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全球经济衰退和广泛的经济衰退的主要后果之一是对许多国家的政府财政的影响。在欧元区，影响特别严重的是一些国家，如希腊、意大利、葡萄牙和爱尔兰，都看到他们的预算赤字和国家债务飙升。要纠正这些不平衡的经济挑战是非常高的，需要尝试实施广泛的经济改革，在一个持续的经济不确定性的时间，结合在欧元区的限制。
One of the main consequences of the global economic downturn and widespread recession has been the impact on the government finances of many countries. In the Eurozone the impact has been particularly severe with a number of countries such as Greece, Italy, Portugal and Ireland all seeing their budget deficits and national debt soar. The economic challenge to correct these imbalances is very high given the need to try to implement widespread economic reforms at a time of ongoing economic uncertainty combined with the restrictions of being in the Eurozone.
Executive Summary 执行摘要
Increase in budget deficit and debt although bad, was needed!, as this leaved the economy from a deeper and prolonged recession, but now the the worse "looks" to be over, Governments need to start tackling the excessive debt level. This will be an audious task, as policy makers will have to strike and balance between lower debt levels and sustainable growth.
The bail out to rescue Greece evidenced the fiscal framework problems and that goverments were abusing of it. Government Debt of certain countries is too high and because of the international borrowing between countries there was the risk of contagion, therefore austerity measures needed to be implemented as soon as possible. On the other hand the economy is still recovering from the recession and critics argue that it still too early for the austerity measures and it could lead to a double dip recession.
The european commision and the eurozone governments realise the importance to deal with the high debt and deficit due to the economic risks the single currency is facing. Also new legislation and reforms are being discussed and implemented in order to safeguard the future of th euro as a currency. These decisions will have several impacts on the control and resposibilities on each country's management.
Introduction 简介
Terms of Reference
I was asked by our organisation to write a report and to analyse the economic impacts and economic risks brought by the rapid rise both in budget deficits and national debt for countries within the Eurozone. Also i was requested to compare and contrast the measures taken by Greece and Germany to aim to reduce their budget deficits and burden of their national debt.
Proceedings 诉讼
In order to examine best way foward for the european economy, official data issued by the eurostat and media publications were examined. An analysis of different opinions of some market analysts were also taken into consideration.
Question A
Findings
The bailout package‚¬110 billion in loans over three years from the 16 eurozone countries to rescue Greece on the 2 May, 2010 in order to keep it from defaulting on its debts showed the problems in the single currency economic system due to the lack of control and enforcement by the European Commision on one of the Growth and Stability Pact criteria (Maastricht Criteria).
Zangana, A., (10 May 2010) a european economist, is of the opinion that the structural problems within the weaker eurozone members remain, and that serious repair work is now needed to restore credibility to Europe's fiscal framework. Zangana,A., writes, " we expect tougher new rules on fiscal management to follow with stricter implementation of the excessive deficit procedure."
On the 22nd May 2010 Euro News reported that the European Union Finance Ministers agreed that there should be tougher sanctions against countries that break budget rules. The meeting's aim was to discuss changes to the way the 27 nations coordinate economic policy. It was agreed that those countries who break off deficit limits could lose EU money and voting rights. The sanctions will remove the fiscal freedom of government as to prevent an escalating debt crisis.
Belgian Finance Minister Didier Reynders explained that these measures are essential due to level of deficit countries have. He emphasised that it's not enough to reduce the deficit in Greece or in other countries but they have also to increase growth by creating jobs and generating business. In order to reduce the countries debt, the big economies goverments in europe have spelled out spending cuts and inreased taxes (E.g Germany and Italy) with the aim to halve their deficits by 2013.
