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Assignment during my study in the two-year master programme in EU studies organized by the Centre international de formation européenne in cooperation with the Jean Monnet Chair of the University of Cologne (info:
   Assignment during my study in the two-year master programme in EU studiesorganized by the Centre international de formation européennein cooperation with the Jean Monnet Chair of the University of Cologne(info: Assignment for the course‘Economic challenges for the enlarged EU’Professor András Inotai Topic:Why could Greece not become a more competitive economy after three decades of EU membership?  Christina Kontaxi,30/05/2010 Greece acceded to the EC in 1981, after being an associate member for almost 20 years, since 1961,the year in which the (first) association agreement between Greece and the EC was signed. Accordingto the European Navigator  [1], at the periodof accession there were substantial economic hurdles toovercome, since Greece: · had a much lower gross domestic product (GDP) and a higher unemployment rate than itsEuropean partners. Its GDP was 50% below the Community average · more than 26% of the working population in Greece was employed in agriculture, whereasthis primary industry accounted for just 8% of the working population in the Community · the Greek agricultural products (olive oil, wine, fruit &vegetables) threatened to competewith products in Italy or France which were already in surplus under the common agriculturalpolicy (CAP) · the Greek merchant fleet and the competition with the European oneGreece became the tenth Member State of the European Community on 1January 1981, butGreece’s backward economy and its geographical isolation —it had not a single common borderwith a Member State of the European Community —exacerbated regional disparities within theCommunity[1].It was no secret that the Greek economy differed substantiallyfrom those of theother nine member countries. Indeed many studies, including those by the Commission itself,expressed reservations about the ability of the relatively underdeveloped Greek economy to mergesuccessfully with the much more developed and prosperous economies of the EC [2]. Greece hopedto benefit in particular from guaranteed agricultural prices, from Community structural funds, thegrowth in tourism and inflows of hard currencybut the disparities between the economic structuresin Greece and in the Community made it difficult to apply immediately and uniformly all theoperating rules of an internal market that was designed for developed economies[1].It’s importantto add also that in the beginning, when Greece was seeking to join the EC,the effort did not enjoywidespread support among Greek political parties. Greece joined (January 1981) with the support of the conservatives, while months later the elections were gained by those who were fiercelyopposed, the socialists (October 1981). Some say, that the first years of membership were lost whilethe government was gradually accepting the fact the Greece was a member state.The state in Greece, in 1981, occupied a hegemonic position in practically every aspect of the society,often referred as“gigantism” because of [3]:(1)the over-employment in the public sector;  The number of public sector employees amounted in 1981 to 351,028 people, rising to 615,956people in 1992, or 17 per cent of the total Greek population, dominating in this waythe labormarket. Furthermore, the clientelistic nature of Greek politics was an important factor for swellingemployment in the public sector.(2)the high amount of public expenditure as a share of GNP;Total public expenditure amounted in 1981 to 49.6 per cent of Greek GDP, much higher than the EUaverage, while public debt rose from 17.6 per cent of GDP in 1970 to 28.3 per cent in 1981, and 112per cent in 1986. The huge public deficits incurred by the steadily expanding activities of the Greekstate were described as 'the blight of the Greek economy'(3)the extensive regulatory role performed by the state and the latter's overwhelming participationin economic activities [3].In the areas of production (regulation for product production) and the labour market, Greece wasviewed as the most tightly regulated country in the EU. The regulatory rules imprinted in tens of opaque bureaucratic provisions, laws or texts, governed the allocation of state subsidies, grants andaids in every form (to business, exports, economic activities, transfers, etc.).According to Mr Ioakimidis [3], gigantism resulted from a varied set of socioeconomic conditions, themost important of which was the patron-client system operated by the political parties in order tomaximize their electoral appeal.The net effect was that at the time of Greece's entry into the EU as