Contemporary Debates in Macroeconomics (6ECON002W)
Assessed Coursework: 50% of the overall module mark
Due date: Thursday 7th December 2017, 13.00
Topic: Fiscal Aggregates and Fiscal Policy
For a country of your
with the effects of an event/crisis and critically assess their effectiveness on the overall
1. Present the main fiscal aggregates of your selected country and discuss the main
sources of spending and revenues.
2. Chose a major event/crisis (e.g. global financial crisis, sovereign debt crisis, sovereign
default etc.) which strongly affected the country of your choice and demonstrate
how the fiscal and main macroeconomic variables were affected during and after
effectiveness on macroeconomic performance and on consumption and investment
4. Make policy recommendations.
Your analysis should reflect your understanding of relevant topics covered by the module
via lectures, seminars, directed and self-managed reading and research activities.
Inclusion of graphs and/or tables is strongly recommended.
Graphs concerning data or model illustration should be included in the main text.
Presentation: The CW must be written in the form of an essay. It must contain
introduction, main body
Academic references should be included in the bibliography.
Full name and student ID must be included on the first page of the assignment.
Word limit is 2000, excluding appendices and tables. The assignment should be produced
in Word format (font size: 12, line spacing: 1.5 or double) and it can be submitted in the BB
as a pdf file.
Below is a Sample Paper. You Can Order a Custom Essay Written From Scratch From Our Website. CLICK HERE TO ORDER.
This paper aims to explore on contemporary international economic debates, with a focus on Greece sovereign crisis. The nation had experienced a steady economic growth, especially after its entry in Eurozone because it had access to massive loans. However, government financial misappropriation and lack of accountability, and with the 2008b global financial crisis, the country entered into economic struggles. This paper explores the sovereign debt crisis of Greece, policies adopted to solve the crises and the policy recommendations to the Greece government.
Although the country had experienced a constant economic growth for several decades, Greece has been facing grievous debt crises; and it has been off-hand because the nation has already surrendered its monetary sovereignty to the European Union. The country has been operating under high-level public borrowing to sustain its dropping GDP, and in 2010, the state had to sign for a bailout from other eurozone nations and the International Monetary Fund. This paper describes the contemporary international economic debates, with a primary focus on Greece current financial condition which is characterized by sovereign debt crises. Further, it represents the policies that the country has adapted to handle the debt crises, with a focus on the austerity policies to bring the state of deficit to manageable levels. Finally, the typology gives the policy recommendations for Greece to put the financial struggles under control.
Fiscal Aggregate and Economy of Greece
With the implementation of the European Monetary Union, individual Eurozone member states have been denied crucial elements of macroeconomic control (Scharpf, 2011, p. 1). This hit several nations, denying them a chance to enact on policies to control its debt levels. In Greece, the EMU has been a systemic cause of the current macroeconomic imbalances which it has found difficult to counteract. The fiscal condition of the nation has been vulnerable, and the citizens have been significantly hit by the policies the country had to enact to meet the terms of the lender nations. The overall description of the Greece fiscal aggregate is the one which is characterized by widespread unemployment, poverty, and high tax rates to recover the debts.
The entry of Greece to Eurozone in 2002 saw it change its currency from drachma to euro. The economy of Greece had for some time in the past characterized by growth and development, and it was the 15th largest economy of all twenty-seven European member states (Greeca.com, 2017, n.p). Greece is also taken as a developed nation, whose revenue depends on service sector (85%) and industry (12%), but agriculture takes up the remaining three percent of the national economic input. Tourism and merchant shipping are the most critical commercial industries in Greece, and it attracts over ten million tourists annually, making it the seventh most toured nation in the European Union and 16th globally. The country also has the most extensive merchant shipping in the world, which makes up to 16% of the global average capacity (Greeca.com, 2017, n.p).