The cuts in the goverment spending have to be done from some sectors which do not stimulate the economy. Spain is following the echoing moves by Ireland and Greece, but will the country be able to be competitive as to remove the negative perception from International Markets and attract foreign direct investment? With high taxes and a negative perceptiion it will not be easy to attract investment and create jobs. With an unemployment rate at around 20%, Spain has one of the the weakest economies in Europe. There has been chaos in the streets with social unrests and people protesting against the government's austerity measures, introduced to reduce the government debt. The austerity measure introduced by the Spanish government are a:
5 per cent cut in civil service pay;
6bn cut in public sector investment;
1.2bn in savings by regional and local governments;
a pension payments freeze;
abolition of 2,500 childbirth allowance from next year;
600m cut in foreign aid and savings on the cost of pharmaceuticals in the public health system.
There are fears that austerity measures aimed at reducing deficits could damage the economy if there will not be a better economic growth in the future. The Economist (3rd July 2010) writes about why critics like the economist Paul Krugman and their concerns that the austerity measures being implemented by goverments will lead to an increase in the unemployement rate and a risk of a double dip recession. Mr Krugman and his allies argue that fiscal stimulus remains an essential for the growth of the economy and that deficit cutting now will cause stagnation and deflation. The Economist (3rd July 2010, p13 - 14) advises that on the other hand deficit spending can not go on for ever and that the supporters for the introduction of the austerity measures are of the opinion that "by boosting firms' and housholds' confidence and lowering the risk premium on goverment debt, well designed fiscal consolidation can actually boost growth."
If the European economy falls back into recession, Goverments could not be able to borrow through the Fiscal Policy in order to fight another financial crises because of the high goverment debt. Individuals have increased their concerns to invest in the international markets following the crises, which lead to a lowering in credit rating of some countries. This caused an increased cost of borrowing in the International Markets as countries have to offer higher rates for their goverment bonds, e.g. Greece whose credit rating has been decreased to "junk level", from A3 to Ba1 by Moody's.
Meanwhile the ECB (European Central Bank) kept the eurozone interest rates at 1%, which are the lowest in the ECB's 10-year history. The ECB has held eurozone interest rates at a record low of 1% for the last year, as expected in order to sustain growth in the euro area. The ECB aim is to use Monetary policy to maintain price stability in the euro area over the medium term in order to achieve sustainable economic growth, job creation and financial stability. ECB president Jean-Claude Trichet is of the opinion that growth would be moderate and uneven and a decrease in governments' deficit is essential.
Since the rates were been kept low, the government is competing with the public sector in order to finance its deficit. The government will have to offer better rates for its government bonds and this will cause a higher cost of borrowing also for the private sector. This is known as the crowding out effect, which gives less incentive for the private sector to invest and create new employment opportunities. This also depends on the availability of liquidity within the domestic market.
On the 5th August 2010 during the meeting with journalists in Frankfurt, ECB president Jean-Claude Trichet explained the current economic analysis. Statistics show that the Euro area real GDP increased by 0.2% in the first quarter of 2010 and from the data available for the second quarter and third quarter, things seem that went better than expected. One must analyse which countries have lead to the 0.2% increase, and it is important to differentiate between the large economies and the small countries which make up Euro Zone. The economic situation in the newly emerging Europe (i.e. Czech Republic, Hungary, Poland, Estonia, Latvia, Lithuania) is not the same like the core of Europe (i.e. Germany, Netherlands). The emerging countries have run a huge current account deficit in this decade for the expectation to join the Eurozone. The large deficits made them quite vulnerable to a sudden stop in capital flows.#p#分页标题#e#
Rizzo, E., (27/05/2010), a Maltese stockbrocker in an article on the Times of Malta explains the reasons of the EURO sharply decline against the US dollar. He explains that this is because of the response to the sovreign debt crisis in the eurozone and fears of contagion from Greece to other European countries (like Spain and Portugal) which lead to substantial pressure on the value of the Euro which fell to a four-year low against the dollar. Rizzo, E., (27/05/2010), writes that "the euro has shed 17 per cent from its January peak to its recent low of $1.2143" in the week before the 27th May 2010.
