European Union and Rescue Package for Greece

Greece found its way into the European Monetary Union early 2001 to become the 12^th member. This occurred after there was a dramatic economic stability where inflation decreased and the interest rates fell. However, it emerged later that Greece had not fully met the conditions demanded by the euro-zone membership. By 2009, Greece’s national debt had skyrocketed to €262bn up from €168bn five years earlier. Investors began to shy away from Greece in January 2010 due to the fear that the nation may default. On May 2, 2010, after extensive negotiations, the IMF, the EC and the European central bank agreed on a three-year package to salvage Greece from the crisis (Baldwin, Gros and Laeven, 2010). The essay discusses the impetus for the rescue package and the conditions set by the IMF. It highlights the reasons that were advanced to settle for the rescue package as well as analyze the viability of Greece attempting to access the international debt markets to borrow funds to cover their debt position. The essay also points out the measures which Greece is implementing to correct their problems.

Euro zone members were forced to respond to the crisis that Greece found itself in but with conditions attached. The decision to rescue Greece was motivated by the need to protect the value of Europe’s common currency and hence financial stability (Tamer, 2009). Another reason was the fact that other markets had raised their borrowing rates and euro zone members together with IMF opted to lower their rates for the sake of Greece. The need to enhance investor confidence in buying Greek bonds and stocks was also considered when approving the rescue package (Lantier, 2010).

The IMF agreed to support the Greece bailout for good of the euro region. However, there were some conditions that had to be met before the rescue is given. Greece was expected to cut wages/salaries and temporarily suspend pensions for a period of three years. It was also required to increase taxes from the main sales from 21% to 23% (Boyes and Melvin, 2006). The implementation of these conditions was set to be monitored on a quarterly basis by the government and the stakeholders. Given the period over which the package will be offered, Greece will be expected to cut its budget deficit lower than that of EU minimum of 3% of GDP (OECD, 2009). Another condition that was set was the repayment of the bail-out to the lenders with interest. It is the risk posed by the Greek financial crisis to the entire European Community and other stakeholders that was used to justify the rescue package.

Greece made attempts to access the international debt markets to borrow funds to cover their debt position. The viability of this alternative has been analyzed. In April 2010, Greece made public its intention to borrow funds from US’s Wall Street (Lantier, 2010). It presented itself as one of the ‘emerging markets’ which are usually characterized by the tendency to default. Borrowing at this level means higher interests rates are used when repaying debts due to the high risk of defaulting (Boyes and Melvin, 2006). This alternative was not viable due to the drastically declined investor confidence. This implies that investors could not buy Greece bonds and stocks especially China which had announced that it would not lend funds to Greece. It emerged that Greek government’s borrowing cost for 10-year bonds increased to 7.16% from the standard 3% for the EU region (Lantier, 2010). In fact, the attempts to borrow from international sources were marred by the strike called by trade unions to counter government’s measures. Greece’s consideration of borrowing from large economies like the US would have served to widen the already existing tension caused by the financial crisis.

Following the significantly huge bail-out to Greece, the country has been making concerted efforts to ensure that they save themselves from the crisis. The greatest yet controversial measure is in the implementation of the IMF conditions and other expectations set out by the European Community (Tamer, 2009). Pinning the implementation of these terms and conditions has proved to be a great challenge for the Greek government. Steps to cut salaries and wages sparked protests among Greek workers who saw the measures to be to their disadvantage. The government has also been striving to ensure that monthly progress is at par with the yearly target. The Greek government is well aware that failure to implement the expected conditions under which the bail-out was approved would be disastrous to its economy and hence recovery from the economic woes (Boyes and Melvin, 2006).

The essay has discussed the impetus for the rescue package and the conditions set by the IMF. It has highlighted the reasons that were advanced to settle for the rescue package as well as providing an analysis of the viability of Greece attempting to access the international debt markets to borrow funds to cover their debt position. The essay has also identified the various measures which Greece is implementing to correct their problems. It is evident that the Greece financial crisis was not only a threat to the country but also to the financial (the euro) stability of the European Community and the international arena as well.

References

Baldwin, R., Gros, D. & Laeven, L. eds., 2010. Implementing the Euro zone rescue: what more needs to be done? Center for Economic Policy Research.

Boyes, W. & Melvin, M., 2006. Global economics (7^th ed). Cengage Learning Lantier, A., 2010. Greece moves to borrow from Wall Street. Web.

ECD, 2009. OECD economic surveys: Greece 2009. OECD Plc.

Tamer, C. M., 2009. Understanding international business: the Greece crisis. 5^th ed. Pearson Education.