The financial crisis in Greece and its impact on the euro area

Abstract
Due to the 10 factors which postponed the financial crisis in Euro Zone and Greece, The financial crisis has had a pervasive impact on the real economy of the EU, and this in turn led to adverse feedback effects on loan books, asset valuations and credit supply and like many countries Greece, the Greek government relies on borrowed money to balance its books making the recession harder to achieve, because tax revenues are falling just as welfare payments start to rise. And even with the IMF assistance, will be enough to save Greece for the current situation? But the current state of Greece is related to the state of affairs in Greece is hot, no doubt about that. This is not new, nor is it directly correlated to the current financial crisis; rather, we have a scaling of the tension that is definitely related to the fact that the Greek oriented capital manages to achieve very high rates of profitability, while there is a very strong political movement. Even though all the negative reports a forecast has been made and a return to sustained positive growth

is projected for 2012 as external demand strengthens, competitiveness improves and the farreaching structural reforms implemented in response to the fiscal crisis start to take hold.

Financial crisis outburst

The crisis was the product of 10 factors. Only when taken together can they offer a sufficient explanation of what happened: Starting in the late 1990s, there was a broad credit bubble in the U.S. and Europe and a sustained housing bubble in the UK (factors 1 and 2). Excess liquidity, combined with rising house prices and an ineffectively regulated primary mortgage market, led to an increase in nontraditional mortgages (factor 3) that were in some cases deceptive, in many cases confusing, and often beyond borrowers' ability to pay. However, the credit bubble, housing bubble, and the explosion of nontraditional mortgage products are not by themselves responsible for the crisis. In the UK losses from the housing downturn were concentrated in highly leveraged financial institutions. Which raises the essential question: Why were these firms so exposed? Failures in credit-rating and securitization transformed bad mortgages into toxic financial assets (factor 4). Securitizers lowered the credit quality of the mortgages they securitized, credit-rating agencies erroneously rated these securities as safe investments, and buyers failed to look behind the ratings and do their own due diligence. Managers of many large and midsize financial institutions amassed enormous concentrations of highly correlated housing risk (factor 5), and they amplified this risk by holding too little capital relative to the risks and funded these exposures with short-term debt (factor 6). They assumed such funds would always be available. Both turned out to be bad bets. These risks within highly leveraged, short-funded financial firms with concentrated exposure to a collapsing asset class led to a cascade of firm failures. We call this the risk of contagion (factor 7). In other cases, the problem was a common shock (factor 8). A number of firms had made similar bad bets on housing. A rapid succession of 10 firm failures, mergers and restructurings in September 2008 caused a financial shock and panic (factor 9). Confidence and trust in the financial system evaporated, as the health of almost every large and midsize financial institution in Europe was questioned. The financial shock and panic caused a severe contraction in the real economy (factor 10). ... It is dangerous to conclude that the crisis would have been avoided if only we had regulated everything a lot more, had fewer housing subsidies, and had more responsible bankers. Simple narratives like these ignore the global nature of this crisis, and promote a simplistic explanation of a complex problem. Though tempting politically, they will ultimately lead to mistaken policies. I don't think the conclusion that better regulation would not have stopped the crisis follows from the factors they list.

By their own admission, the reason that factors 1 and 2 led to factor 3 was "an ineffectively regulated primary mortgage market." So right away better regulation could have stopped the chain of events the led to the crisis. Factor 3 was "nontraditional mortgages that were in some cases deceptive, in many cases confusing, and often beyond borrowers' ability to pay." Sure seems like regulation might help to prevent deception and confusion (through, among other things, a financial protection agency). One thing is clear in any case. The market didn't prevent these things on its own. Factor 4: Securitizers lowering credit standards, a failure of credit agencies, and buyers failing to do their own due diligence. Once again, regulation can help where the private market failed. The ratings agencies exist because they help to solve an asymmetric information problem. The typical purchaser of financial assets does not have the resources needed to assess the risk of complex financial assets. Instead, they rely upon ratings agencies to do the assessment for them. Unfortunately, the ratings agencies didn't do their jobs and this is where regulation has a role to play. Factor 5: the accumulation of correlated risk.When regulators see this type of risk building up, they should do something about it. The question, however, is how to give regulators better tools for assessing these risks. Backing off on regulation, as implied above, won't help with this. Factor 6: holding too little capital relative to the risks and funded these exposures with shortterm debt. Mandating higher capital requirements is the solution to this problem. Factors 7 and 8: risk contagion and widespread exposure to a common shock. The private sector didn't prevent these risks from getting too high so, again, why wouldn't we want a regulator to do something about excessive risks of this type? False positives is one worry but that is a matter of how high to set the threshold for action, not an argument against regulation itself. If anything, the threshold for action was too low prior to the crisis. Factor 9: A rapid succession of 10 firm failures, mergers and restructurings in September 2008 that endangered the financial system. Factor 10: Effects on the real economy. I'll concede that regulation could not have helped much here. Once the financial system crashed in the way that it did, the real economy was sure to follow. These factors are, for the most part, a chain of events. If the chain had been broken by more effective regulation anywhere along the way, the chain of events is interrupted and factor 10 does not come into play.