American Dollar to 1 Eurp
Diagram 1 shows the valuation of the Euro against the US Dollar in the last five months. In April, investors were still concerned about the situation in the Euro market and the risk of contagion following the rescue to Greece. Investors preferred to save their investments in US Dollars, as the greenback once again acted as the safe haven currency. In June, as the euro market stabilised, investors were once again willing to hold euro denominated investments, thereby boosting confidence in the single currency.
When there is a depreciation of the Euro against the US Dollar, European exports towards the United States and countries that have their currencies linked to the US Dollar become cheaper and more competitive. Whilst imports from the United States and currencies that are linked to the green back (i.e US Dollar) become more expensive. Therefore in May countries like Germany, which has the largest national economy in Europe and is one of the world's largest exporter country, had the opportunity to increase exports. On the other hand the EU Member states that rely heavily on Petroleum for their energy production (E.g. Malta) were negatively impacted with the increase in the price of the US Dollar against the Euro, since petrolium is traded in US Dollars.
The below diagram shows the Foreign bank ownership of European debt in 2009 between five members of the Eurozone: Greece, Ireland, Italy, Spain and Portugal. The European Union could not let Greece default since the financial system in europe would have colllapsed due to the international borrowing.
Foreign bank ownership of European debt, Dec 09
Diagram 2: - Source BIS Table 9B New York Times.
Conclusion 结论
Due to the risk of contagion there was no other sollution but to rescue Greece. Greece used to provide false information on the country's financial status and the financial problems were kept hiden. The EU Commision should take a diffrent approach and be more strict to check the information provided by the countries.
Greece failure raised negative sentiments on the structural problems of the fiscal framework. The Euro Area can not afford the failure of another country, therefore the EU Commision has to make sure that governements are working to decrease their debt.
It is definitely not going to be an easy task for the governments to implement the austerity measures, but they have to decide now or else we will face the consequences in the near future. Many Governments like the United Kingdom have already raised the taxes putting the burden on the tax payers to cover for the wrong decisions taken by politicians. Following this financial fiasco it is important to considerate more how to avoid it happens again. There should be creation of laws to keep control on the use of Fiscal Policy. Investors lost much of their trust in politicians and it is the time to introduce more prudence measures and to insist on fiscal responsibility.
The statistics for the second quarter of 2010 show that there was a GDP growth by 1 percent in the Euro area, boosted by a strong performance by Germany and France.This is another positive sign that the worst is behind and governemnts can start reducing their spending.
On the other hand the reduction in the government expenses is not enough. Countries have to create the right business environment for private companies to prosper in order to raise their revenues and bottom line profits. Governments must strive for a a sound legal framework, adequate educational resources and technology advancement are also of utmost imporptance to attract and cultivate investment.
Following the governments aid to rescue some major banks around the world ( E.g. Lloyds TSB & The Royal Bank of Scotland) from defaulting, there are on going discussions on new laws and regulations. The most important are: BASEL 3, restrictions to mergers and take overs and separation between investment and retail banking, which will help to provide confidence in the control of the banking system once again.
Recomendations 建议
The new governance structure related to the Government budgets being reviewed by the European Commision prior going to national parliaments for approval should tackle the lack of control by the Member states. Country's who would not be following the European Commision instructions to reduce their deficits could be sanctioned and not receive funds of the funding programmes.
Greece is in a very difficult position and belatedly the government lead by George Papandreou started to embrace structural reforms. There have been strikes and protests by the people since there families have been hit by pension and wage cuts. The Goverment must keep strong like he did with the truck drivers, because there is no other solution now and they must meet the targets agreed with the EU/ IMF.
Other European Union members should be given achievable targets too as to prepare a plan to reduce their deficits and debt. Governments have to cut their spending from certain projects and investments which do not stimulate economic growth. Also the increase in taxes should be more for those who can afford and not pensioners. It is important that each governement tackles the economic leakeges in his country's economic system, like the wealthy tax evaders and take the necessary legal actions.
Importance has also to be given to the banking system since if it was not for the governments intervention, a lot of banks would have gone bust. The crises evidenced that the introduction of tougher regulations on investment banking and more control on credit rating agencies are needed. On the other hand the new regulations may mean more costs for banks (e.g. compliance) and limitate their ability to create money and hence less prosperity.
