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)
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.
Updated 10 minutes ago Top aluminium producer United Company Rusal will start producing metal at its Boguchansk project, in Russia, by June and will ramp up output over the following year depending on demand, the company's chief executive said on Monday. Weak aluminium prices are forcing...
Updated 13 minutes ago Dubal Holding, the holding company for Dubai's stake in Emirates Global Aluminium and other assets, is considering possible acquisitions in local and international energy projects, it said on Monday. The firm was looking for equity interests related to coal, solar,...
Recent Research Reports
Steel 2015: A review of South Africa's steel sector (PDF Report)
Creamer Media’s Steel 2015 report provides an overview of the key developments in the global steel industry and particularly of South Africa’s steel sector over the past year, including details of production and consumption, as well as the country's primary carbon...
Projects in Progress 2015 - First Edition (PDF Report)
In fact, this edition of Creamer Media’s Projects in Progress 2015 supplement tracks developments taking place under the Renewable Energy Independent Power Producer Procurement Programme, which has had four bidding rounds. It appears to remain a shining light on the...
Electricity 2015: A review of South Africa's electricity sector (PDF Report)
Creamer Media’s Electricity 2015 report provides an overview of State-owned power utility Eskom and independent power producers, as well as electricity planning, transmission, distribution and the theft thereof, besides other issues.
Construction 2015: A review of South Africa’s construction sector (PDF Report)
Creamer Media’s Construction 2015 Report examines South Africa’s construction industry over the past 12 months. The report provides insight into the business environment; the key participants in the sector; local construction demand; geographic diversification;...
Liquid Fuels 2014 - A review of South Africa's Liquid Fuels sector (PDF Report)
Creamer Media’s Liquid Fuels 2014 Report examines these issues, focusing on the business environment, oil and gas exploration, the country’s feedstock supplies, the development of South Africa’s biofuels industry, fuel pricing, competition in the sector, the...
Water 2014: A review of South Africa's water sector (PDF Report)
Creamer Media’s Water 2014 report considers the aforementioned issues, not only in the South African context, but also in the African and global context, and examines the issues of water and sanitation, water quality and the demand for water, among others.
This Week's Magazine
Forest products group Sappi has confirmed the selection of its 25 MW biomass-to-power project, to be erected at its Ngodwana mill, in Mpumalanga, as a preferred bidder under the South African government’s Renewable Energy Independent Power Producer Procurement...
Information and communications technology (ICT) distributor DCC is making Windows- and Android-operating systems tablets available through retailers and education equipment suppliers to provide school children with affordable, high-performance education tools. The...
Another cement manufacturer is set to enter the Ugandan market, raising hopes that prices will come down and spur growth in the construction industry. National Cement, a Kenyan manufacturer, has unveiled plans to invest $195-million in a new manufacturing plant in...
With growth rates exceeding that in the developed world – at an average of between 4% and 5% between 2002 and 2014 – African countries provide investors with ample reason to tap into booming consumer demand says Manufacturing Circle executive director Coenraad...
The South African Chamber of Commerce and Industry’s (Sacci’s) Business Confidence Index (BCI) decreased by 3.7 index points month-on-month to 89.1 in March.
Next ArticleWhy another amnesty for illegal capital flight?