EU Economic Crisis: The Case of Greece

Opening Case: The Economic Chaos in the European Union

• The EU started as trade agreements among 6 European countries after WWII to prevent another European war
• Six decades after its inception, the EU achieved free trade, free movement of people, a single currency and regional peace
• The EU encountered its first major economic crisis, prompting questions about its ability to withstand significant stress
• A financial crisis occurred affecting Europe and, in particular, Greece

What Really Happened in Greece?

• Some experts claim several European countries borrowed beyond their means
• Greece received significant attention in 2010 due to a severe financial problem
• The financial crisis in the EU was triggered when Greece concealed true debt levels
• Investors focused on the debt levels of other EU countries, once Greece's situation was revealed
• Greece officially required an international bailout from the EU and IMF in April 2010
• Greece faced its first negative economic development rate since 1993 in 2009
• Greece was unable to make debt payments due to a fast-growing crisis
• Concern from investors and bankers surrounding lending to Greece raised its debt costs
• Greece was accused of concealing deficit issues with a significant deficit revision in the 2009 budget by economic historians
• This bailout was due to the country's large budget deficits, lack of transparency, and widespread corruption
• Corruption, characterized by "fakelaki" (bribes) and "rousfeti" (political favors), has become endemic in Greece
• Greece has experienced significant levels of political/economic corruption and poor global-business competitiveness compared to other EU members

The Impact on Europe and the EU

• Some see promise amid Europe's debt crisis, citing reforms implemented to help Europe thrive in a globalized world
• European banks channeled $2.5 trillion into the five most vulnerable eurozone economies - Greece, Ireland, Belgium, Portugal, and Spain
• Sixteen countries using the euro have economies that are interlinked
• Countries using the euro face specific difficulties, such as the absence of monetary policies tailored for each country
• Euro currency has made countries, such as Portugal, Spain and Greece, less cost competitive
• They must pay wages/costs in euros, making goods/services more expensive than those from lower-wage countries, like Poland, Turkey, China, and Brazil
• Indebted EU countries can't devalue currencies to boost exports due to using a single currency
• Rigid EU rules impede government navigation of country-specific problems like deficit spending and public works projects
• Most countries in the monetary union ignored the EU’s Stability and Growth Pact by running excessive deficits, which means more spent than available
• Reducing deficits/cutting social programs comes with a high political cost
• According to Steven Erlanger, the EU and 16 nations using the euro face two crises - too much debt/government spending, and a divide between competitive (Germany/France) and uncompetitive countries

What it means to business

• Global business/trade are connected to the political, economic, and social realities of countries
• Trade agreements/country groupings are expanding based on the idea that peace, stability, and trade are interdependent
• Public/private sectors have embraced this

What Does This All Mean for Businesses?

• Businesses still see opportunity despite crises in European countries
• Diageo (UK based), Guinness beer maker, opened a new distillery in Roseisle, Scotland
• The new distillery symbolizes optimism due to downturn
• The scotch industry was thriving until the financial crisis caused demand to collapse in 2009
• Sales in South Korea fell almost 25%, with Spain and Singapore down 5% and 9% respectively
• Drinkers traded down for cheaper spirits, such as hard-up Russians going back to vodka
• David Gates (Diageo) says emerging markets lead recovery and Southern Europe is concerning

Why Countries Borrow Money

• Governments operate first from tax revenues before borrowing
• Saudi Arabia, Brunei, or Qatar doesn't need to borrow due to oil tax revenues
• Countries might need to borrow money if tax revenues go down

Reasons for Borrowing

• Recession: Countries borrow to keep public services running until the economy improves
• Investment: Countries may borrow to invest in the public sector and build infrastructure
• War: Countries may borrow to fund wars or military expansion
• Politics: Countries may borrow money to reduce tax rates because of political pressure or to stimulate its economy
• People do not want to give up a benefit or service or, in the case of a recession

When Countries Borrow

• Countries increase their debt when they borrow
• Debt levels become too high, investors get concerned the country may not be able to repay the money
• Investors and bankers ask for a higher interest rate or return as compensation for the higher risk
• This leads to higher borrowing costs for the country

National Deficit

• The national deficit refers to how much a country borrows from either the private sector or other countries
• National deficit differs from the current account deficit, which indicates that imports are greater than exports
• Healthy countries run national deficits

International Economic Cooperation among Nations

• Following WWII, nations understood that global cooperation was a key element for global peace
• Intention was to reduce economical disagreement since areas of disagreement could lead to conflicts
• Nations decided to work together to promote free-trade via entering bilateral and multilateral agreements
• The General Agreement on Tariffs and Trade resulted from agreements
• GATT was created, its successes, its challenges, and the World Trade Organization are reviewed
• WTO replaced GATT in 1995, the creation of an institution overseeing international trade

General Agreement on Tariffs and Trade (GATT)

• GATT is a series of rules governing trade created in 1947 by twenty-three countries
• By the time it was replaced with the WTO, there were 125 member nations
• GATT has been credited with substantially expanding global trade by way of tariff reduction
• GATT had the basic principles of trade free and equal, open markets equally to member nations, without discrimination or preferential treatment
• One of GATT's key provisions was Most-Favored-Nation Clause (MFN) which required once a benefit was agreed on between two countries, it was automatically extended to others
• GATT initially focused tariffs, which are taxes placed on either imports or exports

MFN Everywhere

• MFN requires trading partners to require it of their partners for pricing, access, and other provisions
• VC requires it on companies that invested so that they are sure to have negotiated the best price for equity
• A signee that is given MFN status benefits from any better negotiation to receive a cheaper price point or better term

GATT Member Countries

• They turned their attention to non-tariff trade barriers, including government procurement/bidding, industrial standards, subsidies, etc
• Member countries agree to limit/remove trade barriers in these areas
• Countries agreed to permit a wider range of imported products to enter their home markets by simplifying licensing/developing standards
• Duties have to result from uniform procedures for the same foreign/domestically produced items
• Early successes led some countries to get more creative with developing trade barriers
• The challenge for member countries was enforcement
• Registering the disapproval of others with actions and trade barriers had little that a country could do
• Trade got more complex, leading to the Uruguay round, starting in 1986/ending in 1994

World Trade Organization (WTO)

• WTO was one which had developed due to the Uruguay Round of GATT, starting operations in 1995
• The WTO website states, it is the global organization which deals with trade rules between nations -It focuses on helping producers, exporters and importers with business

Multilateral Trade Agreements

• The global focus on multilateral trade agreements/cooperation has expanded trade exponentially
• GATT and WTO have helped create a prosperous trading system with unprecedented growth

WTO's Primary Purpose

• The forum is for member nations to dispute, discuss, and debate trade-related matters
• The WTO undertakes discussions that impact trade, globalizations, environment, etc

GATT and WTO - Normal Trade Relations

• WTO’s round is called the Doha Round, starting in 2001 and with 153 member nations
• Because of so many members, MFN status has been eased into normal trade relations

WTO: Settling Disputes and Trade Practices

• If a country calls another country's trade practices unfair/discriminatory, they settle it in a provision of the WTO