Understanding Effects of the Crisis in Greece on Lives of Greek Citizens - Research Paper Example

Understanding Effects of the Crisis in Greece on lives of Greek Citizens: An Empirical Study Table of Contents Table of Contents 2 Introduction (Background Context) 4 Secondary Data Analysis 6 Greek Fiscal Crisis: Reasons 6 Greek Fiscal Crisis: Effects & Probable Way to Achieve Economic Prosperity 9 Research Method 14 Primary Data Analysis & Findings 15 Recommendations 20 Reference List 21 Appendices 24 Appendix 1: Open Ended Questionnaire Survey 24 List of Figures Figure No. Figure Name Page No. 1 Greek ten-year bond yield spread to the German Bund 7 2 Economic Perspective of Greece in contrast to other EU nations 8 3 GDP Comparison 9 4 Greece Unemployment Rate 10 5 Effective Tax Rates in Greece 11 6 Trade Deficit in Greece 12 7 GDP Comparison of Greece-2012 & 2013 13 8 Disbursements under the Second Financial Bailout 13 9 Gender Segmentation 15 10 Employment Status 16 11 Age Distribution 16 Introduction (Background Context) Since the mid-1970s, continuous retreat from Keynesian regulation has fostered the growth of economic liberalization among countries. Saad-Filho (2011) rightly pointed out that recent economic liberalization trend in European Union (EU) countries has made its citizens responsible for borrow additional money in order to invest to avail social security such as social health insurance, pensions etc. Neo liberalization of economy and financialization of working class have conjointly created socio-economic background of financial crisis in EU countries like Greece. As the financial crisis halted the growth and stability of Greece and most of member countries in EU, government and banks of these countries started looking for rescue plan. In 2009, the economic crisis broke out in Greece and a rescue plan was implemented which faced harsh criticism from social members and commercial players. Newly implemented rescue plan created negative side effects like rise in unemployment, decrease in purchasing power parity (PPP), high inflation rate, public sector downsizing, job cutting in commercial sector, degradation of service quality etc. As austerity measure, government expenditure was drastically reduced; merger of public institutions and organization, recruitment of new employee was restricted for all sectors etc. From economic perspective, economic crisis in Greece had its most severe phase from late 2009 to early 2010. This was the time when Greek Government failed to run long term budget deficit and on the other hand, probability perception of sovereign default by international capital markets was increased. As a result, cost of fund borrowing was increased for Greek government and the government adopted fiscal consolidation program with an intention for reducing public debt and stabilize the economy (Kouretas and Vlamis, 2010; Vlamis, 2013). During the economic crisis, three players have played important role in directing economic policy of Greece such as Greek government, credit rating agencies and financial market and Euro zone Governments or better to say European Central Bank (ECB). According to Benos, Karagiannis and Vlamis (2011), Greek government and Euro zone leaders implemented stringent austerity measures which decreased demand for goods due to decrease in disposable income of citizens. As a result, Greek economy was pushed to deep recession and that severely affected quality of living of citizens. Consideration of research work of Karousos and Vlamis (2008) reveals the fact that sovereign debt crisis driven recession can force big companies to go bankrupt. Same thing happened to local companies during the time of economic crisis (Hellenic Statistical Authority, 2013). It has been found by the researcher that previous research works of Benos, Karagiannis and Vlamis (2011), Vlamis (2013) and other scholar precisely analyzed cause and effect of economic crisis in Greece but the topic “effects of the crisis in Greece on lives of Greek citizens” is being mostly ignored by the previous scholars. According to limited knowledge of the researcher, very few previous scholars tried to shed light on impact of issue like high tax rate, unemployment rate, cut down in government expenditure on lives of Greek citizens. Very few researchers tried to understand perspective and thinking of Greek citizen regarding issues like funding from EU, effect of austerity measures, impact of acceptance of European currency (Euro) on national economy, impact of returning to original currency, the drachma, what they think about the country should start from zero stage (bankrupt condition) or go with current situation, how to change the current economic situation etc. Therefore, gap in the literature has been created and such gap has influenced the researcher to take up this study in order to fulfil gap in the literature partially. In such background context, the researcher has selected the topic “Understanding Effects of the Crisis in Greece on lives of Greek Citizens: An Empirical Study” in this research paper. The study will use empirical