In order for the country grow economically the investments in education are very important, because it is important to have the right labour with the right skills. The governments should keep investing in those educational courses which lead to qualifications in the professions needed by the country. These will help the country to grow and create new jobs.
Lai, A., ( July 2010) advises that a possible solution to help the european economy to recover, is the creation of transfereable euro-denominated sovreign bonds. These Bonds would allow to have the same cost of borrowing for all the euro zone members( e.g. France and Greece). The single currency fiscal structure would be united between all it's members. The European Central Bank would be provided with the auditing and veto power for the overall budget of each member country. This would make sure that members do not over leverage, as this would endabger the stability of the other countries. Germany and France the main driving forces within the Euro-area would probably oppose the above proposals since their cost of borrowing would increase. Although necessity could drive weaker countries such as the PIGS (Portugal, Ireland, Greece and Spain) to request the negotiation in return of concessions.
Total Word Count Question A: 2,315
Question B
Findings
Greece has the highest proportion of working poor in the EU27. In-work poverty is directly associated with low wages, inability to find a full-time job and low skills. It is also associated with poor existing system of taxation and the lack of an effective well-planned social policy. Policies are needed to increase workers' share in output, promote full-time, permanent employment, adopt some form of guaranteed income and reinforce graduated income taxation.These will help the country to reduce its debt, which increased to 115%.
On the other hand, Germany is the continent's most industrialized country, famous for its technological achievements. It is considered as the most important member of the Eurozone. Germany was one of the first European economies to come out of the recession. The weaker euro helped Germany for an increase in exports which lead to a quarter-on-quarter growth of 2.2% in the second quarter of 2010.
Diagram 3
With reference to the above diagram, the Greek economy had another negative quarter in the second quarter of 2010, as Gross Domestic Product (GDP) shrank by 1.5% and unemployment rose to 12 percent. The Greek goverment's plan is to reduce the deficit to less than 3% of GDP by 2014. The austerity measures introduced by the the goverment include pay cuts, reform of the pension system, tax reform and privatisation.
One of the problems of the Greek Economy, lays in the excessive number of state workers, 768,000. In the last several years the government provided continuous increases in pay, and the salaries in general were increased by an average of 30% since 2006. To minimise some of these costs, the government opted to reduce salaries, remove the traditional extra 15 days of salary paid in the summer and refrain from paying any bonuses.#p#分页标题#e#
The government has also approved the reform in the pension system as to reduce early retirement. The average age of retirement in Greece was 61, which has now been increased to 65 years. The government will introduce financial penalties and disincentives for early retirement, in order to try to raise the effective average retirement age from the current 61.4 to 63.5 years by 2015. Other austerity measures advised by the Prime Minister, George Papandreou are:
to freeze pensions in 2010, 2011 and 2012;
decrease bonuses for pensioners receiving less than 2,500 Euros a month and abolished for those earning more,
An introduction of an extra tax ranging between 5-10% for the pensioners who draw more than 1,400 Euros a month
The tax reform approved by the government includes an increase in the VAT from to 21% to 23%, an increase of 10% in indirect taxes for alcohol, fuel and cigarettes. One of the main government's objectives is to reduce tax evasion and untaxed illegal construction, since they are estimated to cost the Greek Government approximately 20 billion Euros a year.
Another long term objective set by Papandreou's government is to reduce the reliance of the Greek economy on the public sector. This can be achieved through the growth of the private sector and by the privatisation of some industry players.
Although the German government has low government debt compared to Greece, Angela Merkel's government decided to reduce the deficit, but through a different strategy than Greece. On the 07th of June, Chancellor Angela Merkel told reporters that around 80 billion must be saved until 2014 in order to put the financial future on a solid footing. The leaders have already advised that serious difficult times lie ahead as to improve the euro economic situation. The plan is to cut the spending but not to not increase income tax or value added taxes for Germany. Areas which are likely to face the bulk of the cost control measures include social welfare and unemployment. Another area to take a hit might be the utility companies with nuclear power plants, since the Government could start taxing them on their profits. The Defence Ministry will also be cheking if it is feasible of reduce 40,000 jobs in the armed forces, after proposals to scrap national service sparked fierce debate in Angela Merkel's coalition.