Strategies proposed by the European Union for recovery from the Financial Crisis: The strategies developed by EU to the financial and economic crises can be categorized under three groups:

The first group of strategies devoted to the restore of confidence in markets with stimulus plans. y The second group of strategies developed for the proper supervision and governance of the financial system y The third group comprises the strategies to enhance economy policy coordination among Member States through economic governance mechanisms. Right after the crisis enters the most critical stage in September 2008; European Economic Recovery Plan was the first stimulus package introduced by the EU. The strategic objectives of the plan were to recover the economy by considering the long-term objectives such as enhancing competitiveness and creating green economy and to mitigate the social costs of the crisis. In order to attain these objectives, the plan proposed a number of strategic actions in accordance with Lisbon Strategy and was supported by a budget of 200 billion Euros. y As the crisis spread the eurozone periphery countries, namely Greece, Ireland and Portugal, European Financial Stabilisation Mechanism (EFSM) and a European Financial Stability Facility (EFSF) were introduced as new mechanisms to avoid financial distress in euro area. Within the framework of EFSM the Commission can contract borrowings from financial markets on behalf of the EU, and then lend it up to 60 billion to the Member State in financial difficulties. Additionally, EFSF was as a special purpose vehicle, which can issue bonds up to 440 billion for lending to Eurozone Member States in difficulties. Both EFSM and EFSF were adopted following the Ecofin Council in 9 May 2010, became fully operational since August 2010 and will remain in force until June 2013. After June 2011, European Stability Mechanism (ESM) will replace ESFM and EFSF as a permanent instrument to safeguard the stability of euro area. The second group of strategies has started when European Union gave a mandate to a high level group chaired by Mr. Larosiere, in order to identify what has to be done to undertake more deep-rooted reforms. Based on this Larosieres group report, European Commission launched a set of strategies intended to constitute a more transparent European financial system. In March 2009 a communication was adopted for the formation of European Financial Supervision System. With the establishment of the new system, three existing Committees (Committee of European Banking Supervisors, Committee of European Insurance and Occupational Pensions Committee, Committee of European Securities Regulators) will be replaced by more strengthened Authorities, which will operate at European level and in coordination with national supervisors. In accordance with the Communication of March 2009, European Commission published a second communication two months later which details the European Financial Supervisory Framework. The Commission proposes a system based on two dimensions: y The first dimension establishes European Systemic Risk Board (ESRB), which will be responsible for monitoring the macro risks in the financial