afull member, the state was regarded as the greatest entrepreneur and employer, controlling anunspecified number of businesses in practically all areas of economic activity.According to Mr Stamatopoulos’article [2],exsenior economist at the Bank of Greece, on the Greekexperience between 1981 –1994 · The economy was struggling hard to keep up let alone reduce the gap with other memberstates · Despite the net direct transfers from the Community budget, Greece's economic per-formance failed to improve · The poor results can be attributed mainly to internal factors -successive governments'inability and lack of commitment to tackle structural problems. · The Community's net transfers created a 'moral hazard' problem since a softening of budgetary discipline allowed necessary structural reform to be postponed.In the major sectors, he notes that [2]:Farming sector:CAP regulated the excessive production of cereals, meat and dairy products whenGreece is a traditional producer and exporter of products such as fresh fruits and vegetables (withvery little or no CAP protection) resulting in the subsidize of cereals, cotton, tobacco and olive oilwhen wine, fresh vegetables and pork, stagnated, and production of milk, beef and wheat felldramatically.CAP and IMPs contributed strongly to the restructuring of remoteand mountainous agrarianactivities by financing infrastructure improvements, introducing new technologies and preservingemployment in deprived andisolated regions.  Manufacturing/ industrysector:there was a severely hit by EC membership. Manufacturing activityhas traditionally been insulated from foreign competition, heavily regulated and subsidized by thestate. Protection through tariffs and quotas, indirect taxation, subsidies and easy access to credit allled to poor competitiveness and weak financial discipline. With the Single Market programmeduringthe 1980s and early 1990s industrywas shaken up, as barriers to trade were gradually dismantledand goods, services and capital markets were deregulated in line, resulting in an intensifiedcompetition and as credit was drying up, many firms in mining, textiles, metallurgy and shipbuildingbecame over-indebtedand others were forced to close or discontinue some operations. A stateorganisation (OAE) was founded in the mid-1980s to take over the liabilities of the largest over-indebted firms with the aim to reorganise their activities, improve their financial structure andsafeguard some employment, something that failed. Viable firms were sold to the private sector,otherwise they were liquidated.The Single Market plan also imposed strains on the typicalmanufacturing units forcing enterprises to adopt new community rules on everything from technicalstandards to accounting and industrial rights, leading to merges with larger distribution networks orto becoming sub-contractors of larger international companies.The country was not sufficientlyprepared to face the increasing openness to world competition in the eighties, and the challenges of the Single European Market.Today, it’scommonly said, that resources given by CAP and IMPs were not been used in the mosteffective way.The state organization (OAE) -seized the last decade -actually turned all the factoriesand industrial installations into ghostsand the selling of the “viable firms”to the private sectorhasbeen related to scandals and black money transfers.As far as Single markets strains areconcerned,the patron-client system operated in a way that some gained access to the European market whileothers seized.Between 1981 and 1985, when Greece seek EU's assistance two large devaluations of the drachma(currency) occurred in 1983 and in 1985while the government practiced a wild expansionary fiscalpolicy in order to satisfy the pressing social demands as well as demands of its electorate, increasingthe total volume of public expenditure from 30 per cent of GNP in 1980 to 42 per cent in 1985[3].The net effects of this reckless fiscal policy were uncontrollable public deficits, rapidly raisingpublicdebt and a bloated public administration with a steadily increasing number of employees in thepublic sector [4].As soon as the tight fiscal and monetary restraints of the Stabilisation Program 1985-1987 wererelaxed in 1988/89 the familiar pattern of the growing deficits was inevitably resumed, somethingthat happened again years later when with the new EEC loan new strict terms were imposed with the1990-1992 Stabilisation Program[5].At the start of the new decade, the Maastricht (1992) treaty introduced the single Europeancurrency, the euroand the euro convergence criteria.Greece was very far from meeting theconvergence criteria. Kostas Simitis, (1996 –2004 prime minister of Greece)aimed to achieve theconvergence criteria for the accession of Greece to the