evidences to address the research problem. In such context, research question for the paper can be briefed in the following manner; Research Question: How economic crisis in Greece has affected lives of Greek Citizens? Answering this research question will help the researcher to understand Greek citizen’s perception and understanding of different perspectives of economic crisis in the country. Based on the research question, following research objectives can be highlighted. Research Objective To understand how economic crisis has affected lives of Greek citizens. To understand perception of Greek citizens regarding austerity measures and government actions during economic crisis. To identify suitable solutions that can help Greece to come out of the crisis and ensure future prosperity of Greece. Secondary Data Analysis Greek Fiscal Crisis: Reasons In case of Greece, widening public deficits was being caused due to several factors such as extensive reliance on sovereign fund, decrease in economic competitiveness, reluctance of the government to increase domestic competitiveness by encouraging tourism business or other business avenues. In the last decade, Greek government had drastically increased public expenditure in order to achieve high growth rate and as a result the country started relying on external borrowings in order to support growth initiatives. On the other hand, for consecutive years, Greece government falsely reported financial data in order to ensure high credit rating. As a result, level of public debt had increased and budget deficit crossed the buffer limit (Vlamis, 2013). Weak governance and paralysis of financial consolidation policy were one of the key reasons behind the initiation of financial crisis. For example, in September 2009, previous government estimated budget deficit to 6.5% of GDP while in October 2009, newly elected government revealed the truth that actual budget deficit is almost 13% of GDP (Vlamis, 2013). According to Malliaropoulos (2010), economic competitiveness of Greece further reduced due to persistence of current account deficit which was caused due to EMU entry. In such context, lack of structural and labour market governance reform, decreasing social security and market competition had influenced or better to say force Greece government to launch bonds characterized with short maturity period and high interest rate. Interest rates of these bonds were higher than the bond released by Germany which is “Anchor” country in EMU. Not surprisingly, debt of the country had been doubted as probable sovereign default by international capital markets. Figure 1: Greek ten-year bond yield spread to the German Bund (Source: Vlamis, 2013, p. 25) During the time of economic crisis in Greece, lack of EU solidarity in funds had also widened bond yield for Greek government. For example, bond yield of Greek government as against German bund ranged up to 40 basis points. As the public debt crossed the sustainable capacity level, the volatility and spread in bond yield of Greek government as against German bund reached its maxima. The above diagram is depicting the fluctuation in Greek bond yield during the period of 2009. Degree of fluctuation smoothened after the financial assistance from other EU nations was published. Considerations of research works of Reinhart and Rogoff (2009 and 2010) reveals the fact that prolonged economic crisis is being caused complex interaction between pertinent factors that can severely affect economy. In context to Greece, financial crisis in Greece has been deepened due to dilemma of Euro zone Governments to provide monetary support to ailing country. Legal sceptics regarding bailout policy or questions regarding legal validity of bailout were the root cause behind dilemma of EU member country. On the other hand, ambiguities regarding ECB’s credit rating policy, collateral eligibility requirements, issue of marketable debt instruments by Greece government had also created confusion and uncertainties among investors and institutions holding Greek government bonds. The following diagram can be used in order to compare economic condition of Greece as against other EU nations. Figure 2: Economic Perspective of Greece in contrast to other EU nations (Source: Vlamis, 2013, p. 26) The above figure that net borrowing and government debt for Greece was highest among its peer EU countries and such high level of public debt is quite abnormal for medium sized economy like Greece. Such sheer amount of abnormality is showing that financial crisis of the country is not being created in overnight manner. Rather, mismanagement and lack of financial consolidation steps of Greece government triggered the economic crisis in the country (Awojobi, 2013). In order to understand depth of the economic crisis in Greece, the study will compare GDP data of the country during crisis period. Greek Fiscal Crisis: Effects & Probable Way to Achieve Economic Prosperity Figure 3: GDP Comparison (Source: Hellenic Statistical Authority, 2011) It is evident from the GDP comparison that during the crisis period, gross