system. The decisions of ESRB will not be binding on Member States, but an action or explanation might be demanded in case they didnt act on ESRBs recommendations. The organizational structure of ESRB will be composed of members and observers. President and Vice-President of European Central Bank, governors of national central banks, chairpersons of three European Supervisory Authorities and one person from the European Commission would have a right to vote as members in the ESRB. The representatives of national supervisory authorities and chairperson of European and Financial Committee would join the organization as observers. y The second dimension of financial supervision is the European System of Financial Supervisors (ESFS). The main objective of ESFS is to identify micro risks stem from financial institutions, other sectors players or consumers. It transforms three existing Committees of financial regulation into the Authorities (European Banking Authority, European Insurance and Pensions Authority and European Securities and Markets Authority) with more power and responsibilities. The Authorities can take binding decisions when a disagreement occurs between national authorities or actors. The organization of ESFS consists of a steering committee, board of supervisors and management board. One representative from each authority would work in Steering Committee to determine the cross-sectoral risks. The Board of Supervisors in each Authority will be composed of the chairperson of that Authority and representatives from relevant authorities in Member States, moreover, a representative of European Commission, of ESRC and of EFTA-EEA country would be involved in as observers. A management board will be responsible for operational tasks, which comprise national representatives and the Commission. European Commission presented legislative proposals for the European Financial Supervisory Framework in September 2009 and one year after European Council and European Parliament approved the new financial supervision structure was created. Both ESRB and three Authorities started to work officially in January 2011.As mentioned above, while dealing with the global financial crisis, Europe has to cope with sovereign debt problems of some Member States since November 2009. European Monetary Union has been widely criticised because it is based on a single central bank without a common fiscal policy among Member States. The lack of supranational fiscal coordination has become more apparent in the absence of immediate and mutual response to the Greek crisis. Hence, EU initiates a new strategy to reinforce economic policy coordination by the invitation of EC Commissioner Olli Rehn in April 2010. European Unions new economic governance strategy is based on three pillars; strengthening of Stability and Growth Pact, enhancing macroeconomic coordination within EU and harmonisation of national budget frameworks of Member States. As a fiscal surveillance mechanism of Euro area member states, Stability and Growth Pact plays a key role in European economy policy coordination, however, recent debt crisis has shown that Member States could not perform in compliance with rules and principles set by the

Pact. To enhance its implementation and to avoid the breaches of the rules, Commission set out a strategy that will reinforce so-called the preventive and corrective parts of the SGP. The existing preventive arm of SGP operates through stability and convergence programmes in which Member States outline medium-term objectives (MTO) of their budgetary positions in accordance with the rules of SGP. However, as the current crisis proved, Member States are insufficient to achieve their MTOs and a new tool is added to the existing mechanisms, namely prudent fiscal policy-making, which ensures that annual expenditure should not exceed a prudent medium-term rate of growth. With the help of prudent fiscal policy-making it is aimed to use unexpected extra revenues for debt reduction instead of spending it. On the other hand, the existing corrective arm of SGP is implemented through excessive deficit procedure (EDP) - EDP is an instrument to prevent excessive deficits and debts of Member States. While current EDP mainly focuses on deficit criterion (3% of GDP), the new strategy puts more emphasis on debt threshold (60% of GDP); in addition to this, the evolution of debt levels would be monitored more tightly. If a Member States debt level exceeds 60% criterion, that Member State should take appropriate actions in order to decrease the difference between its debt level and the reference debt values at a rate 5% per annum over the last three years. Both for the breach of preventive and corrective practices, the Commission developed new sanctioning mechanisms for the Member States in the euro area. If a Member State fails to adopt preventive actions, 0.2% of its GDP would be held as an interest-bearing deposit. In the case of corrective action, the amount deposited would be the same; however, Member States in would not bear any interest as such, these sanctions, Commission developed a reverse voting mechanism in order to strengthen their implementations. Through this mechanism, the Commissions recommendation would be adopted, unless Council disapproves of it by the qualified majority. The rationale of second pillars formation of economic governance is to prevent and correct macroeconomic imbalances. The reactions of Member states to the financial turbulences could be wide ranging as a result to manage the process more efficiently, first mechanism introduced is an alert system based on Member States scoreboards in which a series of macroeconomic indicators represented and analyzed. An alert threshold would be specified for each indicator that will give a signal to experts for the in-depth evaluation of the problematic situation. The evaluation process of the scoreboards would be conducted on a regular basis. Indepth reviews can lead to two different outcomes for Member States. The first option is to take no action when macroeconomic indicators are stable. The second option is to recommend preventive actions if there is a risk of macroeconomic imbalance. If the macroeconomic imbalances of a Member State produce severe negative consequences for other Member States, the mechanism of excessive imbalance procedure (EIP) would be put into effect. In such cases, Member States are obliged to take a corrective action within a specific time period. Similar to implementation of the first mechanism, if the macroeconomic imbalance corrected, EIP will be closed. If the Member State took corrective actions, but its effects didnt occur simultaneously, the procedure will be closed but monitoring would be continued. If a

