politicians.

By adhering to these criteria it is believed that a country and therefore the entire Monetary Union will benefit from:

Price stability, measured according to the rate of inflation in the three best performing Member States;
Long-term interest rates close to the rates in the countries with the best inflation results;
An annual budget deficit which does not exceed 3% of gross domestic product (GDP) and total government debt which does not exceed 60% of GDP or which is falling steadily towards that figure;
Stability in the exchange rate of the national currency on exchange markets. The exchange-rate mechanism of the European Monetary System requires this stability to be demonstrated and sustained for two years.

So, the prophets of doom were out in force when the Greek government announced that its number were wrong. Well, not just wrong but out by a considerable amount!

The Euro as of 5th March 2010.

Yet, as the chart above clearly shows ‘the markets’ have warmed to the Athenian statements and the calm predicted by some has returned. The other members of ‘the zone’ will be relived and Chancellor Merkel will not have to visit the Bundestag and ask for Federal funds to bail out the Greeks.

It would appear that the crisis has passed. But should we still be concerned? Well, the Greek government have approved an austerity package of tax rises and spending cuts worth 4.8bn Euros and with this they hope to convince financial markets that they can pay off their debts and possibly the more important task of persuading European leaders that they have done enough to stabilise the Euro, which on Tuesday reached a 10 month low against the US dollar.

The package includes:
Greece has pledged to reduce its deficit from 12.7% to 8.7% during 2010.
Raising VAT to 21% from the current rate of 19%
Cutting civil servant bonus payments during holidays

These all seem to be a worth attempt to address their underlying structural problems.

But the problems may not be confined to Greece and by that I don’t mean the other Euro countries that are experiencing problems. No, might the dreaded ‘bankers’ have had a hand in this crisis too?

The European Commission has announced that it intends to question banks (including Goldman Sachs) and regulators over the role played by credit-default swaps in the Greek debt crisis, and how these financial instruments might be regulated in future.

Credit-default swaps are similar to insurance contracts, and allow banks and other institutions to buy financial protection against the risk that a borrower is unable to repay its debts.

The swaps have also been used by hedge funds to speculate against Greek debt, and make money if Greece's standing in the markets deteriorates.

If any evidence does exist to support this then is it not time to say ‘enough is enough’ and work towards an international agreement on how the bankers are to be regulated? Their first little ‘mistake’ cost the UK 6% of GDP and the Greek episode may have seriously reduce the credibility of the second most secure currency on the markets, namely the Euro.

Is it not time to think Tobin Tax and some form of Europe wide regulatory body with the power to ask really serious questions!