Contemporary Debates in Macroeconomics (6ECON002W)
Coursework
Fall 2016
Assessed Coursework: 50% of the overall module mark
Due date: Thursday 7th December 2017, 13.00
Topic: Fiscal Aggregates and Fiscal Policy
For a country of your choice evaluate how fiscal policy has been used in that country to deal
with the effects of an event/crisis and critically assess their effectiveness on the overall
macroeconomic performance.
1. Present the main fiscal aggregates of your selected country and discuss the main
sources of spending and revenues.
2. Chose a major event/crisis (e.g. global financial crisis, sovereign debt crisis, sovereign
default etc.) which strongly affected the country of your choice and demonstrate
how the fiscal and main macroeconomic variables were affected during and after
the event.
3. Analyse and critically evaluate the fiscal policies adopted to tackle the crisis and their
effectiveness on macroeconomic performance and on consumption and investment
behaviour.
4. Make policy recommendations.
Guidelines
 Your analysis should reflect your understanding of relevant topics covered by the module
via lectures, seminars, directed and self-managed reading and research activities.
 Inclusion of graphs and/or tables is strongly recommended.
 Graphs concerning data or model illustration should be included in the main text.
 Presentation: The CW must be written in the form of an essay. It must contain abstract,
introduction, main body and conclusions. Sections and subsections (if necessary) are
advisable.
 Academic references should be included in the bibliography.
 Full name and student ID must be included on the first page of the assignment.
 Word limit is 2000, excluding appendices and tables. The assignment should be produced
in Word format (font size: 12, line spacing: 1.5 or double) and it can be submitted in the BB
as a pdf file.

Below is a Sample Paper. You Can Order a Custom Essay Written From Scratch From Our Website. CLICK HERE TO ORDER.

Abstract

This paper aims
to explore on contemporary international economic
debates, with a focus on Greece sovereign crisis. The nation had
experienced a steady economic growth, especially after its entry in Eurozone
because it had access to massive loans.
However, government financial
misappropriation and lack of accountability, and with the 2008b global
financial crisis, the country entered into economic
struggles. This paper explores the sovereign debt crisis of Greece, policies
adopted to solve the crises and the
policy recommendations to the Greece government.

Introduction

Although the country had experienced a
constant economic growth for several decades, Greece has been facing grievous
debt crises; and it has been off-hand because the nation has already
surrendered its monetary sovereignty to the European
Union. The country has been
operating under high-level public
borrowing to sustain its dropping GDP,
and in 2010, the state had to sign for a bailout from other eurozone nations and the
International Monetary Fund. This paper describes the contemporary international
economic debates, with a primary focus on Greece current financial condition which is characterized by
sovereign debt crises. Further, it represents
the policies that the country has adapted
to handle the debt crises, with a focus on the austerity policies to bring the
state of deficit to manageable levels. Finally, the typology gives the policy
recommendations for Greece to put the financial struggles under control.

Fiscal Aggregate and Economy of Greece

With the implementation of the European
Monetary Union, individual Eurozone member states have been denied crucial
elements of macroeconomic control (Scharpf,
2011, p. 1). This hit several
nations, denying them a chance to enact on policies to control its debt levels.
In Greece, the EMU has been a systemic cause of the current macroeconomic imbalances which it has found difficult to
counteract. The fiscal condition of the nation has been vulnerable, and the citizens have been
significantly hit by the policies the country
had to enact to meet the terms of the lender
nations. The overall description of the Greece fiscal
aggregate is the one which is characterized by widespread unemployment,
poverty, and high tax rates to recover the debts.

The entry of Greece to Eurozone in 2002
saw it change its currency from drachma to euro. The economy of Greece had for
some time in the past characterized by growth and development, and it was the
15th largest economy of all twenty-seven European member states (Greeca.com, 2017, n.p). Greece is also taken as a developed nation, whose
revenue depends on service sector (85%) and industry (12%), but agriculture
takes up the remaining three percent of the national economic input. Tourism
and merchant shipping are the most critical
commercial industries in Greece, and it attracts over ten million tourists annually,
making it the seventh most toured nation in the European Union and 16th
globally. The country also has the most
extensive merchant shipping in the world, which makes up to 16% of the
global average capacity (Greeca.com, 2017, n.p).

