Oct 08, 2010
Crisis in Greece provides important lessonsBack
© 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)
Creamer Media Senior Deputy Editor
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 building...
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
Input Sector Review: Pumps 2015 (PDF Report)
Creamer Media’s 2015 Input Sector Review on Pumps provides an overview of South Africa’s pumps industry with particular focus on pump manufacture and supply, aftermarket services, marketing strategies, local and export demand, imports, sector support, investment...
Liquid Fuels 2015: A review of South Africa's liquid fuels sector (PDF Report)
Creamer Media’s Liquid Fuels 2015 Report examines these issues in the context of South Africa’s business environment; oil and gas exploration; fuel pricing; the development of the country’s biofuels industry; the logistics of transporting liquid fuels; and...
Road and Rail 2015: A review of South Africa's road and rail sectors (PDF Report)
Creamer Media’s Road and Rail 2015 report examines South Africa’s road and rail transport system, with particular focus on the size and state of the country’s road and rail infrastructure and network, the funding and maintenance of these respective networks, and...
Defence 2015: A review of South Africa's defence sector (PDF Report)
Creamer Media’s Coal 2015 report examines South Africa’s coal industry with regards to the business environment, the key participants in the sector, local demand, export sales and coal logistics, projects being undertaken by the large and smaller participants in the...
Real Economy Year Book 2015 (PDF Report)
There are very few beacons of hope on South Africa’s economic horizon. Economic growth is weak, unemployment is rising, electricity supply is insufficient to meet demand and/or spur growth, with poor prospects for many of the commodities mined and exported. However,...
Real Economy Insight: Automotive 2015 (PDF Report)
Creamer Media’s Real Economy Year Book comprises separate reports under the banner Real Economy Insight and investigates key developments in the automotive, construction, electricity, road and rail, steel, water, gold, iron-ore and platinum sectors.
This Week's Magazine
Engen Driver Wellness, the mobile health awareness initiative, continues to make a tangible difference to the lives of the country’s bulk truck operators with increased driver participation in voluntary screenings and improved health scores. Now in its fifth year,...
At the sixth IQ Business conference held in Sandton last month, a panel of business leaders and academics advocated that business reclaims the initiative to spur growth in South Africa amid fragmented and haphazard political direction. Management consulting firm IQ...
The building industry is an essential component of the South African economy as it contributes about 15% to the gross fixed investment that drives the economy. However, with the country’s economy going through a tough time currently, this, in turn, reflects on the...
The recipients of the 2015 South African National Energy Association (Sanea)/South African National Energy Development Institute Energy (Sanedi) Awards were announced at a ceremony and banquet in Sandton last month. Sanea chairperson Brian Statham named Exxaro CEO...
As South African information technology (IT) firm EOH posted another full year of strong growth, CEO Asher Bohbot, known for his frank words, people-centric management style and stoic humanism, attributed the company’s continued South African and African growth to...
Next ArticleWhy another amnesty for illegal capital flight?