From the 1970s, Greece economy experienced break-down because of inappropriate economic policies enacted by the government (Dell’Anno, et al., 2007, p. 52). As a result, in the latter part of 20th century and early 21st century, the country spent much of its resources attempting to rebuild and get the economy back on its feet. Soon after joining the European Union, Greece received many subsidies to raise its crumbling economy and to improve the public services (Hale, 2013, p. 1). However, even after receiving the grants and support from other EU member states, the nation remained at the trail of overspending, which drained its resources, affected the inflation and interest rates (Reinhart, et al., 2003, p. 1). Consequently, being under control of European Central Bank monetary control, Greece economy now experiences the challenge of structural reforms to keep its economy from falling and to improve the living standards of the Greeks.
Greece entry into the Eurozone encouraged investors to play convergence game; lending to the government and lowering the interest rates as spreads strengthened compared to the European Union countries (Kindreich, 2017, p. 1). Low-interest rates powered economic development, which was further encouraged by the direct foreign investments inflows. However, the private-sector credit increase sooner revealed the unsustainable economic growth for Greece. Also, few years before the global financial crises, the Greek government was characterized by overspending, which resulted in the budget deficit and the whole government borrowing rates. With the global economic crises in 2008/9, Greece’s fiscal debits increased, and the interest rates on public and private debt exponentially surged. However, the nation could not reduce the interest rates or devalue its currency since it was already tied by the European Central Bank (Beck, 2012, p. 3); and thus, economic growth stimulation remained at low levels. The nation was unable to enact an internal monetary policy to match its financial and political demands.
Sovereign Debt Crises
According to Lane (2012, p. 49), the principal challenge noted with the eurozone countries was their capacity to withstand adverse macroeconomic and fiscal downfalls for the success of the common currency (Euro). When the Eurozone nations switched off the option for national currency devaluations, the traditional system of adjusting between national money was removed. There was also a challenge of using the same currency by these countries since the countries didn’t agree to operate under similar banking and monetary systems. Instead, the economic and banking regulation was retained by the states (Lane, 2012, p. 1).
The European sovereign debt crisis is a debt crisis for several countries that have been happening since 2009. Several countries in the Eurozone such as Cyprus, Greece, Portugal, Ireland, and Spain were unable to pay their debts to refinance their government loans or to bail-out national financial institutions over-indebted under their administration (Featherstone, 2011, p. 193). They needed assistance from other Eurozone member states, the European Central Bank, or international monetary fund.
The sovereign debt crisis was as a result of structure-formation issue of the European Union and a combination of complicated matters, including globalization of monetary policies, easy borrowing terms during 2002-2008 which promoted high-risk borrowing and lending policies and the global financial crisis in 2007-8 (Scharpf, 2011, p. 3). Other factors that might have led to eurozone debt crisis include the global trade imbalances, the 2008 Great Recession, economic methods related to government revenue and spending, and the approaches used by nations to bail out failing financial institutions and private investors as well as supposing individual lending burdens.
The Greek economic crisis started off with the global economic recession in 2008. Although its causes were endogenous characteristically because it originated from the mishandling of the Greek economy and government fiscal policies (Kindreich, 2017, p. 1). Further, the country’s membership in the European Union inhibited its full control on enacting on monetary policy, which implied that the interest rates remained too low despite the inflation characteristic in the Greek economy. The financial system had not adequately integrated with the growing economy and debt policies.
Despite the Greece being a victim of economic mismanagement and misrepresenting its financial data by previous administrations, investors failed to notice the alarming states of unsustainable borrowing levels and public overspending (Kindreich, 2017, p. 1). They couldn’t also see high wage rate which was not proportional to profitability development resulting in loss of the country’s competitiveness; and excessive tax avoidance in the country. Additionally, there was lack of accountability and responsibility in many elements of Greek finances, which furthered the crisis. At the peak of the global financial crisis in 2009, the investors were focused on the worldwide banking problem and thus didn’t pay attention to the specific issues relating to Greece.
The European Union was established for political reasons, and it gave rise to flawed fiscal policies, and Greece’s membership to the Union made its crisis unavoidable. Due to its inability to sustain its economic condition, Greece sent a distress signal which has led to three bailouts, amounting to over 246 billion euros, resulting to austerity measures (Kindreich, 2017, p. 1). This partially calmed the situation but with a high cost of high levels of unemployment, high poverty levels, and tumbling revenue. The real Gross Domestic Product dropped by almost one-fourth from 2009 to 2015.
