My Big Fat Greek Crisis

It seems that the head of the IMF Christine Lagarde has offended the Greek people according to Greek politicians. Evangelos Venizelos, PASOK (socialist party) president, told an election rally that "Nobody can humiliate the Greek people during the crisis" whereas Alexis Tsipras (the leader of the far left political party) took this as an opportunity to attack the other parties claiming: "For tax-evaders, she should turn to PASOK and New Democracy". I can understand that their role as politicians requires them to keep a strong image to the public, however, what Lagarde said was not an insult. When asked  whether what she was saying meant that Greece and the other European nations had a nice time and it was now payback time, she simply answered "That's right.". As far as I'm concerned she was just stating the truth and was in fact being kind towards Greece as the statement involved 'Greece and the other European nations'. 

If we take a look back in 2004, Greece confessed that they forged their figures in 1999, as their deficit was not below 3% of their GDP (one of the requirements to join the Eurozone), thus, they shouldn't have been accepted in the first place. Unfortunately for them, they managed to make the cut. Conversely, it might have worked out better if this flaw was seen and brought up so that Greece would be able to keep their monetary sovereignty. Supposing, Greece kept the Drachma, they would have been able to depreciate their currency, lower their own interest rates, and increase quantitative easing during the recession resulting in Greece as well as the rest of the world being in a healthier position today. Regrettably, Greece did join the Eurozone, which made it cheaper for them to borrow money, as a result, Greece began to increase its spending, hence, increasing its debt. The most notable project, in my opinion was the 2004 Olympic games; it went well over its budget and cost Greece an estimated $15 billion. At the time it might not have been a great deal, but it certainly is now. Luckily for Greece however, they didn't win the Eurovision as I don't think they would have the capacity to finance it.

It's no secret that there have been many Greeks who have been evading tax. The first thing that may pop into your head might be the claim of there being more Porsche Cayennes in Greece than there are people declaring an income of  50,000 euros and above. Well fortunately, that's false, in 2010, 311,428 people declared an income of 50,000 or more euros, also a Porsche spokesman said that they have only sold about 1,500 Cayennes in Greece since the car was released. However, in 2011 there was a farmer who owned a Ferrari as well as a Porsche and had only declared 100,000 euros of income in the past decade. Moreover, income tax revenue as a percentage of GDP in Greece is only 4.7% making it the lowest in Europe and the average is 8%. And so I think I've made my point about Greece evading taxes.

Having said all that, Greece should not leave the Eurozone, it won't be just Greece which turns to turmoil but the rest of the world as well. Greece has a total debt of $447 billion from governments, banks as well as private lending. Therefore, if it leaves the euro and declares bankruptcy, the $44.3 billion which France used to support Greece would have been for nothing (Greece's largest lender). What's more, Germany would be in a worse state because their government has given roughly $6.68 billion to Greece. Leaving the Eurozone, would also put banks in shock, making borrowing a lot harder and lending a lot more expensive. Thus, tightening the rest of the Eurozone members as it will be difficult for them to borrow money to aid their economies.

The opinion polls indicate that the 17 June elections in Greece are going to be won by Syriza, the one party which is against the bailouts. I honestly don't know how selfish these people can be. If they don't accept the terms to the bailout Greece will be forced to leave the Eurozone, most likely adapt the Drachma again. Let's have a quick look at the outcome of such a scenario; high costs to Greece to change everything back to Drachma, it will annoy every country which had faith and made an investment towards Greece, it would make it harder for other struggling Eurozone countries to come out of recession because lenders would not risk another default scenario.

The way in which Greece may be saved is if the European Central Bank, instead of it increasing its interest rates from 1% to 1.5%, they should decrease them. Furthermore, the Greek government needs to subsidise or support, as subsidising might be very expensive, firms. Those firms will provide new jobs for the unemployed and contribute to GDP, thus resulting to economic growth. Unfortunately, the world economy is in a terrible state, meaning that firms won't be expanding, however when they do, Greece needs to make sure they're the most appealing candidates for that firm to be prosperous.

IMF

At times of economic hardships many countries look up to the International Monetary Fund (IMF) for solutions. Ideas and methods in which their national economic system can be kick started back up to its former performance before the economic crisis of 2008.

However, with Greece on the verge of bankruptcy and other eurozone countries such as Spain which face many economic difficulties, for example dealing with a high unemployment rate, the IMF's job proves to be very difficult. Spain had an unemployment rate of 24.1% in March, what this means is that out of all the people who are able to work and are looking for work, 24.1% of them can not find a job, comparing this to  Spain's unemployment rate at the end of 2007 when it was just 8.8% just shows how hard Spain has been struck by the recession. As you can see, nearly a quarter of the labour force are not active, this makes it not only an economic problem but a social problem also. It has a negative effect on society as at times of high unemployment more people tend to drift to robbery, black markets grow larger and other negative influences to society arise. Furthermore, the Spanish government will also suffer as it will face an increasing budget deficit due to factors such as more unemployed benefits being issued, whilst at the same time trying to find a solution to their existing problem.

England has also had a hard time since the crisis, but luckily it kept its monetary independence. Although it faced levels of inflation which were higher than the targeted 2% (plus or minus 1%) and poor economic growth, it has managed to keep inflation at 3% thus reaching its target,  also reaching its lowest since February 2010. Nevertheless, due to quantitative easing (when the Bank of England buys financial assets in order for there to be a new flow of money in the economy, hence giving the economy an extra boost) it should face higher levels of inflation in the future. 

The IMF has recently instructed George Osborne to go to "Plan B" in order to combat weak economic performance. What "Plan B" consists of is cutting interest rates and introducing more quantitative easing. One doesn't have to be in the Monetary Policy Committee (MPC) or IMF to tell you that adjusting interest rates and quantitative easing are the most effective ways to stimulate the economy, other than those, the Bank of England (BoE) doesn't have many other tools in its disposal. Let's have a brief look at the statistics. Interest rates are already at an all time low at 0.5% reducing it to just 0% won't have a large effect on the economy, if there hasn't been a big change in the economy from the 0.5% interest rate then reducing it to 0% will not miraculously increase economic growth. Quantitative easing already totals 325 billion pounds, increasing that further will just result in a higher inflation rate in the future, which will be acting against the MPC's objectives. Furthermore, don't forget that when Gordon Brown was in power and claimed economic stability, the IMF lauded his administration of the British economy, yet look at the state of the economy now. Hence, the economy in England should be "fixed" by the use of fiscal policy (in collaboration with monetary policy). Although it's hard for the government not to make cut's, it must in order to help with the already going boost which the monetary policy has started. A country can not efficiently overcome a crisis on just one of its two methods of dealing with the economy, it can control the economy using both monetary (supply) and fiscal (demand) policies, and it should combine both in order to gain economic prosperity.

Nevertheless, it is important to note that this is an international crisis, affecting many countries across the globe. Therefore, we should all work in unity to try and overcome this crisis because in the long run, although individual countries may face their own little problems, every country will be better off. And when the crisis is over, then individual countries should tend to their own problems.