The Social Perception of the Economic Crisis in Greece

By Popescu, Gheorghe H. | Contemporary Readings in Law and Social Justice, July 1, 2012 | Go to article overview

The Social Perception of the Economic Crisis in Greece


Popescu, Gheorghe H., Contemporary Readings in Law and Social Justice


ABSTRACT. This study is grounded in the considerable body of scholarship examining the formation of the global environment around the Greek crisis, the evolution of the crisis that affected the Greek economy, the need of financing the individuals and the enterprises after the crisis, and the impact of the crisis on the basic aggregates of the global economy. The paper generates insights about the impact of the economic crisis on Greece's external relations, the impact of the crisis on Greece's foreign policy, the association of self-rated health with economic crisis, and the role played by global finance in the crisis in the euro zone.

Keywords: Greek economy, crisis, social effects, governance

1. Introduction

We are specifically interested in how previous research investigated the decline in competitiveness experienced by the Greek economy since entering monetary union, the determinants of spreads in Greece, the sustainability of Greece's fiscal and external imbalances, and the rapid worsening of the fiscal situation in Greece. The theory that I shall seek to elaborate here puts considerable emphasis on Greece's fiscal crisis prominent external effects of the Greek economic crisis, the social and political effects of the crisis, the role of global finance in propagating business cycles, and the crisis of democratic governance in Greece.

2. The Role Played by Global Finance in the Crisis in the Euro Zone

Brunnermeier and Oehmke argue that as a crisis erupts, short-term creditors to financial institutions1 may decide to take out their funding. The bursting of credit bubbles leads to more de-leveraging and stronger amplification mechanisms (the potential for creditor or depositor runs is an important amplification mechanism during financial crises). The negative shock caused by the bursting of the bubble leads to persistent adverse effects and deep and drawn-out recessions. The collapse of the real estate bubble led to the default of a number of U.S. financial institutions. Bubbles are often associated with mispricings that have certain features. Prices can deviate systematically from their fundamental value.

It is of first-rate importance to notice that relatively insignificant news events can trigger large price movements. Brunnermeier and Oehmke state that the bursting of a bubble may leave the balance sheets of firms, financial institutions, and households in the economy impaired. Frictions that arise from delegated investment can help sustain bubbles. Once a bubble is under way, risk shifting may lead to further distortions. Heterogeneousbeliefs bubbles predict that bubbles are accompanied by large trading volume and high price volatility. Brunnermeier and Oehmke contend that in order to identify a bubble, one needs to know an asset's fundamental value. Key elements in understanding financial crises and systemic risk are direct domino effects and spillovers, and the endogenous responses of other market participants. Runs may occur as depositor runs on banks, and can materialize as creditor runs on unsecured short-term credit of financial institutions. Liquidity mismatch is a valuable function in terms of channeling savings into long-term investment activity.2

Noeth and Sengupta describe some of the patterns of global finance3 that played an important role in the turmoil both in Europe and the United States. A significant economic slowdown currently plagues the countries in Europe. The economic woes are especially severe in the euro zone. Much of the debt obligations of the troubled countries of the euro zone is held in euros. Cheap funding in U.S. money markets enabled an expansion of the balance sheets of global European banks.

According to this discussion, the global European banks expanded thenbalance sheets and significantly increased leverage. Motivations to increase leverage are suboptimal in the long run. Noeth and Sengupta write that most of the peripheral countries witnessed a significant increase in asset prices. …

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