Economic Analysis of the Effect of the Recession on the Economy - Assignment Example

1029227 perspectives on Macroeconomics Background information The fiscal crisis in Greece is attributed to a situation of economic fiscal profligacythat is attributed to begin as early as 1980s when an upward trend in public debt began. The situation of fiscal profligacy was facilitated by the presence of deep-rooted corruption and inefficient political system (Georgios, 2010). For Greece, the economic situation remained concealed until the mid-2008 when there was a dramatic increase in public debt as observed in numerous advanced economies. Currently, the financial tragedy in Greek brings out three primary players. First, the Greece government is responsible for allowing a weak political system that resulted to the mismanagement of domestic economy thereby contributing to the additional government debt at an incredible rate (Georgios, 2010). Compared to other Eurozone economies, this debt rate was very high. Secondly, the financial market especially the credit rating agencies were myopic in their prediction of the US sub-prime mortgage loan crisis of 2007. Consequently, the attempts to unveil potential sovereign debt crisis led to an overreaction and the country’s large budget deficits made the economy a target. Lastly, there was a fair part of the blame on the delayed reaction of the European Central Bank by the Eurozone governments particularly Germany (Georgios, 2010). Economic analysis of the effect of the recession on the economy Based on history, financial crisis tends to result to sharp downturns economically, low revenues for the government, government deficits that keep widening, high debts levels, and the pushing of government into defaults (OECD, 2013). A recession also results to high unemployment levels, falling average incomes and increased inequality. In the course of a recession, there is a fall in GDP that results to increased unemployment. Unemployment is attributed to firms going bankrupt hence most workers losing their jobs, and firms failure to hire new employees in the aim of reducing costs. In addition to not hiring new employees and reducing the number of employees, recession forces organizations to reduce costs which then translate to low wages especially the temporary workers (OECD, 2013). Reduction of costs amongst firms is also as a result of high costs of living that see most workers have their real wages cut. Fall in tax revenue is also another result of recession since firms make less profit that translates to low corporate tax; employees receive low income that result to lowered income tax; and lower expenditure result to lower VAT payments. Lower VAT payments were experienced in Greece during 2011 recession where VAT revenues translated to a fall by 18%. Budget deficit is not an exceptional in cases such as this where declining tax revenues and payment for welfare rises resulting to increased deficit in the budget and entire debt to the government. Rising bond yields is also another outcome of recession since saving tends to rise and people demand security bonds. Source: European Commission, Communication from the Commission Recommendations of the measures to stimulate the current low growth situation In order to fully recover from the current recession, Greece should consider implementing a full and timely second economic adjustment programme as its priority (EU, 2012). The main focus for this program is to ensure that the Greece economy experiences growth restoration and job creation potential while eliminating all rules perceived as value-destroying as well as all opportunities that encourage corruption and bureaucracy that hinders engagement into productive activities by both Greece citizens and businesses. So far, the nation is characterized by poor performance in its public administration and over-regulation that results to inefficiency in the administration (EU, 2012). However, through the second programme, Greece is expected to a more equitable society that eliminates any severe imbalances. Some of the recommendations include restoration of cost competitiveness; facilitating exports; stimulating new investment; modernizing public procurement; unleashing competition and freeing prices; creating a competitive energy sector; creation of efficient services in transportation; overseeing successful privatization programme; and tackling social impact of the crisis including promoting youth employment and training (EU, 2012). Evaluation of the consequences of the policy measures In order to enhance the economic growth of Greek’s productive sector, a permanent exit is needed such that all areas of the country’s economy are catered for. The restoration of cost competitiveness will result to the implementation of cost competitive economy through labor costs adjustments to fight unemployment (Georgios, 2010). The policy will result to considerable reduction of the minimal unit labor costs in business by about 15% between years 2012-2014. In addition, facilitating the export sector will result to favorable custom formalities in Greece compared to other European governments. Reduction in the complete export clearance would result to a remarkable reduction in unnecessary documentary. Since the economy of Greece is depended on 12% income from public procurement, the mover to modernize the sector would result to reduced time for contracts awarding and this would result to availability of supplies and services needed to perform public services. The figure below indicates the sectors of Greek economy that will be affected by the implementation of the new policies. In addition, tackling social impact of crisis through urgent response is expected to curb unemployment particularly amongst young people thereby causing a reduction in the high poverty levels. Building a modern public administration is also an effective policy that will be result to proper management of public finance, tax collection, open the market to competition, make public procurement work efficient and innovative and ensure all citizens are provided with timely judicial reviews (OECD, 2013). Source: OECD 2013, Greece at a Glance Assessment of the likelihood of the implementation of policy measures for desirable consequences Even though proposed policies have been made to assist the nation to revive its economy, the Greece government may choose to implement them or not depending on what it considers as highest priority. However, there Eurobank report proposes several interventions that must be made to ensure that Greece like other European nations has achieved reduced government deficits. Some of the reforms include equating domestic inflation to the average Eurozone through combating of market rigidity and oligopolistic situations; restructuring of production such that it occurs in market-oriented sectors of the economy; the banks to exercise self-control in their loans extension; facilitation of productive investments and incentives so as to attract investors and elevate wages to through a rate below the inflation and productivity level. Through these proposed interventions, Greece is expected to operate on measures that are long-term unlike using short-term solutions. The long term solutions are expected to reduce labor costs and not improve services in education sector; public administration; boosting competitiveness; and addressing municipality of laws (Georgios, 2010). Bibliography EU, E. C., 2012. Communication from the commission to the European an Parliament, the council, the european central bank, The European Economic and Social Committee, the Committee of the Regions and the European investment bank., London: European Commission. Georgios, P. K., 2010. The Greek Crisis: Causes and Implications. Panoeconomicus, 27 October, Volume 4, pp. 391-404. OECD, O. f. E. C.-o. a. D., 2013. Greece at a Glance. Policies for a Sustainable Recovery, London: Diane Stametelato. Read More