euro and introduced radical reforms of theGreek public finances and economy, something which unavoidably created a large number of 'losers'among those who depended on the state for their economic survival [3].In 1999 the economy of Greece changesremarkably and in 2001 (surprisingly)Greece joined the euro area.Over the years the Greek manufacturing has lost its pace and dynamism, in spite its promisingperformance in the sixties and the share of manufacturing production as percentage of GNP declinedfrom 19.5% in 1980 to 16.7% in 1990, whilst it retracted further to below 13% by 2000[7].The parties that governed Greece since 1981policy is ‘socialist approach to development’ with theaim everything to be public/state owned, preserving with this attitude gigantism and patron-client  systems. And even when something is privatized, like the Greek telecommunication company OTE,then there is an economic scandal of black money transfers (Siemens in this case). The fact thatforeign or even private capital has not played a significant restructuring role in Greece's economicrestructuring there is a serious doubt of success of this strategy[5], at least as far as Greece ismember of the European family.Allthis period, the state was forced to introduce EU legislation aiming at securing transparency in thetransactions between the state and public enterprises. This, coupled with the introduction into theGreek economy of the plethora of EU directives underpinning the internal single market, directivesdesigned to establish a competitive regulatory regime for the whole of the European economy, theliberalization of the banking system and the general reduction of the economic role of the state,resulted in shaping a new competitive regulatory regime for the Greek economy congruent with thatof the wider European economy and the single market [3].With this rules,economic scandals startedappearing massively.Greece adopted the euro as its currency in January 2002. The adoption of the euro provided Greece(formerly a high inflation risk country under the drachma) with access to competitive loan ratesleading to adramatic increase in consumer spending, which gave a significant boost to economicgrowth.Greece, in 1997-2007, averaged 4% GDP growth, almost twice the EU average. As with otherEuropean countries, the financial crisis and resulting slowdown of the real economy have taken theirtoll on Greece’s rate of growth, which slowed to 2.0% in 2008. The economy went into recession in2009 and contracted by 2.0% as a result of the world financial crisis and its impact on access tocredit, world trade, and domesticconsumption--the engine of growth in Greece. Key economicchallenges with which the government is currently contending include a burgeoning governmentdeficit (13.6% of GDP in 2009), escalating public debt (115.1% of GDP in 2009), and a decline incompetitiveness. Hosting the Olympics in 2004, whichcost double the srcinal estimate of €4.5billion, only made matters worse . Greece is the country in Europe with the longest time inrescheduling debt, next comes Hungary with 37.1 years. Greece defaulted five times sinceindependence, being a total of 50.6 years in reschedulingThe EU placed Greece under its Excessive Deficit Procedure in 2009 and has asked Greece to bring itsdeficit back to the 3% EU ceiling by 2012. In late 2009, eroding public finances, misreported statistics,and inadequate follow-through on reforms prompted major credit rating agencies to downgradeGreece’s international debt rating, which has led to increased financial instability and a debt crisis.Greek economy is characterized by informal economy, lack of competitiveness and nocountermeasure to limit debt capacity.Only for military expenses Greece spent 3.6% of GDP in 2008,the EU’s highest, and became the world’s fifth-biggest weapons importer between 2005 and 2009,according to the Stockholm International Peace Research Institute.In April 2010, under intense pressure, Greece requested activation of a joint European Union-International Monetary Fund support mechanism designed to assist Greece in financing its publicdebt. Greece' two key problems are: high debt and a lack of competitiveness.After joining the EMU,countries agree on keepingtheir spending at a certain level (Stability andGrowth Pact). Under that, governments that run excessive budget deficits and do not attempt tosolve this problemmay be fined. In 2003 both Germany and France broke the rule stating thatgovernments cannot run a yearly deficit of more than 3% of the Gross National Product (GNP). Theywere not fined. After the 2008 financial crisismore member states found themselves in breach of theceilings for public spending and were threatened with fines.In 2010 it was Greece’s turn.
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