The change in the policy is part of the government's attempt to reduce the structural deficit. The German government is aiming to keep the structural deficit within 0.35% of GDP by 2016 as required by a recent amendment to the constitution.
Conclusion 结论
Greece and Germany have the same objective to reduce their government debt but have opted differing strategies due to the countries' different economic situation.
Greece debt was too high and could not keep on borrowing, especially after the financial aid from the International Monetary Fund (IMF) and the Euro-area members, who requested a change in the governments approach to show its commitment to tackle the fiscal debt. The greek government is facing a number challenges following the introduction of the austerity measures. Violent protests and social unrests have been a constant feature over the past months. This surely does not bode well for the Tourism industry, as the industry contributes to one fifth of the country's GDP.
Germany austerity measures plan is less harsh. Angela Merkel's parliament strategy is controlled and measured, taking also into consideration the growth and stability of the country.The Germans are also concerned that the fiscal deficit could lead to an increase in inflation in the medium to the long term. The largest european economy wants to lead by example, as it aims to come in line with the Masthricht criterias sooner rather than later.
The Germans' decisions for debt reduction did not effect the growth and stability of the country, but Greece's GDP is keeping falling sharply. This lead Greece to an increase in unemployment and many shops and businesses closing down. Wolfgang Schauble, Germany's Finance Minister defended the decisions taken by his country following the criticism received by the U.S.A. president, Barack Obama. Obama is of the opinnion that it is still too early for the introduction of austerity measures and that it will obstruct the global economic recovery. Mr Wolfgang Schauble replied that the aim of the German government is to try and combine an exit strategy from the present large fiscal stimulus with laying the foundations for future growth.
Greece focussed their measures on taxes in order to increase the government revenue, while on the other hand Germany opted to decrease the government spending. For greece one of the main objectibtives will surely be to improve its credit rating so to attract investments. Greece is currenytly paying 350 basis points over German debt (state the source where you got this data and the date) Greece can't afford to waste the gains from the austerty measures to pay such a high debt premium. On the other hand, Germans are still fret about moral hazard since Greece used Fiscal Policy irresponsebly for several years and got away, which could set a bad precedent for other euro delinquents.
Recomendations 建议
During the latest G8 and G20 Summit meetings, countries discussed the possible solutions to avoid another deep and lengthy recession. For the European economy it was agreed to continue pushing its members for deficit-cutting austerity.
Greece has to continue its restructuring and make up for wrong decisions taken in the past. The Government should focus on the economic leakeges like tax evasion, black market dealing and illegal immegration. The country needs to have a sound legal and regulatory framework which stimulates economic growth. This would help to remove the negative public opinion on politicians. As already highlighted, the reduction in the public sector staff number and privatisation of some companies is crucial for the growth of the private sector and so that the country's economy would not be fully dependent on the government's financing. In order to inspire future prosperity, the country should try to discuss and negotiate investment plans with other countries outside the euro area for the future.
On the other hand Germany should follow up its plans to reduce the government debt as to lead by example. The German government has to understand its influential position for the recovery of the euro zone and that it needs to help the other weaker countries in restructuring their finances to the mutual benefit of the whole European Union. The help needed is not just financial aid, but also guidance on how to use their countries resources and the advantages of the single currency for the growth of their economies.
Euro Sceptic Paul Krugman a well renowned economist, has been propogating for a number of years the the European union will falter upon the first deep recession. This nobel laurete has been proved wrong up till this very day, but then again his prophecy could still be looming on the horizon. European leaders must come together with the same enthusiasm they had when joining in the Euro-area, and work together towards a single aim, achieving a sound path of economic growth for the old continent.
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