domestic product growth of the country was stagnated. Stagnant GDP growth negatively affected the employment sector as well as quality of life of citizens. Due to stagnancy of GDP growth and over reliance of governments of external borrowing have decreased the scope foreign investment and job creation in the country. Consideration of research works of Kim and Lin (2009) and Jenkins and Katircioglu (2009) reveals the fact that economic crisis can affect citizens of the country in multi perspective manner such as, 1- government would impose higher tax rate on citizen as austerity measure and the step would reduce disposable income level of citizens, 2- purchasing power capacity of citizens would reduce that would reduce demand for products, 3- as conjoint impact of economic crisis and inflationary pressures, unemployment rate of the country will reduce due to freeze in hiring and employee layoff by companies and 4- in case of Greece, lack of focus on alternate business sources would further decrease the scope of employment for employees. Figure 4: Greece Unemployment Rate (Source: Trading Economics, 2014) The above diagram is showing that unemployment rate in Greece has been increased at constant basis for last three years and reached its maxima point during November, 2013. Such diagram is showing that austerity measures and financial bailouts have not improved employment condition in the country. Domestic industry sector of the country is still not strong enough to create jobs and provide economic propriety to its citizens. Figure 5: Effective Tax Rates in Greece (Source: Papageorgiou, Efthimiadis and Konstantakopoulou, 2012) Due to unemployment rate and slow economic growth, government of Greece lowered the tax rate to ease the financial stress on workers in public and private organization On the other hand, government imposed higher tax rate on self employed individuals in order to compensate low tax earned revenue from employee in private and public enterprises. However, slashing of corporate rate has not created much enthusiasm on investors due to persistent uncertainty and doubt regarding economic condition of the country. On the other hand, high unemployment rate has also decreased the scope enjoying low tax regime for most of the employees. As of 2013, the tax rate in Greece follows the same pattern as depicted in above diagram. In such context, trade deficits of Greece can be compared in order to identify existing economic opportunities in the country. Figure 6: Trade Deficit in Greece (Source: Hellenic Statistical Authority, 2011) The table is showing that trade deficit for Greece was quite high during the period 2008 to 2010 because the country failed to attract sufficient investment or domestic production capabilities so that it can export more items to EU nations and other countries. The countries relied more on imports from other countries while their focus should be to develop domestic competitiveness (Todaro, 2000; Wei, 2002). It is evident from GDP comparison and trade deficit comparison that the current economic competitiveness of the country would do very little in helping Greece to move out of economic crisis. To substantiate the claim, the researcher will compare above data in context to GDP data of the country during 2013. Figure 7: GDP Comparison of Greece-2012 & 2013 (Source: Hellenic Statistical Authority, 2013) The result is showing that GDP growth of the country is still stagnated and in some quarters in 2013, GDP of the company has been reduced from same quarter in previous year. Greece still needs the financial assistance from European Union (EU) in order to stabilize its economy. Figure 8: Disbursements under the Second Financial Bailout (Source: Böcking, 2013) In the second bailout program, The EFSF issues bonds are being accessed by Greece as capital market debt instrument in order to raise funds while EU nations provided financial assistance to the country with lending capacity over €437 billion (Böcking, 2013). The above evidences are showing that although Greece has the opportunity attract investment, foster business growth in non-traditional sectors and strengthen domestic production level but the country is still not in the right track and still struggling to move out of economic crisis. According to Greene (2003) and Awokuse (2008), countries can achieve economic competitiveness by strengthening its domestic production and service sector. Using research work of Vlamis (2013) as reference coordinate, it can be said that Greece can improve the current economic condition by attracting investment from other states for developing tourism sector (Greece its already preferred tourism hub due to its landscape, natural beauty and architectures), exporting local products like white cheese (feta), extra virgin olive oil, oregano etc. Considering agricultural sector of Greece, it can be said the country reduce the trade deficit emphasizing more on exporting locally cultivated items that are difficult to find in other countries (fertile lands and natural resources of Greece foster the cultivation of these items). Fairly high unemployment rate in the country can be reduced by creation of jobs in enterprise using the financial assistance from EU nations (Awojobi, 2013). Next section will brief research methodology that will be used for address the research problem. Research Method According to Saunders, Lewis and Thornhil (2007 and 2009) and Davies (2007), researchers can use two types of methodologies such as qualitative research methodology, quantitative research methodology and mixed approach. 