Oct 08, 2010
Crisis in Greece provides important lessonsBack
Africa|Industrial|Resources|Africa|Europe|Germany|Greece|Ireland|Portugal|South Africa|Spain|United States
© Reuse this
There was corruption by powerful government and business interests, which meant that government turned a blind eye to tax avoidance and other illegal activities, and there were some unsustainable spending programmes by government. At the same time, the Greek economy was the victim of economic imbalances in the European region and the global economy and the profligacy endemic to global financial markets, which caused the recent global financial crisis. Greece’s inclusion in the European Union (EU) has some advantages in terms of increasing access to resources and a larger market. However, there are important economic lessons about regional and global integration that South Africa can learn from the problems experienced by Greece and other relatively poor countries in Europe, such as Portugal and Spain.
Firms have different levels of technological proficiency and countries have different levels of industrialisation. Therefore, different countries and firms will have different levels of success in regional and global markets. For example, countries like Greece, Spain, Ireland and Portugal face a distinct disadvantage relative to Germany and other more technologically and industrially advanced countries. Even the increase in direct foreign investment that may result in the transfer of skills and technology from more-advanced economies to less- advanced countries has not reduced the big gaps between these countries within the EU. Therefore, the less-advanced countries in the EU have deindustrialised and a situation has emerged where there is a long-running structural economic imbalance between the advanced industrial countries, which run trade surpluses, and the less-advanced countries, which run trade deficits.
When global liquidity increased with widespread financial liberalisation during the 1980s and 1990s, countries such as Greece had access to increased foreign capital. This increased capital allowed the government of Greece to increase debt rather than collect taxes that the rich had to pay. The Greeks could also continue spending on unsustainable public programmes. Greece’s private sector had access to more foreign borrowing, which was not directed to the country’s struggling industrial sector, but to consumption and speculation in financial and real-estate asset markets. At the same time, careless global financiers treated the increasingly indebted Greek economy as if it had similar risks to those of richer countries, such as Germany. The views on risk in the less-advanced countries of Europe abruptly ended when financial markets crashed and the price of credit default swaps, which were used to mitigate the lending risks of the global financiers, drastically increased. The government of Greece ended up taking responsibility for not only public debt but also high levels of private debt when debt markets collapsed. The sovereign debt problem in Greece resulted not only from wasteful and corrupt practices on the part of the country’s public sector, but also from the fact that Greece, like the US and other European governments, bailed out wasteful and corrupt private- sector financial institutions.
The poorer countries of Europe lack macro- economic sovereignty because they have to follow EU monetary policy rules and are part of the euro currency zone. In other words, countries like Greece were unable to use macroeconomic policies to support and further build their industries.
Further, the strength of the euro, mostly owing to the economic activities of advanced industrial countries like Germany, had a negative impact on industry in Greece. The deindustrialisation resulting from long- running structural economic imbalances within the EU played a big role in creating the debt problems now confronted by the Greek economy. The profligacy in deregulated global financial markets allowed the government of Greece and the country’s private sector to continue building unsustainable levels of debt. Economic integration that causes less-advanced countries to lose economic policy sovereignty with regard to traded protection for industry and the use of macroeconomic policy and exchange rate management can lead to devastating economic consequences.
Edited by: Martin Zhuwakinyu© Reuse this Comment Guidelines (150 word limit)
Other Seeraj Mohamed News
The Corporate Strategy and Industrial Development Research Programme (CSID) - the University of the Witwatersrand's (Wits') economics policy research unit of which I am director – hosted a launch of the Department of Trade and Industry’s (DTI's) capacity...
We enter 2011 with much global economic uncertainty. South Africans should consider the country's economic policies and activities within the context of an uncertain and volatile global economy.
Recent Research Reports
Real Economy Year Book 2014 (PDF Report)
This edition drills down into the performance and outlook for a variety of sectors, including automotive, construction, electricity, transport, steel, water, coal, gold, iron-ore and platinum.
Real Economy Insight: Automotive 2014 (PDF Report)
This four-page brief covers key developments in the automotive industry over the past 12 months, including an overview of South Africa’s automotive market, trade figures, production and the policies influencing the sector.
Real Economy Insight: Construction 2014 (PDF Report)
This five-page brief covers key developments in the construction industry over the past 12 months. It provides an overview of the sector and includes details of employment in the sector, infrastructure and municipal spending, as well as insight into companies’...
Real Economy Insight: Electricity 2014 (PDF Report)
This five-page brief covers key developments in the electricity industry over the past 12 months, including details of State-owned power utility Eskom’s generation activities, funding and tariffs, independent power producers and prospects for the sector.
Real Economy Insight: Road and Rail 2014 (PDF Report)
This six-page brief covers key developments in the road and rail industries over the past 12 months, including details of South Africa’s road and rail network and prospects for both sectors.
Real Economy Insight: Steel 2014 (PDF Report)
This four-page brief covers key developments in the steel industry over the past 12 months. It provides an overview of the global and South African steel and stainless steel markets, South Africa’s major steel producers and events that have shaped these markets.
This Week's Magazine
South African construction company Group Five says work on the rehabilitation of the 800 km stretch of the Plumtree–Mutare highway, in Zimbabwe, should be completed by the end of this year. Giving evidence before the Parliamentary Porfolio Committee on Transport...
The Space Operations division of the South African National Space Agency (Sansa) revealed on July 17 that it had supported the successful launch of the US National Aeronautics and Space Administration’s Orbiting Carbon Observatory-2 (OCO-2) satellite on July 2. The...
Phase 1A of Johannesburg’s Rea Vaya bus rapid transit (BRT) system should carry around 42 000 people a day, while it was been expected that Phase 1B, rolled out last year, would add another 60 000 daily passengers. However, the entire system is currently carrying...
A stormwater project in Bedforview, east of Johannesburg, has stalled for eight months after project managers in the Ekurhuleni municipality resigned and municipal managers were placed on special leave without designating replacements. Construction to reinforce the...
The design of the Beit Bridge border post is the biggest impediment to efficient freight movement between Zimbabwe and South Africa, says Cross-border Road Transport Agency CEO Sipho Khumalo. Beit Bridge is the busiest border post in Africa. A research study on the...
Next ArticleSocial forces drive financial insecurity