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Entry into the euro area allowed Greece to obtain credits like Germany

17 September 2010 / 10:09:12  GRReporter
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Rescheduling of foreign debt and even the suspension of payments is inevitable for Greece. This is the opinion of Professor Costas Lapavitsas lecturer at the London School of Economics. He presented a study on the causes and consequences of the economic crisis in the euro area countries, forecasting particularly dark future for Greece. Costas Lapavitsas said firmly in his presentation that the economic policy of cuts (which is applied to stabilize the state debt and is fixed by the Memorandum of financial aid) that the government of George Papandreou follows will certainly lead to deep and long recession.

Greece's obligations under the contract for financial assistance include a series of measures that at the end of the three-year period would leave behind a faint economy that would not be able to recover soon, he said. After the memorandum signed with the IMF, the European Commission and the European Central Bank expires the external debt would be greater than it was at the beginning and Greece would need decades to pay it back. And this would happen only if it provides an average positive economic growth of around five percent per year. Lapavitsas explains that cuts of wages and pensions, increased direct and indirect taxes, combined with the lack of any policies to stimulate the economy would enslave Greece in an incurable recession that would forever change the living conditions in the country. The professor also explains that the stringent economic measures combined with higher tax burden mainly on the middle-class of the society seriously reduce consumption. In the long run, this would irreversibly divide the society into the richest and the poorest social strata, leading to the disappearance of the so-called middle class or the consumer backbone of the country.

At the same time, the country would remain unattractive for investments and this would block its capacity to raise productivity and in particular increase the volume of exports. Disadvantage of Greece to the international markets would strengthen and the chances of the country to restore its economic stability would drift away as the horizon even after the expiry of the contract for financial support. Therefore, Lapavitsas argues that the only result of the signing of the Memorandum of financial aid is to keep the welfare of euro area banking system (including Greece), rather than the actual recovery of the Greek economy.

According to him, the problem lies still in the foundation of the euro area. The union of various European countries to form one strong single currency align the value of the currencies of member countries that had a different burden on the international markets until yesterday. The countries of the so-called euro area periphery like Greece, Spain, Portugal particularly benefited at the beginning as they were enabled to obtain credits at nearly the same levels as the strong Central European economies like Germany, France and others. The access of peripheral countries to cheaper crediting increased its volume, Lapavitsas says, and the external debt of Greece increased twofold in the last 10 years. At the same time, Central European banks avail a bulk of Greek (and not only) government bonds. After the beginning of the international economic crisis European banks continue to finance the weaker economies in the euro area without taking additional measures.

Economies such as the Greek one are based on consumption rather than production and exports. The downward trend in the international economic environment have brought the problems in countries like Greece to the surface and the markets showed their lack of confidence in them through raising interest rates on loans. Then the euro area would split and the differences in stability between the Central European countries and the peripheral ones would be apparent. Costas Lapavitsas argues that one of the reasons for this difference is the level of wages in Germany that are artificially kept down as proportion of productivity. This, in turn, caused further decline in competitiveness of the southern euro area countries.

Whatever the reasons, the banking systems in each EU country are directly linked with each other and this is the main reason for the Memorandum of financial aid. EU countries that obtained a large volume of impaired Greek bonds saved their own investments, rather than the economy of Mediterranean countries, through the rescue plan for Greece (Memorandum). At the same time, Lapavitsas stresses that the reforms the agreement with IMF, ECB and EC imposed have a high public response in Greece, which leads to undesirable extremes as the arson of the branch of Marfin Bank in May this year.Costas Lapavitsas considers that the government will most likely be forced to reschedule the external debt payments to avoid the worst public and social scenario. He does not exclude even the possibility Greece to leave the euro area.

According to the professor in economics, such an option would not be so detrimental to the country if Greece takes the initiative first and requires debt rescheduling or even voluntarily give up the Euro and returns to the drachma. Thus, the debtor country will not be subject to the requirements of its creditors and may, by devaluing its own currency, restore the economic stability, says Lapavitsas. He, however, stressed: "It will not be easy." Notwithstanding this statement, it became clear that the professor supports the idea of Greece leaving the euro area. Then, the economic system should be completely reformed in a way that greatly benefits the productive and labour forces in the country rather than the financial and credit ones.

Tags: EconomyCrisisEuroBankruptcyGreeceCostas Lapavitsas
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