1- Quantitative methodology- in this approach, researchers analyze relationship between variables through statistical and numeric parameters. This approach works well when the researchers are confident about identifying dependent and independent variable and aim of the researcher is not to find root cause of the research problem (Robson, 2011). In this paper, the researcher is analyzing a broad topic (impact of economic crisis on lives of Greek citizens) hence it will not be justified to conduct quantitative research by selecting specific variables. Rather, the researcher will conduct the research in unconstrained manner and analyze perception of Greek citizens regarding impact of economic crisis. 2- Qualitative methodology- analyzing data in non-numeric manner and assessing parameters on the basis of their qualitative merits. This type of research methodology works very well for analyzing reasons behind particular phenomenon in detailed manner, understanding human perception regarding a social event or doing phenomenological research (Sekaran and Bougie, 2009; Gray, 2009). Due to broadness of the research topic and objective of the researcher to assess perception of Greek citizens regarding economic crisis, the researcher will use qualitative research methodology for this research paper. Open ended questionnaire will be used for collecting qualitative responses from respondents and open ended questionnaire will help respondents to express their opinion and perception in free manner (Curwin and Slater, 2008). Convenience sampling and snowball sampling will be used to select respondents such as chat room participants, Greek citizens. As the researcher will use mix convenience sampling and snowball sampling as part of non-probabilistic sampling hence it will not be rational to predict the exact sample size (final sample size will be reached after series of trial and error method) (Creswell, 2009). Secondary data will be collected from statistical report of Hellenic Statistical Authority, peer reviewed journals, books, articles of renowned economists, company websites, newspaper articles, print sources, online magazines (Bryman and Bell, 2003). Secondary data sources will be used to for theoretical discussion of the research problem while responses for open ended questionnaire survey will be used for primary data analysis. Secondary source based analysis is given in the paper as evidence for collection of secondary source based information while analysis on the basis of open ended questionnaire survey of chat room participants and Greek citizens will be used as evidence for collection of primary source based information. Primary Data Analysis & Findings Question: Tell me something about yourself (include personal description, job description, age, whether permanent resident or expatriate, current employment status). At the end of Snowball sampling, total sample size was 50. 68% respondents are male while rest of respondents is female. Figure 9: Gender Segmentation In such context, employment status of respondents can be explained in the following manner. Figure 10: Employment Status The above diagram is showing that 16% of respondents are unemployed and there is probability that their unemployment is caused due to ongoing economic crisis. Majority of the employed respondents work in private sector and self employed respondents contribute minimum to total employed profile. Figure 11: Age Distribution Age distribution is showing that more than 50% of respondents below to younger section of the society and majority have work experience lower than 5 years. On the other hand, only 12% of respondents represent mature section of the society and many of them having work experience higher than 17 years. Question: Are you aware about economic crisis of your country? If yes, then explain how the ongoing economic crisis is affecting life of you and your family. All the respondents have stated that although they are aware about economic crisis of Greece but most of them have very little knowledge about financial details and financial factors that had influenced the economic crisis. Most of them find it difficult to comprehend financial and economic reasoning for financial crisis of their country due to their lack of exposure to financial theories and economic theories. However, they agreed with the fact that ongoing economic crisis have affected their lives in negative manners. Some major effects have been identified by them and these factors can be explained in the following manner. 