Academic journal article European Journal of Sustainable Development

Non-Linear Dynamics of Macroeconomic Variables: The Case of Greece

Academic journal article European Journal of Sustainable Development

Non-Linear Dynamics of Macroeconomic Variables: The Case of Greece

Article excerpt

1. Aims and Objectives of the Study

At the dawn of the 21st century, many important financial transitions were put into action for U.S. and Europe as well, one of them being the introduction of the new euro currency to the EU-member states. The need for better coordinated economic policies and monetary cooperation introduced the new currency not later than early 2002, earlier attempts are dated in the 1960s, while the idea for a European currency emerged back in 1929, in the League of Nations (LN). Meanwhile after 2002, the EU continued to grow large and accept new member states that would also be part of this coordinated European market, seeing it as their safety net. The outburst of the global recession in 2008 pulled euro zone into its first financial crisis. EU as a whole displayed negative growth for the three last quarters of 2008 and the first quarter of 2009 before returning to positive growth. Such a big crisis was feared that could break EU down. In order to avoid any domino effects where one member state could harm the other, all member states agreed to a joint action plan for the Euro zone to stabilize the European economy. Fearing a default for weak members such as Greece, they all agreed to set up a temporary bail out mechanism to overcome any financial solvency and credit limitations that could jeopardize the whole euro zone, aiming at restoring financial stability for Europe, and ensure further economic integration. This would be the start of a new era for Greece, that of austerity. Greece was proven a very special case, if not the weaker member state in terms of dealing with the onset of a recession. A major adjustment program was going to take place. The process of modernization of its economy and the continuation of the structural reforms dictated and financially supported by the EU/IMF/ECB (Troika), launched in 2010 would continue as announced in the summer of 2011, stating that this was the only way out. European leaders agreed to provide another financial support package to Greece. Greece committed to promote sustainable economic growth by applying all the needed fundamental fiscal and structural reforms (OECD, 2011), in return for their emergency loan that it received.

As a member state, Greece favored the same interest rates like the rest of the EU-countries. The eagerness though of the financial institutions to offer bigger purchasing power parity to people, even to those citizens who didn't qualify for those loans and all the lending criteria, made them forget the past stock market crash, and start all over setting up of another bubble. Immoderate consumption leading to high inflation rates and absolutely unorthodox growth was the new religion. The excess liquidity from the banks and the unstoppable demand for more products made the prices skyrocket. Apart from disposable goods, the biggest share of their borrowing capacity was devoted to real estate. This phenomenon was common for many countries around the globe. But when the 2008 financial crisis was outside the door, Greek economy couldn't fight against it, as it was already on the edge. The year of 2009 found the country with a fiscal deficit that had ballooned to over 15% of GDP reflecting uncontained (public) spending, a collapse in tax revenues and the onset of a recession, while public debt reached 140% of GDP in 2010 (OECD, 2011),the highest in the euro zone, not to mention the high private debt.

Ideally speaking, none of these adjustments would have been necessary if this country was an island, a rather remote and self catered one, away from all these regulating institutions. But in modern times no country can be that isolated. A country's national income, interest rates and market prices affect another country respectively. One country's economic growth or stagnation, contributes in the economic growth or stagnation of other countries, as the imported goods of a country, constitute the exported ones of the other. Mercantilism as a philosophy towards growth would never bear fruits for any country with a high public deficit in this global economy. …

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