International Institutions Help or Hindrance to Economic Recovery in Greece - Case Study Example

INTERNATIONAL INSTITUTIONS HELP OR HINDRANCE TO ECONOMIC RECOVERY IN GREECE By Students Name Course Professor University State Date Globalization has helped in generation of unprecedented stages of financial risk and growth. In this case, financial markets opened up allowing firms and governments to invest freely. However, due to growth in global finance it grew into being complex. Domestic regulators struggled hard to pace in which financial practices were evolving. As a result, the international cooperation assumed the patchwork with limited coercive and scope. The international monetary fund and EU agreed on initial steps to enable international regulations, as well as, liquidity support. However, these regulating bodies effectiveness has been questionable. Greece economic crisis and debts have left it with no choice by to plan to exit the euro zone posing many questions on its imminence (Abbasid, & Insert, 2012). On the other hand, the international monetary fund has continued demanding that Greece adhere to the terms of its earlier bailout and implement economic reforms as a prerequisite for additional aid. The action of these bodies has raised democratic deficit concerns. This is a concept that is principally invoked in the argument that the EU and other organizations do not portray forms of democracy and seem remote to the ordinary citizen due to their sophisticated method of operation (Taylor, & Taylor, 2006). The aim of this paper is to deduce whether international institutions such as the International Monetary Fund (IMF) and the European Union (EU) are helping Greece economic recovery basing argument in democratic deficit context. Crises Overview Greece had rapid economic growth between 2000 and 2009 where their actual GDP average was 4% against the euro, however, the sources that generated this growth were from unsustainable drivers. The large real wage increase, low-interest rates, and increased credit growth boosted the private consumption as well as the public spending. The country failed to invest in projects that had the ability to pay off in future but used it to cover current consumption. The pension and health system become financially unsustainable in the long run and tax evasions that significantly affected the government revenue (Ait-Shelia, Andritzky , Jobst, Nowak, & Tamirisa, 2012). There have been optimistic projections and consistent overspending in Greece leading the country to miss its fiscal targets. All these factors together with economic imbalances and uncompetitive economy Greece has remained vulnerable to the global credit crisis. IMF and EU Efforts As far as the international monetary funds and the European Union have made several is seen as a stabling block towards Greece economic recovery. Some of these efforts include the following; The Eurozone committed a total of €80 billion in loans to Greece while IMF offered €30 billion in a three-year stand-by agreement. This short term loan was aimed at boosting, restoring confidence and maintaining Greece financial stability (European Commission, 2012). In addition, the economic growth and improved competitiveness were also prime goals to be met within the medium term. In 2011, another bailout need arose which were announced in 2012. This program goal was aimed at focusing more on growth enhancement reforms. In this bailout, the autonomous debt holders had to recognize losses on their bonds (Eriksen, & Fossum, 2000). As a result, this affected the banks in Greece, which held roughly €32 billion in government bonds. In these two efforts stated above, the EU is seen to pose sturdy accusations on Greece on what it termed as mixed progress. Political instability, recession, and social unrest were stated as the main factors that limited success. According to this body the deficit reduced, but efforts made to fight tax evasion, reinstate competitiveness and expenditures management were not sufficient enough (Ward, 2002).  The primary aim of IMF and EU in bailing out Greece is a clear sign that they are dedicated to ensuring that the country recovers from the economic crisis. Their efforts are aimed at restoring investors’ confidence in the country, as well as, restoring global financial command. Numerous observers have confirmed that liquidity efforts act as an encouragement to investors to retain funds in the program country, thus putting off a liquidity run and recovery support (European Commission, 2010). This kind of effort is crucial in that it encourages the performance of efficiency-enhancement reforms because these strategies these can be too risky and costly in case these supporting bodies are not available. Democratic deficit The problem in Greece can be attributed to lawlessness other than just astronomical public debt levels. The communist party has a strong believe that by destroying the country economy and democratic institutions it’s a way of bring revolution nearer. As a result, European Union and international monetary fund bailouts and other efforts put forward to resolve Greece's economic problems will have been in ineffective (Bekkers, 2007). As a result of these factors, these regulatory bodies day by it is becoming apparent that they have no intention of tackling issues of democratic deficit. The European Union should realize that it has failed Greece despite previous efforts in bailing the country (Brealey, and Kaplanis, 2004). Judging of its claims the European Union commitment to democracy issues is highly disputable. The Union is based on numerous key values democracy being one of them which also one of the directing principles in international relationship. Being a club of democratic nation states whose prospective criteria for its members