The lack of political and fiscal unity among the Eurozone nations could have been the cause of the sovereign debt crises. The creation of Eurozone in 1999 was for monetary union, and Greece failed to meet the criteria of inclusion in the Union as per the Maastricht Treaty of 1992 (Kindreich, 2017, p. 1). However, it was allowed to join in 2001 despite failing to meet some of the inclusion criteria: a budget deficit of 6% and Government debt of over 100% as required of 3% and 60% respectively. The European Union broke their own rule by allowing Greece to join Eurozone even in its state. But it could also become a trap for Greece in case of an economic crisis since it couldn’t implement its own monetary policies to fight the inflation and interest rates. The mandate to set fiscal policies was given to the European Central Bank, and therefore, Greece couldn’t devalue its currency to meet the economic and political pressures (Lane, 2012, p. 2). This led to a severe deceleration of GDP and low living standards of the Greeks.
Policies Adopted to Solve Debt Crises
Amidst this crisis, talks arose of Greece exiting the union. However, this could not have helped solve the issue since the country can only get a bailout if it is a Eurozone member (Nelson, et al., 2011, p. 2). Therefore, the state would not have got the bailouts to salvage the situation, and it would be left to battle on its own. However, the Greece government had to adopt policies to help the country battle its economic crisis, and this involved taking, among others, austerity policies.
On June 2012, the eurozone council settled to allow loans by the European Stability Mechanisms to be made expressly to troubled financial institutions rather than through European Union countries, to reduce the severity of sovereign debt (ESM, 2017, n.p). This policy was connected to the reform of banking regulation by the ECB. Some of the strategies taken to put the situation under control include:
- Financial aid from Eurozone and IMF
Eurozone leaders and the International Monetary Fund in 2010 announced a three-year salvaging plan to loan Greece 110 billion euros at market-prevailing interest charges (Nelson, et al., 2011, p. 6). Giving of the debt was, however, conditional and Greece was expected to adopt some economic reforms. Seeking to prevent the crisis going beyond Greece, European Union leaders also agreed to advance financial aid to the member states under troubled markets. After the expiry of the three-year lending mechanisms in 2010, European Union and IMF established permanent loaning facilities to Greece and other affected nations.
- Fiscal Consolidation and Economic Reforms
As a requirement from the loaning eurozone nations and IMF, Greece has undertaken economic reforms and fiscal consolidation policies. The government has enacted austerity policies with the aim of reducing the government spending deficit. The program objective is to reduce public spending and increase taxes as well as reduce tax evasion (Nelson, et al., 2011, p. 6). The government aims at collecting more revenue by increasing tax and higher fees for tax evaders. Other fiscal consolidation reforms include pension and health reforms with the aim of boosting the nation’s competitiveness.
- Central Bank Intervention
The ECB and the Fed have intervened to respond to the crisis (Nelson, et al., 2011, p. 7). For instance, the ECB announced in 2010 that it would start acquiring government bonds in tertiary markets to heighten confidence and reduce bond spreads over market pressure. On its side, the US Fed has supported Greece by re-enacting on non-permanent reciprocal monetary agreements, referred to as swap lines to increase the dollar liquidity in the global markets.
To ensure that the situation is entirely under control, Greece should consider the following policy recommendations.
- Seriously and amicably consider restructuring the debt, providing time for lenders to promote progress on the agreed solutions.
- Be ready for high deceleration of employment and revenue- to a more significant extent than the austerity measures have predicted, despite the policies in place to battle it.
- Greece should also depend on exports and implement policies including wage cuts in the private and public sector, to reestablish competitiveness (Carnegie, 2017, n.p).
- If competitiveness proves hard to achieve, the Greece could consider leaving Eurozone, which will call for debt restructuring.
Overall, Greece had experienced significant economic growth, especially after joining the Eurozone. However, the country was characterized by overspending, and at the onset of the global financial crises, the country was severely hit, and it was forced into mercies of other Eurozone nations and IMF bailout. This paper has described the economic condition of Greece, the sovereign debt crisis, and the actions taken to handle the situation. It has also given policy recommendation that could help Greece amidst their financial troubles.