N071010_Sovereign_Debt_Rohit

N071010_Sovereign_Debt_Rohit - NOTES Sovereign Debt Crisis...

Info iconThis preview shows pages 1–2. Sign up to view the full content.

View Full Document Right Arrow Icon
NOTES Economic & Political Weekly EPW july 10, 2010 vol xlv No 28 77 Sovereign Debt Crisis in Greece: Is There a Way Forward? Rohit The International Monetary Fund package for Greece is likely to make things worse, not better, for the beleaguered economy. And as other European economies show similar signs of a sovereign debt crisis, the situation does not bode well for Europe and the world economy. W hile Greece reels under a sover- eign debt crisis there are omi- nous signs that there are other countries like Spain and Portugal where pub l ic debt is grow ing at a fast pace . Whether these countries would follow a similar trajectory as Greece is a dif± cult question to answer at the moment. Hun- gary is now being seen as the next Greece. The Euro sank to a four-year low on 4 June after the news of Hungary reached the ± nancial markets. In this note we argue ± rst, that if the International Monetary Fund ( IMF ) condi- tionalities for Greece of ± scal “consoli- dation” are adhered to, it would further p rolong the crisis and make recovery extremely painful, especially for the work- ing class and the poor sections of the popula- tion. Second, if Greece wants a long-term solution, the only option that might be left for it would be to come out of the European Monetary Union ( EMU ). The paradox how- ever is that, in the short run, that itself would fuel the crisis even more both for Greece and Euro. So, Greece ± nds itself in a Catch-22 situation with very l imited options. Acting on the conditionalities of the bail- out package, Greece has recently announced that it has reduced its de± cit faster than expected in the ± rst ± ve months of the year, as a lower than expected increase in reve- nues was offset by higher spending cuts. As we argue below, such spending cuts are going to be counterproductive. Magnitude and Reasons There are different facets of the debt crisis in Greece. It has a ± scal de± cit and public debt of 13% and 113% as a percentage of GDP . 1 There are a few reasons for this. First, the share of wages in GDP has been declining in Greece because the real wages of workers have grown at a much lower rate than the growth of productivity. In other words, the bene± ts of growth in labour productivity have not gone to the workers in the form of increase in real wages, rather some of the bene± ts have gone in increasing pro± t margins. This means the share of wages in GDP has been declining. As argued by Kalecki and the underconsumptionist school, this would lead to a decline in the share of consump- tion out of GDP (income multiplier) since workers spend a higher proportion of their income on consumption than the capital- ists or the rentiers. A decline in income multiplier, ceteris paribus , adversely affects investment, and thereby, the GDP in future periods. This coupled with trade de± cit severely limits all the sources of demand in an economy. For a given level of govern- ment expenditure and a near stagnant or at best slowly growing GDP and, therefore, tax revenue, means a higher ± scal de± cit and growing public debt over time.
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Image of page 2
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 07/31/2010 for the course FIN 201 taught by Professor Hcverma during the Summer '10 term at IIT Kanpur.

Page1 / 4

N071010_Sovereign_Debt_Rohit - NOTES Sovereign Debt Crisis...

This preview shows document pages 1 - 2. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online