Thesis Statement On The Current Economic Recession

Table of Contents

Executive summary

1. Introduction
1.1. Background of the study
1.2. Statement of the problem
1.3. Research aims and objectives
1.4. Structure of the rest of the report
1.5. Description of the situation
1.6. Statement of the problem

2. Literature review

3. Proposed plan of analysis

4. Sources of data

5. Analysis and findings

6. Proposed solution to problem
6.1. Integrated assessment of the analysis

7. Recommendations

8. Proposed plan of action

9. Limitations of the study and scope for more research

10. Application of learning to another organization

11. Financial Crisis of Bank of America

References

Executive summary

In 2008, the world witnessed economic turndown of the most dangerous nature since the Great Depression of the 1930s. It all began in 2007 when high home prices in the United States turned downward that spread quickly to the entire US financial sector and then to financial markets globally. The overall casualty in the United States included the biggest insurance company, the entire investment banking industry, the largest mortgage lender, two of the largest commercial banks and the largest savings and loan. The impact of downfall in the United States had a huge impact globally and specifically the European countries. The worst hit country by financial turn down was Greece (Salaset al, 2010).

Greece even before joining the Euro was living beyond its means. After adopting single currency, public spending soared. Between 1999 and 2007, public wages increased by 50%, faster than most of the countries in Eurozone. The government also hosted 2004 Athens Olympics and piled up debt. The debt in Greece kept soaring till the point where the country was no longer able to repay its debts. Greece was forced to ask for help from the IMF and European parts in the form of massive loans (Shiller, 2008).

This research analyzes the global financial crisis and its impacts on Greece. It analyzes the austerity measures taken up by Greece and its impacts on the country. The research analyzes the bail outs that were granted to Greece to save the country from defaulting. IMF, World Bank and European Central Bank helped Greece by providing loans along with strict austerity measures by the economy of Greece had continuously shrank and the situation is not getting any better.

The aims and objectives of the research include:

- Analyzing the current financial crisis in Greece
- Analyzing if there is any opportunity present in Greece for economic revival
- Proposing a plan for revival of Greece’s economy

For analyzing the financial situation of Greece, secondary data was used for extensive and in-depth analysis. The secondary research data sources included books, case studies, articles and literature review. With this methodology, the research investigated and analyzed the weaknesses and strengths of steps that were taken in Greece in order to counter the financial crisis. The analysis revealed that it was the poor taxation policies and economic structure that contributed to the worsening financial situation of Greece. The research revealed that IMF and World Bank played significant role in order to take the country out of this worst situation. Although the austerity measures are being implemented in Greece by cutting employment, increasing taxes and lower wages but the impact haven’t been staggering as the austerity measures in the country led to social disruption. The riots and strikes triggered in Greece due to higher taxation, recession and cut backs on pays. The research revealed that if Greece defaulted, it will deeply affect the German and French economies that hold 70 percent of debt. IMF and World Bank have asked Greece to take more austerity measures such as cut down high costs of labor along with instituting key tax reforms. The country might raise the VAT to 25% at all their purchases including homes, cars etc. (Sladek, 2010)

The research provides recommendations for the revival of Greek economy. The recommendations include the maintenance of sovereign debt of Greece before 2020, write off or reduction of Greek debt and issuance of GDP lined warrants to investors and creditors. The research also applies the findings on Bank of America that went through similar financial crisis in the wake of 2008 financial crisis where Bank of America was on the verge of defaulting and was saved by the government with the largest bailout amount (Theotokas and Harlaftis, 2009).

1. Introduction

1.1. Background of the study

Greece has been raised as a service oriented nation supporting the backbone of economy at the corner stone of services. The services in different sectors never remained constant as sectors continue to acquire to positions based on growth patterns relatively (David, 2005).

In the 1960s, the agriculture sector declined a great deal that caused the industrial sector to reach to the top in 1973. Moreover, in 1979, the industrial sector attained another peak level with its increased share of GDP. Both these sectors continue to fluctuate over the years (Allison, 2012).

During the 1950s to the 1974, around 1.25 million Greeks got migrated to other lands. The money they earned and sent back to their homeland and family pumped the tourism and shipping sector as a huge influx of foreign exchange. Though, the gap for the tourism sector lowered and reduced in the 1970s, but it broadened in the shipping sector. There, again the tourism and shipping was at their boom from 1970 till 1978 (Bien, 2007). Since foreign direct investment, called the FDI was just average and merely equal to the annual remittances received by the country that averaged around 620 million dollars from the period 1954 to 1976. After 1976, the exchange rate was shifted to modest foreign direct investments and accounted for less than 1% of the total Gross Domestic Product GDP (Commission, 2011).

