Context
Governments across the world greeted the second decade of the 21st century, wishing that the economic crisis of the last decade will become a tale of the past and the economic recovery could finally become a reality. Greece is the latest problem child for Europe. The current financial crisis in Greece can be attributed to immense spending in the past and the country’s social programs. The country’s total debt accounts for 115.1% of the GDP. What it precisely means is that Greece will never be able to fully pay off its debt unless some adjustment is made to the amount owed.
In addition to this, the country has an annual budget deficit of 13.6%, which surpasses the Eurozone maximum of 3% by a long way. This shows that not only did Greece spend a great deal in the past but the massive interest payments also prevented her from making progress.
Analysis
A government would normally try to borrow money by putting up its bonds for sale, in order to be able to finance its current debts whilst cutting on spending. However, it’s rather unfortunate for Greece that nobody wants to purchase the bonds due to the high risks involved. In other words, investors are looking for a very high rate of return if they are to invest in Greece bonds.
Both the Eurozone countries of the EU and the IMF have been attempting to help bail out Greece. The problem would’ve been easy to tackle had Greece been the only country in need of a bail out. There is a widespread fear of the Eurozone facing a domino effect, especially countries like Italy, Portugal, Ireland and Spain. The biggest cause of concern is Spain with an economy that is five times that of Greece. If Spain defaults, the whole of EU and eventually the entire world will be influenced.
In view of this situation, bail out appeared inevitable. Recommendations presented by the EU and the IMF entailed a three-year debt bail out plan valued at around 45bn euros in the first year, with a concessionary rate of interest of about 5%. The Eurozone would contribute around 30bn euros, with 8.4bn euros coming from Germany this year and up to 16.8bn euros by 2012.
This package was put forward prior to the summit on the Greece debt crisis. The public in Germany, the country which was supposed to be the largest contributor to the package, strongly opposed this proposal. Fingers were immediately pointed at the immensity of this amount, which is around 2bn euros more than the German family ministry’s annual budget.
As a result, the German government put forward a proposal at the summit that focused on preventing a bail out for the Greek economy. The German delegation provided assurance to the Greece government on precondition that it pays out punitive interest rates for the settlement of its debt, whilst clarifying that any aid would only be provided as a last option. In other words, what Germany meant was that Europe would not proffer Greece any more sympathetic conditions than those presently offered on the global financial markets.
What Germany was trying to achieve through these unsympathetic terms was to pressurize the Greece government to pursue its policy of massive spending cuts so as to convince the banks to provide credit to Greece at more favorable terms. In addition, Germany also wanted to make it clear to other heavily indebted countries of Europe not to expect easy payment from Brussels.
The crisis developing in the financial system of Greece is being seen as a continent-wide emergency as members recognize that there is no chance of the European Central Bank or the EU itself to lend a hand. The crisis is threatening to spread beyond Europe and into the countries of South Asia. The dependence of South Asian countries on trade is likely to make them vulnerable to the sharp decline in demand from the European economies. The Greek debt crisis is expected to further undermine the already declining investment flows into the developing economies of South Asia, intensifying the problems of some of the most fragile countries of the region.
Pakistan and the EU have traditionally enjoyed strong and cooperative trade ties, with the EU being Pakistan’s most significant trade partner. Pakistan has been pushing for preferred market access to Europe as the country’s integration into the global economy is vital for the its economic well being as well as for tackling extremist in the long run.
Pakistan has enjoyed very close relations with Germany over the decades. The bilateral trade between the two countries is growing steadily and both regularly share their thoughts on all the global matters of concern and support each other at the international level. Germany has always supported Pakistan by all possible means in her attempts to acquire access to the European markets.
Pakistan’s economy and trade have already been hit hard because of its leading role in the war against terror. Now this latest crisis in the EU could further worsen the situation for Pakistan. If people fear that Greece could go bankrupt, they will fear that Portugal and other countries will also go bankrupt. Once people get scared, they get scared about everything. This fear and lack of confidence will naturally lead to a fall in consumer demand. The EU is a vital export market for Pakistan and producers are relying on sending more goods to Europe.
This latest crisis can also influence the EU’s commitment to the war on terror. It might become extremely difficult to pay inducements to allies and tribesmen. The EU’s involvement in Iraq and Afghanistan will be viewed from the economic viewpoint, and more European taxpayers will support withdrawal. Hence, coalition partners are likely to opt for an early troop pull out in order to steer their home economies out of crisis.
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