The Origin and Implications of Greece’s Public Finance Crisis
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Publication date: 2011-06-30
GNPJE 2011;248(5-6):49-67
The article traces the development of the budgetary situation in Greece since the early 1990s and aims to identify the main causes behind the public finance crisis in this country that began in 2009 and continued in 2010. The author discusses the most important implications of the crisis for the functioning of the euro area. The period covered by the analysis was divided into several subperiods: the period of 1990-1995, which saw the continuation of an expansionary fiscal policy initiated in the 1980s; the period directly preceding the country’s entry into the euro zone Jan. 1, 2001, marked by an improvement in Greece’s budgetary performance; the years after Greece’s entry into the euro zone and the return of the fiscal expansion policy; and the period when the country was forced to launch budgetary reforms. Greece’s current public finance problems are not only a direct effect of the global financial crisis, but also an outcome of domestic factors, which led to persistent economic problems in the country, including the loss of financial stability and decreased competitiveness. The following factors generate high budgetary expenditures and limit revenue in Greece (consequently leading to a high budget deficit and an escalation in public debt): low administrative efficiency, high operating costs of the public sector (high employment and a high level of wages in the public sector), excessive social spending, an inefficient pension system, an overregulated labor market and excessive regulation on markets for goods and services. Greece’s public finance crisis was therefore primarily provoked by structural problems that were evident still before the country joined the euro area and that have not been resolved since then. According to Baran, Greece met the budget deficit criterion for adopting the single European currency only because the country’s government artificially increased its revenues and resorted to statistical manipulation. Meanwhile, budget expenditures increased steadily, Baran notes, and an interest rate cut after the country’s euro-zone entry enabled public borrowing at a lower cost as internal problems accumulated due to abandoned reforms. The result was an explosion of the budget deficit and public debt in 2009. Fellow EU countries have decided to provide financial aid to Greece to maintain the stability of the euro and avoid a situation in which Greece’s problems would spill over to other member states, the author says. According to Baran, Greece is struggling with what is the most serious public finance crisis in this country since it joined the euro zone and adopted the single European currency in 2001. The country’s unresolved structural problems are the fundamental issue that underlies the crisis. Greece scores poorly in terms of competition and product market liberalization. The Greek economy has a low level of competitiveness due to labor market problems, an inefficient social security system and excessive public-sector employment. As a result, the government in Greece collects insufficient revenue and has high public expenditures, Baran notes. Fiscal consolidation has been based on higher revenues and lower interest payments since the mid-1990s. Despite powerful arguments for a radical domestic adjustment, all reforms have been marked by controversy and conflict between the government and its social partners.
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