1- Downsizing and hiring freeze is creating pressure on them to get job and earn money for living. Low wages or unemployment is creating not only financial but also social and psychological pressure to keep their family happy. Aged respondents have even encountered cardiovascular problems due to excessive mental stress, uncertainty regarding gloomy job market and social security caused by economic crisis. 2- Although government recently slashed tax rate but that was not sufficient to rising inflationary pressures and lag effect of recession. As disposable income growth has become stagnant for respondents, they curtailed their expenses as a result demand of products decreased. 3- As the government relies heavily on external debt and importing hence domestic industry development scope is pretty slim at present. As a result, due to lack of alternate employment opportunities in domestic industrial sectors, citizens find it frustrating to compete with each other for getting job in limited business sectors. Overall, economic crisis has degraded their quality of life and also negatively affected their social security. Question: What is your perception regarding financial assistance from EU nations to put Greece out of crisis and other measures taken by government to stabilize the economy of the country? It has been found that most of the respondents blame the government for mismanagement of economy and believe it is shameful practice to seek for financial assistance to borrow money from EU nations for addressing existing economic crisis in the country. They also criticize the austerity measures taken by government to address the problem such decreasing expenditure, playing with tax rates and increasing public debts. Respondents pointed out that lending money from EU cannot stabilize economy because despite monetary disbursement, unemployment rate in the country was 27% during November, 2013 (Trading Economics, 2014). Older and knowledgeable respondents gave more logical responses to the question. According to them, financial assistance is needed at this point of time but the government should use the funding from EU to create jobs in enterprises or develop domestic industrial sectors and in this manner, government can stabilize the economy in sustainable manner (Greene, 2003; Awokuse, 2008). Question: Would it be better for the economy of the country not to accept Euro as currency? Explain your answer. It was a tricky question for respondents because believe accepting Euro as currency is a welcome decision for Greece but they failed to provide sound reasoning for their answer. According to them, accepting Euro made it easier for the country to move goods across countries. Counter argument is that productivity in Greece is low as compared to other EU countries such as Germany and difference in productivity in Greece and other EU countries magnified with acceptance of Euro (Hellenic Statistical Authority, 2013). Compared to Germany, labour wages increment was high during 2000’s. Low productivity problem can be addressed by Greece government by devaluating its currency if it is using original currency, the drachma but as it loose control over currency after accepting Euro (currency in EU nations), Greece found it difficult address problem of high productivity cost (Saad-Filho, 2011; Vlamis, 2013). Due to such economic reasons, certain section of respondents believes that it would be better for the economy of the country not to accept Euro as currency. Question: Would it be better or worse for the economy to return to original currency, the drachma? Explain your answer. More than 50% of respondents believe that draconian austerity measures by Germany is actually intended for paralyzing Greece economy and hurting the social life of Greek people rather supporting the country to achieve sustainable economic prosperity. According to them, revert to the drachma could help Greek government to flourish the tourism sector. Revert to drachma would decrease the cost of hotel rent, tourism and holiday making in the country and subsequently, demand for tourism industry will rise significantly. From economic perspective, revert to drachma would empower Greece government to devaluate its money in order to address high production cost problem (Greene, 2003). Therefore, majority of respondents believe it would be better for the economy to return to original currency, the drachma. Question: Would you prefer the country to start from bankrupt condition or would you like to continue with the current situation? Explain your Answer. As majority of respondents fear that excessive economic and social intervention from EU leader countries and fund lenders, therefore, they believe that continue with the current situation would not help the country to achieve economic stability. Due to national pride and creating scope for Greece government to use drachma as currency, the country should start from country to start from bankrupt condition. According to respondents, starting from bankrupt condition may create problem for the country government to gather fund in the initial stage but the situation will also provide opportunity to governments to implement fresh