Since 2008, Greece has been stuck in the dilemma of a nation with no reward for work and is referred to as a “rentier state” though. Athens Olympic Games held in 2004 in Greece, cost around 9 billion dollars which is still a huge debt to be paid back and the crisis is estimated to be pile up more over the next years (Lachman, 2010).

The economic situation in Greece further deteriorated with the global economic crisis that had the worst impact on Greece. Greece was overspending since many years which created the budget deficit. In addition, much of the borrowings by Greece were concealed which came to light during the global financial turndown hit. The country wasn’t prepared to cope with it (Krugman, 2009).

The 2008 global financial crisis burdened Greece with billions of debt to pay. Due to the crisis, Greece was on the verge of a default and is currently taking up austerity measures to pay back the debts to stay in the European Union. This research will analyze the reasons behind Greece’s downfall and the current economic situation of the country (Elabanna, 2009).

1.2. Statement of the problem

Greece’s economy has been suffering a decline since the year 2008. It has since been awarded two bailouts from the IMF and European Union (Grenander and Rosenblatt, 2008). There was a fall of 6.3% seen in Greece’s economy in the second quarter. However, the contraction became even deeper when its economy suffered a 7.2% shrank during the last quarter (Lapavitsas, 2012). IMF stated that Greece’s economy needs a ‘real fix’ to see it through to sustainability, and a ‘quick fix’ will not go any good to the decline in Economic situation in long term.

The bailouts granted to Greece are based on the condition that they will reduce their debt to 120% of GDP. Considering the economic downfall and the current condition, it seems like they will be able to do it by 2020 (Puchina, 2011). European Union and it members want to grant an extra two years to Greece to meet the condition, but IMF has not been kind as it disagrees. It is a worrying fact for Greece however, as the representatives of the private sector lenders in Greece suggest that for the long term fiscal adjustment in Greece, a softer pace is required. They want the European Union and Greece to work out a new course that allows a perfect balance between growth and austerity. According to the IIF (institution of International Finance), both Greece and Europe need urgent emphasis on growth (Rickars, 2012).

As discussed by Roubini & Mihm (2010), before the year 2000, Greece was not allowed to join European due to high rate of inflation and increasing debts. When it was finally allowed to join the European Union in 2000, there were still concerns from the economists, as they tried hard to squeeze their economics figures to meet the Euro’s criteria, but once it had entered the EU, it fell back to even worse economic conditions. At that time, the inflation rate in Greece was 4% above the EU’s criteria and one out of every ten person was out of job. There economic figures including inflation and joblessness worsen then the conditions in Britain even during recession (Shiller, 2008). With the financial crises of 2008, Greece’s situation further deteriorated. The country is trying to control inflation, unemployment and adjusting tax system in order to generate revenue and clear the debt (Rienhart, 2011). The problem statement of this research is if Greece would remain a tragedy or would it be able to make a financial comeback and become an opportunity.

1.3. Research aims and objectives

The aim of this research is to analyze the overall economic situation of Greece by determining if the financial crisis in Greece is a tragedy or is it an opportunity for Greece to make some major structural changes in the economy. This research has the following objectives:

- To analyze the current financial crisis in Greece
- To analyze if there is any opportunity available in Greece to revive the economy
- To propose a plan for the revival of Greece’s economy

1.4. Structure of the rest of the report

This research will include the description of past and current financial situation in Greece. This research will provide a thorough literature on the financial situation prevailing in Greece along with European Union and other countries especially after the economic downfall in 2008. The research will further propose a plan of analysis for analyzing different sources of information. By using the proposed plan of analysis, the current situation in Greece will be assessed. Based on the assessment made, recommendations will be proposed along with a suitable plan of action for Greece. The research will include the application of the learning to another organization in any industry.

1.5. Description of the situation

The nations that surround the Mediterranean part of the world have suffered from many problems for quite a while now. Amidst all this the nations had to suffer from an economic crisis and usually the major reason that is associated with it is the annexation of the European Union in the year 2001 (Allen, 2013). These issues were not solved there and then. If we want to ascertain as to exactly what went wrong it would be only wise to have a fair view of the condition in Greece before and after the seize.