is to demonstrate their commitment to democracy in protecting the minority. The European is stated to have a commitment to the democracy idea, but democracy principles have never assumed the role in the organization and the way the EU functions. However, the European is referred to as having democratic deficit broadly characterized by a mismatch existing between the input and output government functions (Featherstone, K. 2011). The democratic deficit that induces the mismatch has been in existence since the European Economic Community was created. In case Maastricht first unmasked the amount of the democratic deficit; thus the autonomous debt crisis of the Eurozone has exaggerated its consequences exponentially with clear evidence from Greece. The rise of the neo-Nazi Golden Dawn Party in Greece is an extreme right that troubles electoral radicalisation in an EU member state. This party rose to prominence has been facilitated to by Greece economic downturn that has been compounded by the insensitive severity measures that have been mandated by the troika. The hardships resulting from austerity strategies put into place from abroad have heightened the Greek perceptions of losing control of their country and destiny (Campbell,& MacKinley, 1997). As a result, this has created a situation that is ripe for exploration by tremendous social and political activities. The European Union decision to include Greece in the currency union are prone to blame because they have so far created a situation that has seen the country highly indebted and perennially at a competitive shortcoming to more effectual and productive euro-states. The EU has introduced laws as a result of the financial crisis making the union very influential in certain critical areas. For instance, there is a wave of accepted discontent over the austerity strategies that are colored by the precisely known IMF assertion of commanding its policies on the countries being credited (IMF, 2012). This has been interpreted as a clear reflection of the democratic deficit that is constant with the failure to seek advice from the people on economic strategy choices. Failing to seek advice from people is not the problem, but the EU members have not been in a position to come up with policies that are adequate in addressing the variety of country-specific causes resulting into economic downturns. This is clear on how the economic crisis in Greece is being addressed. The point here is the leaders in EU treated this issue as a short term liquidity issue and downplayed the structural causes of the crisis (IMF,2012). Research shows that fiscal adjustments on the basis of cutting spending and particularly if accompanied by pro-growth supply-side reforms can result in zero cost on the economy and other times lead into expansionary aspects over the medium run. Conclusion The EU and IMF initially made efforts to solve the crisis in bailing Greece twice. However, these efforts did not bear positive results as these two bodies expected it. These efforts instead were disregarded as having any active involvement. This is because they induced moral hazards as well as limited impacts on the Greece economy recovery. In case of excessive borrowing and lending by IMF and EU can reduce the incentive to stay solvent and avoid mistakes. This makes it clear that as long as these bodies are seen as if they are not committed to the recovery of this economy the leadership in the country is to blame as well. In addition, there is a debate that challenges the efforts to contain the crisis based on EU lack of democratic footing. However, it should be made clear that lack of improvements that are remarkable across the Eurozone that is the source of opportunities to ignite widespread dissatisfaction must not be credited to the democracy ills, but aspects of quality and capability of the elected members should be subjected as well. Reference List Abbassi, P. & Linzert, T., 2012. The effectiveness of monetary policy in steering moneymarket rates during the financial crisis. Journal of Macroeconomics 34 (2012) 945. Ait-Sahalia, Y., Andritzky , J., Jobst, A., Nowak, S., & Tamirisa, N., 2012. Marketresponse to policy initiatives during the global financial crisis. Journal of International Economics 87(1), 162-177. Bekkers, V. J. J. M. 2007. Governance and the democratic deficit assessing the democratic legitimacy of governance practices. Aldershot, England, Ashgate Pub. Brealey, R. and Kaplanis, E. 2004 “The impact of IMF programs on asset values” Journal of International Money and Finance, 23 pp.253-270. Campbell, J.Y., Lo, A.W, MacKinley, A.C. 1997. The econometrics of financial markets. New Jersey: Princeton University Press. Eriksen, E. O., & Fossum, J. E. 2000. Democracy in the European Union integration through deliberation? London, Routledge. European Commission, Directorate-General for Economic and Financial Affairs, 2010 “The economic adjustment programme for Greece”. European Economy, Occastional Papers 61 European Commission, Directorate-General for Economic and Financial Affairs, 2012“The second economic adjustment programme for Greece”. European Economy,Occastional Papers 94 Featherstone, K. 2011. “The Greek sovereign debt crisis and EMU: A failing state in a skewed regime”. Journal of Common Market Studies,49 pp.193-217. IMF, 2012. IMF Executive Board Approves €28 Billion Arrangement Under Extended Fund Facility for Greece. Press release no. 12/85. March 12, 2012. IMF, 2012. IMF Reaches Staff-level Agreement with Greece on €30 Billion Stand-By Arrangement. Press release no. 10/176. May 2, 2010 Taylor, R. J., & Taylor, L. E. 2006. Democratic deficit. [Waterloo, ON], R/L Taylor. Ward, D. 2002. The European Union democratic deficit and the public sphere an evaluation of EU media policy. Amsterdam, IOS Press. Read More