failure in implementing corrective action or noncompliance with the recommendations continued repeatedly, a set of sanctions would be imposed for the Member States of euro. A Member State in euro area has to pay 0.1% of its GDP as a yearly fine if it fails repeatedly to correct macroeconomic balances under EIP. The decision of enforcement will be taken by the reverse voting mechanism. Third pillar of economic governance aims to harmonize budgetary frameworks of the Member States. This encapsulates the convergence of public accounting systems, forecasting methods, numerical fiscal rules and transparency. All three pillars have been presented in six legislative proposals to the Council of the European Union in September 2010, and they were planned to be operational in June 2011 with the consent of European Parliament. On the other hand, European Commission has already started the new framework of budget surveillance, so-called European Semester. Within the scope of the European Semester, a schedule of activities is organized in order to coordinate and evaluate the preliminary draft budgets of Member States which will start each year in January with the adoption of the Annual Growth Survey, and after a series of reviews and debates on national budgets of Member States it lasts in June.

Greece
Greece has a capitalist economy with the public sector accounting for about 40% of GDP. Tourism provides 15% of GDP. Immigrants make up nearly one-fifth of the work force, mainly in agricultural and unskilled jobs. Greece is a major beneficiary of EU aid, equal to about 3.3% of annual GDP. The Greek economy grew by nearly 4.0% per year between 2003 and 2007, due partly to infrastructural spending related to the 2004 Athens Olympic Games, and in part to an increased availability of credit, which has sustained record levels of consumer spending. But growth dropped to 2% in 2008. The economy went into recession in 2009 and contracted by 2%, as a result of the world financial crisis, tightening credit conditions, and Athens' failure to address a growing budget deficit, which was triggered by falling state revenues, and increased government expenditures. Greece violated the EU's Growth and Stability Pact budget deficit criterion of no more than 3% of GDP from 2001 to 2006, but finally met that criterion in200708, before exceeding it again in 2009, with the deficit reaching 13.7% of GDP. Public debt, inflation, and unemployment are above the euro-zone average while per capita income is below; debt and unemployment rose in 2009, while inflation subsided. Eroding public finances, a credibility gap stemming from inaccurate and misreported statistics, and consistent underperformance on following through with reforms prompted major credit rating agencies in late 2009 to downgrade Greece's international debt rating, and has led the country into a financial crisis. Under intense pressure by the EU and international market participants, the government has adopted a medium-term austerity program that includes cutting government spending, reducing the size of the public sector, decreasing tax evasion, reforming the health care and pension systems, and improving competitiveness through structural reforms to the labor and

product markets. Athens, however, faces long-term challenges to push through unpopular reforms in the face of often vocal opposition from the country's powerful labor unions and the general public. Greek labor unions are striking over new austerity measures, but the strikes so far have had a limited impact on the government's will to adopt reforms. An uptic in widespread unrest, however, could challenge the government's ability to implement reforms and meet budget targets, and could also lead to rioting or violence.

The impact of the financial crisis in Europe

The financial crisis has had a pervasive impact on the real economy of the EU, and this in turn led to adverse feedback effects on loan books, asset valuations and credit supply. But some EU countries have been more vulnerable than others, reflecting inter alia differences in current account positions, exposure to real estate bubbles or thepresence of a large financial centre. Not only actual economic activity has been affected by the crisis, also potential output (the level of output consistent with full utilization of the available production factors labour, capital and technology)is likely to have been affected, and this has major implications for the longer-term growth outlook and the fiscal situation. Against this backdrop this chapter takes stock of the transmission channels of the financial crisis onto actual economic activity (and back) and subsequently examines the impact on potential output.

The impact on economic activity

The financial crisis strongly affected the EU economy from the autumn of 2008 onward. There are essential three transmission channels: via the connections within the financial system itself. Although initially the losses mostly originated in the United States, the write-downs of banks are estimated to be considerately larger in Europe, notably in the UK and the euro area, than in the United States. According to model simulations these losses may be expected to produce a large contraction in economic activity. Moreover, in the process of deleveraging, banks drastically reduced their exposure to emerging markets, closing credit lines and repatriating capital. Hence the crisis snowballed further by restraining funding in countries (especially the emerging European economies) whose financial systems had been little affected initially. via wealth and confidence effects on demand. As lending standards stiffened, and households suffered declines in their wealth, in the wake of drops in asset prices, (stocks and housing in particular), saving increased and demand for consumer durables (notably cars) and residential investment plummeted. This was amplified by the inventory cycle, with involuntary stock building prompting further production cuts inmanufacturing. All this had an adverse feedback effect onto financial markets. via global trade. World trade collapsed in the final quarter of 2008 as business investment and demand for consumer durables -both strongly credit dependent and trade intensive had

