Posted by admin - August 25, 2015 8:17 am
Greek Economic Crisis – What Does It Mean For You?
Joanne Wright of our Maidstone office takes a look at the implications on the UK with regards the Greek economy.
It can hardly have escaped your notice that the Greek economy took somewhat of a battering in recent months. We witnessed the election of Greece’s Prime Minister, Alexis Tsipras, in January this year, boasting an end, or at least a reduction, to the austerity measures so desperately wanted by the Greek people. The spectacular walk out on negotiations in Brussels this summer by Mr Tsipras got the whole world anxiously wondering what would become of Greece. In the end we saw a U-turn to his promises and further crisis talks, bail outs and increases in austerity measures. It came as no surprise to political insiders that Mr Tsipras resigned as Prime Minister in late August, resulting in delays to the bail out and snap elections to form a new coalition. Angela Markel’s European Union presidency has been put to the test simultaneously with the controversy over the migrant crisis in the Mediterranean, and the diminishing control of the situation in Ukraine with Russia. Couple these very costly and serious situations putting ever more strain on the EU and it’s funding, restoring the Greek economy has proven to be much more of a headache for her than originally thought. So, given that we are all part of the European community, what does it mean for you?
Greek history
If you are not familiar with the history of Greece in the European Union, (EU), here it is in a nut shell. Greece joined the EU in 1981 and adopted the single currency in 2001. Greece, at this time, took advantage of the benefits of the Eurozone of lower interest rates and the influx of capital investment and loans [1].It came to light in 2004 that Greece lied about fulfilling the criteria under which it gained acceptance into the single currency, (the Maastricht Criteria), admitting that its annual budget deficit was never 3% as required. Rather than facing the consequences right there and then, Germany and France had confessions to make of their own. Not a good start. As a result, Greece continued to rack up more and more debt with no end in sight. In 2009, the problems began.
Credit rating
Since 2009, Greece’s credit rating was lowered by the various ratings agencies, which resulted in lower investment and higher borrowing rates than before. In 2010, Greece announced that it would get a handle on its annual budget deficit and reduce it to the required 3%. A tall order by anyone’s standards and the start of austerity measures began in earnest. This ultimately failed. Then stepped in the EU and the International Monetary Fund, (IMF), with €240 billion in emergency funds [1]. In 2011 the European Financial Stability Facility (EFSF), added another €190 billion to the bail out [1]. Even though Greece received these bailouts, it was only enough to cover the interest rates of its loans. Work needed to be done to raise taxes and cut spending. Greece experienced high levels of unemployment and cuts to public services and pensions, which almost half its population relies upon.
It is hard to imagine what effects you and I would experience considering the UK is not part of the single currency. From what the experts say, it is impossible to say in its entirety. There are a few educated guesses which will probably come to pass, but the recent crisis in Greece potentially had the ability to cause a domino effect throughout the Eurozone and beyond.
Consider what would have happened if Greece left the Eurozone, even after the recent bail out agreement agreed in principle was rejected at the 11th hour after a new coalition had been formed, and brought back the Drachma. This would have lessened the value of the repayments of the loans owned by other European governments as a result of the predictably lower exchange rate. This could have resulted in some banks going bankrupt [1]. However, as much of Greece’s debt is owned by other EU countries it is the tax payer that is left footing the bill [1]. This would still not be good news for Greece as it would still owe the original amount of debt with no light at the end of the repayment tunnel.
So back to you and me. As the ratings agencies have already lowered Greece’s credit rating due to large amounts of debt, it could soon turn its gaze to other countries with high levels of debt. The next countries expected to experience problems are Portugal and Spain [2]. As we hold loans to these countries our banks could be affected. Less likely, but a risk all the same, the prying eyes of the ratings agencies could land on us. If this happens, investment in our economy looks less favourable, exchange rates weaken and borrowing at a favourable rate plummets. This could result in our exit of the EU and the next domino will start to fall.
The other big economic domino is the USA. As a major backer of the IMF, the USA stands to lose out as a direct result of the shadow of the Greek crisis. President Barack Obama has come out and said that all efforts must be made to ensure the future of the Eurozone and, by extension, the UK. He fears the Eurozone collapsing and the US losing billions in its wake. The US tax payer will once again feel the sting of economic instability. Tax rises and cuts in government spending will set the rest of the dominoes to fall. As China and Russia are the only countries prepared to help Greece if it should leave the Eurozone, a shift in political power could ensue [1]. As we have seen in the later part of August, the Chinese Central Bank lowered the exchange rate to the Chinese Yuan which has impacted greatly on world markets. This may result in trade from Europe becoming less appealing as trade becomes more favourable with China. Other countries, especially African nations that rely heavily on trading with China, have been hugely affected. It has had a direct impact on the exchange rates of their own currencies against, not only with the US Dollar, but other major currencies across the globe, which has had a major effect on those currencies, and so on, and so on. This recent instability has come about from fears that the Chinese economic growth has started to slow rather than grow as expected. Could this support of Greece, should it adopt the Drachma, be called into question? As we have seen, economic stability really does exist on a knife edge. Nothing is certain.
How does this affect your Greek holiday?
So, where does all this leave the likes of you and me? Well, during the crisis, holiday makers saw the Euro weaken against the Sterling and so saw their money stretch that little bit further. As VAT increases in Greece, the cost of goods and services will rise. Any benefit seen in the exchange rate soon evaporates once you start to spend your money in Greece. If you own property in Greece, or you trade specifically with Greece, you could face much higher taxes than before. If China is a more competitive place to trade than Greece, (or indeed, the rest of Europe), you could see changes within your own businesses. Companies in Greece who import your goods have started to close down, so you could see a decline in your profits. For all of us, the UK lending more money to Greece comes with risk. As we are already owed money by Greece, adding to this amount is putting our economy at greater risk and that dreaded domino looks a bit shaky. Only time will tell what will become of Greece, but what we do know is that it will be a long road, hopefully to economic and political stability.
References:
This article has been taken from the author’s own understanding of information published by the following sources.
- About News – What is the Greece Debt Crisis
- BBC Newsbeat, 6 May 2010 – Greek financial crisis explained
- Reuters Business News, 17 July 2015 – Analysis – Counting the costs for Greece and Europe
- BBC News, 22 July 2015 – Greece crisis: MP’s to vote on crucial reforms
- BBC News Business, 3 August 2015 – The eurozone’s nagging problems
- BBC News Business, 24 August 2015 – Global shares nosedive on China’s economic woes
- BBC News, 21 August 2015 – Viewpoint: Greek election heralds fresh bailout battle
The views contained in this article do not necessarily represent the views of the partnership.