economic plans. However, none of the respondents were able to offer detailed economic and financial reasons why the country to start from bankrupt condition. Therefore, further research is needed to validate their claim. Question: Kindly provide suitable suggestion and recommendation to government regarding how they can respond to current economic crisis and drive Greece to economic prosperity. Some common suggestions are; 1- revert to the drachma and devaluate the currency in order to offer products cheaply as against other EU nations despite high productivity cost, 2- develop the tourism sector and attract foreign investment to make Greece as best tourism place in EU, 3- provide support agricultural sector and strengthen exporting of local products like white cheese (feta), extra virgin olive oil, mastic, oregano etc and other natural fruits and vegetable which are specialty of Greece, 4- use financial assistance to develop national industry competitiveness and business sector that can create jobs and curb down unemployment rate and 5- take stringent measures to increase employee productivity (production of units/hour/employee). Some of the suggestions have close link with arguments being presented by Awojobi (2013) and such similarity strengthens validity of suggestions. Recommendations Key objective of this paper is to view the economic crisis in Greece from the perspectives of Greek citizens. Due to practicality and economic justifications, three suggestions qualified as probable recommendations for Greece to move out of economic crisis and achieve economic prosperity in sustainable manner. Recommendation 1- Greece can think revert to the drachma and the process will give them additional power to control the value of currency and they will also create a risk buffer from further ill effect of Euro Zone crisis. Recommendation 2- Greece government should boost the business prospect of tourism sector and attract investors by using techniques like tax reliefs, special economic zone and ease processing of legal papers. Revert to the drachma will help them to cut the cost of operation in tourism sector and attract more tourists. On the other hand, measures should be taken to strengthen agricultural sector and boost up exporting activities that will decrease the trade deficit. Recommendation 3- reverting to drachma might create problem for Greece to gain further EU support. Hence government should focus on developing small and medium scale enterprises and micro business sectors with existing fund. Such measures will help Greece to decrease the unemployment rate and future base for economic stability (Awojobi, 2013). Reference List Awojobi, O., 2013. Does trade openness and financial liberalization foster growth: An empirical study of Greek economy. International Journal of Social Economics, 40(6), pp. 537-555. Awokuse, T., 2008. Trade openness and economic growth: is growth export-led or import-led? Journal of Applied Economics, 40(2), pp. 161-173. Benos, N., Karagiannis, S. and Vlamis, P., 2011. Spatial effects of the property sector investment on Greek economic growth. 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Saunders, M., Lewis, P. and Thornhil, A., 2009. Research methods for business students. 4th ed. New Jersey: Pearson Education. Sekaran, U. and Bougie, R., 2009. Research methods for business. 5th ed. Chichester, West Sussex: John Wiley& Sons. Todaro, M. P., 2000. Economic Development. 7th ed. Baltimore, MD: Addison-Wesley. Trading Economics., 2014. Greece Unemployment Rate. [online] Available at: [Accessed 14 February 2014]. Vlamis, P., 2013. Greek fiscal crisis and repercussions for the property market. Journal of Property Investment & Finance, 32(1), pp. 21-34. Wei, S. J., 2002. Is globalization good for the poor in china? Finance & development, A Quarterly Magazine of the IMF, 39(3). Appendices Appendix 1: Open Ended Questionnaire Survey Respondents: Chat Room Participants and Greek Citizens Question 1: Tell me something about yourself (include personal description, job description, whether permanent resident or expatriate, current employment status). Answer: Question 2: Are you aware about economic crisis of your country? If yes, then explain how the ongoing economic crisis is affecting life of you and your family. Answer: Question 3: What is your perception regarding financial assistance from EU nations to put Greece out of crisis and other measures taken by government to stabilize the economy of the country? Answer: Question 4: Would it be better for the economy of the country not to accept Euro as currency? Explain your answer. Answer: Question 5: Would it be better or worse for the economy to return to original currency, the drachma? Explain your answer. Answer: Question 6: Would you prefer the country to start from bankrupt condition or would you like to continue with the current situation? Explain your Answer. Answer: Question 7: Kindly provide suitable suggestion and recommendation to government regarding how they can respond to current economic crisis and drive Greece to economic prosperity. Answer: Read More