plummeted .The trade squeeze was deeper than might be expected on the basis of historical relationships, possible due to the composition of the demand shock (mostly affecting trade intensive capital goods and consumer durables), the unavailability of trade finance and a faster impact of activity on trade as a result of globalization and the prevalence of global supply chains.

The impact on labour market and employment

Labour markets in the EU started to weaken considerably in the second half of 2008, deteriorating further in the course of 2009. Increased internal flexibility (flexible working time arrangements, temporary closures etc.), coupled with nominal wage concessions in return for employment stability in some firms and industries appears to have prevented, though perhaps only delayed, more significant labour shedding so far. Even so, the EU unemployment rate has soared bymore than 2 percentage points, and a further sharp increase is likely in the quarters ahead. The employment adjustment to the decline in economic activity is as yet far from complete, and more pronounced labour-shedding will occur as labour hoarding gradually unwinds. Accordingly, the Commission's latest spring forecast (European Commission 2009a) indicates that, on current policies, employment would contract by 2 % this year and a further 1 % in 2010. The unemployment rate is forecast to increase to close to 11% in the EU by 2010 (and 11 % in the euro area). Recent developments Until the financial crisis broke in the summer of 2007 the EU labour markets had performed relatively well. The employment rate, at about 68% of the workforce, was approaching the Lisbon target of 70%, owing largely to significant increases in the employment rates of women and older workers. Unemployment had declined to a rate of about 7%, despite a very substantial increase in the labour force, especially of non-EU nationals and women. Importantly, the decline in the unemployment rate had not led to a notable acceleration in inflation, implying that the level of unemployment at which labour shortages start to produce wage pressures (i.e. structural unemployment) had declined. These improvements had been spurred by reformsto enhance the flexibility of the labour market and raise the potential labour supply. The reforms usually included a combination of cuts in incometaxes targeted at low-incomes and a redirection ofactive labour market policies towards more effective job search and early activation. Measures to stimulate the supply side of the labour market and improve the matching of job seekers with vacancies were at the centre of policies in a majority of countries. Importantly, however, in many countries the increase in flexibility of the labour market was achieved by easing the access to non-standard forms of work.

unemployment rate in EU

The Greek debt crisis Like many countries, the Greek government relies on borrowed money to balance its books. The recession has made this harder to achieve, because tax revenues are falling just as welfare payments start to rise. It doesn't help that, in Greece, tax evasion is commonplace and pension rights are unusually generous but, to be fair, using public spending to even out the bumps of the global downturn is what most large developed economies are trying to do right now. Unfortunately, investors have lost confidence in the Greek government's ability to walk this tightrope so they have been demanding ever higher rates of interest to compensate for the risk that they might not get their money back. The higher its borrowing costs, the harder it is for the Greek economy to grow itself out of trouble. Events began to spiral out of control when credit rating agencies downgraded Greek government debt to "junk" status, pushing the cost of borrowing so high that the country effectively had its international overdraft facility cancelled overnight. Fearing bankruptcy, Greece had to turn instead to the European Union and the International Monetary Fund (IMF) the world's lender of last resort for up to 120bn euros of replacement lending. But political opposition in Germany and IMF orthodoxy in Washington demands that the rescue package comes with strings attached: a tough series of public sector cuts designed to reassure international investors that the government can become creditworthy again. The snag is, this traditional market response is complicated by Greece's membership of the single-currency euro club. This means it cannot stimulate growth by devaluing its currency, and nor can it cut interest rates any further, which would help, because these are decided by the European Central Bank in Frankfurt. Instead, the public sector cuts are almost certain to deepen the Greek recession, reducing tax revenues and making it even harder to service the debts in future. What many investors fear is that the only way out of this vicious circle is for Greece to walk away from its existing debts and try to go it alone potentially triggering a wave of similar defaults in other indebted European countries, and jeopardizing the euro itself. In the meantime, what many Greeks fear is that the IMF option is just going to prolong the agony and drive the country to the brink of political as well as economic collapse.