From the 1970s, Greece economy
experienced break-down because of inappropriate economic policies enacted by
the government (Dell’Anno, et al., 2007, p. 52).
As a result, in the latter part of 20th century and early 21st
century, the country spent much of its resources attempting to rebuild and get
the economy back on its feet. Soon after
joining the European Union, Greece received
many subsidies to raise its crumbling economy and to improve the public
services (Hale, 2013, p. 1). However,
even after receiving the grants and support from other EU member states,
the nation remained at the trail of overspending, which drained its resources,
affected the inflation and interest rates
(Reinhart, et al., 2003, p. 1). Consequently, being under control of
European Central Bank monetary control, Greece economy now experiences the
challenge of structural reforms to keep its economy from falling and to improve the living standards of
the Greeks.

Greece entry into the Eurozone encouraged
investors to play convergence game; lending to the government and lowering the
interest rates as spreads strengthened compared to the European Union countries (Kindreich, 2017, p. 1). Low-interest rates powered economic
development, which was further encouraged by the direct foreign investments
inflows. However, the private-sector credit increase sooner revealed the
unsustainable economic growth for Greece. Also,
few years before the global financial crises, the Greek government was
characterized by overspending, which resulted in the budget deficit and the whole
government borrowing rates. With the global economic
crises in 2008/9, Greece’s fiscal debits
increased, and the interest rates on public and private debt exponentially
surged. However, the nation could not reduce the interest rates or devalue its
currency since it was already tied by the European Central Bank (Beck, 2012, p. 3); and thus, economic growth
stimulation remained at low levels. The nation was unable to enact an internal
monetary policy to match its financial and political demands.

Sovereign Debt Crises

According to Lane (2012, p. 49), the principal
challenge noted with the eurozone countries was their capacity to withstand adverse
macroeconomic and fiscal downfalls for the success of the common currency
(Euro). When the Eurozone nations switched off the option for national currency
devaluations, the traditional system of adjusting between national money
was removed. There was also a challenge
of using the same currency by these countries since the countries didn’t agree to
operate under similar banking and monetary systems. Instead, the economic and banking regulation was retained by the states (Lane, 2012, p. 1).

The European sovereign debt crisis is a
debt crisis for several countries that have
been happening since 2009. Several countries in the Eurozone such as Cyprus,
Greece, Portugal, Ireland, and Spain were unable to pay their debts to
refinance their government loans or to bail-out national financial institutions
over-indebted under their administration
(Featherstone, 2011, p. 193). They needed
assistance from other Eurozone member states, the European Central Bank,
or international monetary fund.

The sovereign debt crisis was as a
result of structure-formation issue of the European Union and a combination of
complicated matters, including globalization of monetary policies, easy
borrowing terms during 2002-2008 which promoted high-risk borrowing and lending
policies and the global financial crisis
in 2007-8 (Scharpf, 2011, p. 3). Other
factors that might have led to eurozone debt crisis include the global trade
imbalances, the 2008 Great Recession, economic methods related to government
revenue and spending, and the approaches used by nations to bail out failing financial institutions and private
investors as well as supposing individual
lending burdens.

The Greek economic crisis started off
with the global economic recession in 2008. Although its causes were endogenous
characteristically because it originated
from the mishandling of the Greek economy and government fiscal policies (Kindreich, 2017, p. 1). Further, the
country’s membership in the European Union inhibited its full control on
enacting on monetary policy, which implied that the interest rates remained too
low despite the inflation characteristic in the Greek economy. The financial system
had not adequately integrated with the
growing economy and debt policies.

Despite the Greece being a victim of
economic mismanagement and misrepresenting its financial
data by previous administrations, investors failed to notice the alarming
states of unsustainable borrowing levels and public overspending (Kindreich, 2017, p. 1). They couldn’t also see high wage rate which was not proportional
to profitability development resulting in loss
of the country’s competitiveness; and excessive tax avoidance in the country.
Additionally, there was lack of accountability and responsibility in many
elements of Greek finances, which furthered the crisis. At the peak of the global financial crisis in 2009, the investors were focused on the worldwide banking problem and
thus didn’t pay attention to the specific issues relating to Greece.

The European Union
was established for political reasons,
and it gave rise to flawed fiscal policies, and Greece’s membership to the
Union made its crisis unavoidable. Due to its
inability to sustain its economic condition, Greece sent a distress signal which has led to three bailouts, amounting
to over 246 billion euros, resulting to austerity measures (Kindreich, 2017, p. 1). This partially calmed the situation but with a
high cost of high levels of unemployment, high poverty levels, and tumbling
revenue. The real Gross Domestic Product dropped by almost one-fourth from 2009
to 2015.