The national currency of Greece commonly known as Drachma was known to be stable for three reasons on the whole. The three industries that had a larger say on its stability were the coin-minting, tourism and lastly the shipping. These, needless, to say were the backbone of the Greece economy and made to what can be called the national income. Thus, it can be inferred these three for the most part suffered the most due to the prevailing international condition in the economy (Conard, 2010).

To, keep it simple, the economy of Greece cannot simply stand on its own feet. Greece has no industrial base of its own (Epping, 2001). Tourism is something that requires an income that can be termed as non-refundable. Shipping requires ever thriving business or companies that want their good to be shipped (Davis, 2013). Numismatics wants companies that require that coins to be minted. Thus, in conditions of the crisis in the foreign market, Greece could by no means hold its own ground independently. Also, this all the while endangered the very strength of the Drachma (Galbraith, 2012).

When Greece economy was annexed, the Drachma was simply taken over by the ever-stable Euro. As opposed to Drachma, Euro happens to be supported by huge and sustaining world economies with the likes of Germany. When it came to the stabilizing part, Greece had needed not to worry. The overall form of the Greece economy hadn’t changed so the minor change could only be noticed from the externally (Krugman, 2009)

Corruption of the government amounts to be another major issue is Greece. According to an estimation it was found out that almost twenty five percent of the budgets went down to all the corrupt activities which also included the foreign lending (Lianou, 2011). Well before the annexation, Greece happened to be on the most creditworthy economy. Now, even the foreign borrowers, doubt the prospects of repayment due to instable economy and the corruption practices in there (Mattick, 2011).

After seize, the rating to the of the credit rose to some level. Now it is unified with the rest of the European counterpart. Had it not been annexed the view is that it would have been way too high. Also, due to this, Greece was able to have better loan access, an incentive that the Greeks simply preferred before. Thus, it can be said that the problem with Greece had already started. Initially that’s how it was until it couldn’t be taken further with the same stance and tolerance any longer (Palley, 2012).

Greece got the second bailout from EU, but based on conditional reforms in the country. Greece has made a lot of progress in structural reforms in the past year, but a lot more remains to be done (Roochnik, 2013). Greece agreed to some targets under the second bailout deal with European Union and in order to stay a member of EU, it has to fulfill those targets. According to Rickars (2012), Greece has fulfilled a number of its targets, but some areas of the Second Economic Adjustment program yet face hurdles in implementation.

Saldek (2010) discusses the positive development made in the structural reforms in Greece during the last three quarters and says that the absorption of support fund from European Union and revenue Collection policy are on the top of list. The funds allocated by the EU were allocated to growth and creation of jobs for the people to tackle the joblessness in country. According to Tuner (2010), the funds were absorbed at a faster pace during the second half of last year. During this time, Greece has already used 35% of the funds allocated to it by EU. A total of $20 billion Euros were made available to Greece. With the money they have spent, they have started around 180 development projects. The focus has been on boosting the employment rate in country by creating more job opportunities for people (Vathakou, 2010).

One of the main challenges that the government faces in structural reforms is to remove the hurdles that keep the investors from investing in Greece. Task forces have been created who are assigned specific tasks to tackles issues such as Red Tape (Berberoglu, 2011). Another important challenge was tax evader’s situation. There was a target of 400 Million Euros set by Greece Government to be collected in taxes. The government successfully exceeded the target and collected over 900 Million Euros in taxes. However, the total collectible amount is around 8 Billion Euros and more work is needed to be done to collect the amount from tax evaders (Authers, 2012).

The authorities in Greece realize that due to reforms and austerity, the pressure on the Greek has increased in the form of high taxes, salary cuts and unemployment. However, if the government keeps progressing at the rate at which it does now, the conditions will improve soon (Berberoglu, 2011). As discussed by Douzinas (2013) the structural reforms will not be able to keep Greece from being default. There is no way that Greece can repay its debt in two years and there is barely any chance that it will be rewarded another bailout. It is impossible for Greece to return to healthy economic condition with so much debt, pending tax amount, unemployment and political uncertainty (Jones, 2009). However, the Greek government believes that they should continue their hard work to overcome the financial crises.

Greece had to agree to very stringent austerity plan to be awarded a bailout from EU in the wake of global economy crisis. When you search for a reason for this financial problem in Greece, the reason that emerges is the profligate spending of its people, but there is another reason as well i.e. tax evasion. People do not pay their taxes and it has burdened their economy heavily (Mills, 2011).

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