Eurozone/IMF Financial Assistance to Greece On May 2, 2010, Eurozone finance ministers and the IMF agreed on a three-year program of loans to Greece totaling 110 billion (about $145 billion): 80 billion (about $105 billion) from Eurozone member states and 30 billion (about $40 billion) from the IMF. The package could reportedly provide 30 billion (about $40 billion) from the Eurozone and 10 billion (about $13 billion) from the IMF in 2010 to help ensure that Greece meets its immediate payment obligations. The breakdown of the financial assistance package for Greece is shown in Figure 1.
Figure 1. Eurozone/IMF Financial Assistance Package for Greece

Eurozone Member States Details on Eurozone Member State Assistance to Greece Over the course of March and April 2010, Eurozone leaders incrementally formulated a mechanism for providing financial assistance to Greece. After considerable negotiation, leaders agreed that the Eurozone countries would provide bilateral loans, at a market-based interest rate (approximately 5%, which is lower than what Greece had paid in recent bond sales), if supplemented by additional loans from the IMF and if the Greek government implemented substantial austerity measures over the next three years. On April 23, 2010, the Greek government formally requested the activation of this mechanism and the final package was announced the following week. Of the Eurozone member states, Germany is reportedly providing the largest loan, expected to be 22.4 billion (about $29 billion) over the three-year period, followed by France, which is expected to loan Greece 16.8 billion (about $22 billion). With payment deadlines on Greek bonds looming, European leaders are aiming to execute the loan arrangements quickly. Due to different legal requirements among Eurozone countriesfinal approval requires a parliamentary vote in some countriesthe loans will likely not all be available at the same time. Advocates of quick implementation overcame a major hurdle, however, when the German parliament approved German participation in the plan on May 7, 2010.

IMF Details on IMF Assistance to Greece

Approximately one-third of the Eurozone and IMF financial package for Greece is from IMF resources. The IMF assistance to Greece is a three-year, $40 billion loan made at market-based interest rates. Specifically, it is a three-year Stand-By Arrangement (SBA), which is the IMFs standard loan vehicle for addressing balance-of-payments difficulties. The IMF does not disburse the full amount of its loans to governments at once. Instead, the IMF will divide the loan into tranches (French for slice) and will only disburse the next tranche after verifying that the specified economic policy reforms have been met. Urging policy reforms in this way ensures that the loans will be repaid to the IMF, and that the required economic reforms are implemented. Greeces loan from the Fund is unusual for two reasons. First, the IMF does not generally lend to developed countries and has never lent to a Eurozone member state since the euro was introduced in 1999 as an accounting currency and 2002 as physical currency in circulation. Second, it is unusual for its relative magnitude. The IMF has general limits on the amount it will lend to a country either through a SBA or Extended Fund Facility, which is similar to a SBA but for countries facing longer-term balance-of-payments problems. The IMFs guidelines for limits on the size of loans for SBAs and EFFs are 200% of a members quota annually and 600% of a members quota cumulatively. IMF quotas are the financial commitment that IMF members make upon joining the Fund and are broadly based on the IMF members relative size in the world economy. In exceptional situations, the IMF reserves the right to lend in excess of these limits, and has done so in the past. The IMFs loan to Greece is indeed exceptional access at 3,200% of Greeces IMF quota and is the largest access of IMF quota resources granted to an IMF member country. The IMF is expected to finance half of Greeces loan ($20 billion) using IMF quota resources. Although the United States has contributed 17% of IMF quota resources, it is unclear what portion of the IMF loan for Greece that is financed by quota resources will be funded by the U.S. quotas. The IMF does not disclose country contributions to individual transactions with the Fund. In deciding which quota resources to use, the IMF aims to provide a balanced position for all members. The other half ($20 billion) of the IMF loan is expected to be financed by bilateral loans that have been committed to the IMF as part of an overall effort to increase IMF resources. None of this portion is coming from the United States. In 2009, the United States did agree to extend a line of credit worth $100 billion as part of expanding the IMF's New Arrangements to Borrow (NAB). However, the expanded NAB is not yet operational, so this $100 billion line of credit from the United States cannot be tapped for Greece's package. Debates over IMF Involvement At the onset of the Greek crisis, many EU officials were insistent that the Eurozone take ownership of the issue. Analysts asserted that it was important for the Eurozone to demonstrate its strength and credibility by taking care of its own problems. The prospect of outside intervention from the IMF was viewed by many as a potential humiliation for the Eurozone,