The lack of political and fiscal unity
among the Eurozone nations could have been the cause of the sovereign debt
crises. The creation of Eurozone in 1999 was for
monetary union, and Greece failed to meet
the criteria of inclusion in the Union as per the Maastricht Treaty of 1992 (Kindreich, 2017, p. 1). However, it was
allowed to join in 2001 despite failing to meet some of the inclusion criteria:
a budget deficit of 6% and Government
debt of over 100% as required of 3% and 60% respectively. The European Union
broke their own rule by allowing Greece to join Eurozone even in its state. But
it could also become a trap for Greece in case of an economic crisis since it
couldn’t implement its own monetary
policies to fight the inflation and interest rates. The mandate to set fiscal policies
was given to the European Central Bank,
and therefore, Greece couldn’t devalue its currency to meet the economic and
political pressures (Lane, 2012, p. 2). This led to a severe
deceleration of GDP and low living standards of the Greeks.

Policies Adopted to Solve Debt Crises

Amidst this crisis, talks arose of
Greece exiting the union. However, this could not have helped solve the issue
since the country can only get a bailout if it is a Eurozone member (Nelson, et al., 2011, p. 2). Therefore, the state would not have got the bailouts to
salvage the situation, and it would be left
to battle on its own. However, the Greece
government had to adopt policies to help the country battle its economic
crisis, and this involved taking, among others, austerity policies.

On June 2012, the eurozone council settled
to allow loans by the European Stability Mechanisms to be made expressly to
troubled financial institutions rather than through European Union countries,
to reduce the severity of sovereign debt (ESM,
2017, n.p). This policy was connected
to the reform of banking regulation by
the ECB. Some of the strategies taken to
put the situation under control include:

Financial
aid from Eurozone and IMF

Eurozone leaders and the International
Monetary Fund in 2010 announced a three-year salvaging plan to loan Greece 110
billion euros at market-prevailing interest charges (Nelson, et al., 2011, p. 6). Giving of the debt was, however, conditional and Greece was
expected to adopt some economic reforms. Seeking to prevent the crisis going
beyond Greece, European Union leaders also agreed to advance financial aid to
the member states under troubled markets. After the expiry of the three-year
lending mechanisms in 2010, European Union and IMF established permanent
loaning facilities to Greece and other affected nations.

Fiscal
Consolidation and Economic Reforms

As a requirement from the loaning eurozone
nations and IMF, Greece has undertaken economic reforms and fiscal consolidation policies. The government
has enacted austerity policies with the aim of
reducing the government spending deficit. The program objective is to reduce
public spending and increase taxes as well as reduce tax evasion (Nelson, et al., 2011, p. 6). The government
aims at collecting more revenue by increasing tax and higher fees for tax
evaders. Other fiscal consolidation reforms include pension and health reforms
with the aim of boosting the nation’s competitiveness.

Central
Bank Intervention

The ECB and the Fed have intervened to
respond to the crisis (Nelson, et al., 2011, p.
7). For instance, the ECB announced in 2010 that it would start
acquiring government bonds in tertiary markets to heighten confidence and
reduce bond spreads over market pressure. On its side, the US Fed has supported
Greece by re-enacting on non-permanent reciprocal monetary agreements, referred
to as swap lines to increase the dollar
liquidity in the global markets.

Policy Recommendations

To ensure that the situation is entirely under control, Greece should consider
the following policy recommendations.

Seriously and amicably
consider restructuring the debt, providing time for lenders to promote progress
on the agreed solutions.
Be ready for high
deceleration of employment and revenue- to a
more significant extent than the
austerity measures have predicted, despite the policies in place to battle it.
Greece should also
depend on exports and implement policies including wage cuts in the private and
public sector, to reestablish competitiveness
(Carnegie, 2017, n.p).
If competitiveness
proves hard to achieve, the Greece could consider leaving Eurozone, which will
call for debt restructuring.

Conclusion

Overall, Greece had experienced
significant economic growth, especially after joining the Eurozone. However,
the country was characterized by overspending, and at the onset of the global
financial crises, the country was severely hit,
and it was forced into mercies of other
Eurozone nations and IMF bailout. This paper has described the economic
condition of Greece, the sovereign debt crisis, and the actions taken to handle
the situation. It has also given policy
recommendation that could help Greece amidst their financial troubles.

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