with officials at the ECB, among others, strongly opposed.46 In late March, however, the debate in Europe appeared to shift, with the door slowly opening for possible IMF involvement as a number of member states came to favor a twin-track approach combining Eurozone and IMF financial assistance. In the end, IMF involvement was reportedly a key condition of German Chancellor Merkels willingness to provide financial assistance to Greece. Some argue that the policy reforms (conditionality) attached to an IMF loan would lend additional impetus to reform and provide both the Greek government and the EU with an outside scapegoat for pushing through politically unpopular reforms. The EU would also make policy reforms a condition of loans, but the IMF is seen as more independent than the EU and has more experience in resolving debt crises than the EU. EU Member States Despite the enactment of the Eurozone-IMF assistance package for Greece, investor concerns about the sustainability of Eurozone debt deepened during the first week of May 2010. Driven down by such fears, global stock markets plunged sharply on May 6, 2010, and the euro fell to a 15-month low against the dollar. Seeking to head off the possibility of contagion to countries such as Portugal and Spain, EU finance ministers agreed to a broader 500 billion (about $686 billion) European Financial Stabilization Mechanism on May 9, 2010. Some analysts assert that such a bold, large-scale move had become an urgent imperative for the EU in order to break the momentum of a gathering European financial crisis. Investors reacted positively to the announcement of the new agreement, with global stock markets rebounding on May 10, 2010, to re-gain the sharp losses of the week before. The bulk of the European Financial Stabilization Mechanism package consists of a Special Purpose Vehicle under which Eurozone countries could make available bilateral loans and government-backed loan guarantees totaling up to 440 billion (about $560 billion) to stabilize the euro area. The agreement, which expires after three years, requires parliamentary ratification in some Eurozone countries. The mechanism additionally allows the European Commission to raise money on capital markets and loan up to 60 billion (about $76 billion) to Eurozone states. Previously, such a procedure could only be applied to non-Eurozone members of the EU, and was used after the global financial crisis to improve the balance-of-payments situations of Latvia, Hungary, and Romania. Lastly, the ECB may take on a more significant new role: if necessary to increase market confidence, the ECB can now buy member state bonds, an activity in which it has not previously engaged. IMF The European Financial Stabilization Mechanism was announced with the IMF contributing up to an additional 220 billion to 250 billion (about $280 billion to $318 billion). This is in line with the Greece package, where the Eurozone states contributed roughly 2/3 and the IMF 1/3. IMF Managing Director John Lipsky reportedly later clarified the news reports about the IMF

contribution to the European Financial Stabilization Mechanism, saying that these pledges were illustrative of the support that the IMF could provide.54 Reportedly, Lipsky reiterated that the IMF only provides loans to countries that have requested IMF assistance and that Greece is the only Eurozone country to date that has requested IMF assistance.

Present situation in Greece

The state of affairs in Greece is hot, no doubt about that. This is not new, nor is it directly correlated to the current financial crisis; rather, we have a scaling of the tension that is definitely related to the fact that the Greek oriented capital manages to achieve very high rates of profitability, while there is a very strong political movement. The key factors in this contradiction are the low level of organization of the workers and the historical roots of the Communist Party in society. This post is the first of a series that will highlight some key features of the current situation in Greece, starting with the presentation of the main frontiers. At the time of writing the farmers were in the 9th day of their blockage of the highways, borders and other major roads with their tractors, practically paralyzing the road network. Some of their claims are against the Common Agricultural Policy and the policies that shrink the income of smaller producers to the benefit of big companies. This has been an open frontier for years, and has its own issues. In the cities, now, there are two frontiers. The first one concerns education. The students are preparing their next move, after the demonstrations of December and those supporting the Palestinians. The main issues concern the founding of private universities (until now constitutionally forbidden), the abolishment of asylum (so police can enter the universities), the equalization of diplomas from universities with those from private colleges, the breakdown of the undergraduate into two cycles (until now 4 years minimum), the imposition of fees, the salaries and the working conditions of the professors, the facilities; practically everything. The events of December following the execution of a 15-year old by a policeman also deserve some comment. First, they occurred against a background of already heightened tension due to very low wages and incomes, strict fiscal policy, inflation, persistent unemployment at the official rate of 9% (the real figure is at least 14%), state terrorism and government corruption and, most importantly, no perspective for improvement; on the contrary, the country was on the brink of crisis. So the murder of the child was the last straw. Second, several other factors were less reported. Another pupil was shot on the 10th, outside his school, while discussing with other pupils their participation in next days demo. The bullet stuck in his arm and that prevented him from dying. On the 22nd, the secretary of the union of the cleaners, a 44-year old woman from Bulgaria was murderously attacked with acid in response to her fighting stance the previous period. The murderers even forced her to drink the acid! During the time that the cities were on fire, the police forces were beating and arresting 10- to 15-year old pupils in the morning, while successfully playing an old game with rioters at night. Finally, big strikes were held, workers demonstrated in the streets with their children and teachers with their pupils, but the media of the bourgeoisie ignored them, presenting only

repeated scenes of destruction, appalling people and discouraging them from participating in the demonstrations. Which brings us to the third frontier: that of the workers. Despite the fact that the workers are struggling, there are serious limits to their fight. In the next post we will discuss the working movement and the political situation.

Greece economic forecast

The economy is suffering a serious recession in the context of the sizeable, but vital, fiscal retrenchment. A return to sustained positive growth is projected for 2012 as external demand strengthens, competitiveness improves and the far-reaching structural reforms implemented in response to the fiscal crisis start to take hold. Substantial economic slack and rising unemployment will keep inflation pressures subdued. The outlook is subject to important, mostly downside risks.

Adherence to the fiscal and structural adjustment program, agreed in May 2010 with the European Union (EU) and the International Monetary Fund (IMF), is indispensible for restoring credibility and market confidence, long-term public debt sustainability and competitiveness. Success depends crucially on rigorous expenditure control and further progress in fighting tax evasion, combined with comprehensive reforms to address chronic rigidities in fiscal management, and in labour and product markets.

Are the Domestic Reforms and Eurozone/IMF Package for Greece Enough?
Some economists fear that Greeces fiscal austerity plan, which entails cutting budget deficits by 9% of GDP in four years, is too ambitious and will be politically difficult to implement. As a result, some economists suggest that the Greek government could still default on or, considered more plausible, restructure its debt. In fact, some observers regret that debt restructuring was not included in the IMF package in order to provide a more orderly debt workout. Restructuring would also push some of costs of the crisis onto private banks that, it is argued, engaged in reckless lending to Greece. However, a default or debt restructuring could accelerate the contagion of the crisis to other Eurozone countries, as well as hinder Greeces ability to regain access to capital markets. In addition, even if Greeces government stopped servicing its debt, it

would still need substantial fiscal austerity measures to address the government deficit unrelated to debt payments. This has led some economists to argue that Greek fiscal austerity should be offset by more accommodating monetary policy by the ECB. This seems unlikely in light of recent reported comments by the President of the ECB, Jean-Claude Trichet, on the ECBs commitment to price stability. As a result, some economists have suggested that Greece should or may leave the Eurozone. This would likely require abandoning the euro, issuing a national currency, and allowing that currency to depreciate against the euro. The Greek government would also probably have to put restrictions on bank withdrawals to prevent a run on the banks during the transition from the euro to a national currency. It is thought that a new national currency depreciated against the euro would spur export-led growth in Greece and offset the contractionary effects of austerity. Since Greeces debt is denominated in euros, however, leaving the Eurozone in favor of a depreciated national currency would raise the value of Greeces debt in terms of national currency and put pressure on other vulnerable European countries. Additionally, some argue that a Greek departure from the Eurozone would be economically catastrophic, creating the mother of all financial crises, and have serious ramifications for political relations among the European states and future European integration.

Bibliography:
European Economy - 7/2009 Economic Crisis in Europe: Causes, Consequences and Responses Luxembourg: Office for Official Publications of the European Communities http://www.bis.org/statistics/consstats.htm. Economic Ties: Framework, Scope, and Magnitude, by William H. Cooper. Wolfgang Mnchau, Why the Euro will Continue to Weaken, Financial Times, March 7, 2010