Economics III Final Draft DR. RAM MANOHAR LOHIYA NATIONAL LAW UNIVERSITY

2015-16FINAL-DRAFTEconomics-IIIEvaluation of Greece Economic Crisis and Lessons for IndiaSubmitted to: Submitted by:

Dr.Mitali Tiwari Arnab RoyAssistant Professor (Economics) 3rd Semester (Roll. No. 42) Section: A

TABLE OF CONTENTS: CHAPTER 14Introduction4Background4Research problem4Research methodology4Objective5Tentative Chapterisation5CHAPTER 2: THE WHOLE STORY5CHAPTER 3: TERMS OF THE BAILOUT8CHAPTER 4: EFFECT ON EUROPE9Worsening of relationship between France and Germany9Germanys growing isolation within the EU10Weakening of the Brussels Commission10It is making the EU introspective10CHAPTER 5: EFFECT ON USA11CHAPTER 6: EFFECT ON INDIA11Effect on Exports11Capital Movement12Stock markets12Indian economy13CHAPTER 7: LESSONS FOR INDIA IN POINTS13Reduce Spending in the Army13Focus on Make India Campaign13Put be a ceiling on the number of welfare projects undertaken14Exploit the new financial institutions like the BRICS bank and the AIIB14CONCLUSION14

AcknowledgementsFirst of all I would like to thank our Honble Vice-Chancellor Dr. Gurdip Singh, our Dean (Academics) Prof Dr, C.M. Jariwala, and our very own Asst. Prof. Dr. Mitali Tiwari for letting me research on such an interesting topic and providing all the necessary resources required to fulfill it successfully.I would also like to thank my seniors and my dear batch-mates for providing the necessary mental support to complete this research paper.

CHAPTER 1IntroductionIn the 2000s, Greece had abundant access to cheap capital, strong capital markets and increased investor confidence after adopting the euro in 2001. Capital inflows were not used to increase the competitiveness of the economy, however, and European Union (EU) rules designed to limit the accumulation of public debt failed to do so. The global financial crisis of 2008-2009 anxiouspublicfinances,andsubsequent revelations about falsified statistical data drove up Greecesborrowing costs. By early 2010, Greece risked defaulting on its public debt.Once again it was saved by the European Union. The EU acted as a guarantor to the debts which Greece was bound to pay. Again in July 2015, Greece faced crisis for the third time.[footnoteRef:2] This time however, the person demanding ransom was none other than the EU. Greece defaulted again. Under these circumstances, the EU has taken various steps to ensure credit control and allied purposes. [2: http://www.academia.edu/5157806/Introduction_of_Greeces_Debt_Crisis]

BackgroundThis project has been made in the backdrop of the huge economic crisis that has taken place in Greece recently. It has failed to meet its deadline for repayment of debts for the third successive time. This led to unprecedented disputes, resignations of Ministers, hard-words and banter and various other forms of protests. While, finally it has been amicably solved, this crisis put a great mark on the credibility of Euro as an emerging currency. It also affected stock markets, investors and relationships among various countries. This project aims to answer the questions that arose and provide a comprehensive study for this matter and also provide.Research problemi. What is the Greece Economic Crisis?ii. What were the terms of the bailout?iii. What was its effect on other countries and especially on India?iv. What are the lessons India can learn from this?Research methodologyThe study of this project shall involve doctrinal research methodology. Study of this project will be done through books, articles, magazines, journals and internet database.ObjectiveThe objective of this research is to perform a comparative study reasons, effects and solutions with respect to the Greece Economic Crisis. It will also discuss specifics on how this would affect India and what lessons India can learn from this.Tentative ChapterisationThis project shall be chapterised roughly into the following heads:1. Chapter 2: In this I have discussed the events that led to the crisis.2. Chapter 3: In this I have discussed the solutions offered and put into place.3. Chapter 4: In this I have discussed the effect on European Countries.4. Chapter 5: In this I have discussed the effect on USA.5. Chapter 6: In this I have discussed the effect on India.6. Chapter 7: In this I have discussed the lessons India can gather.CHAPTER 2: THE WHOLE STORYGreece has always been a country who has cared for its citizens. Be it the recent plebiscite or any other incident, Greece seldom does anything which offends its citizens. While this is very beneficial for the people to have a government which really cares about them, the problem arises when it goes out of bounds.[footnoteRef:3] This welfare-oriented approach can be traced through the numerous number of pension schemes and unemployment benefits given by Greece to its citizens to secure immediate benefits(votes).What this did was, it made its citizens feel struggling to find work, not liking to work, and seeing themselves as "too old" to work. So Greece helps out by sending them some money.[footnoteRef:4] What this often does is that it reduces the intention to work and contribute to the nations development as people become complacent and dont feel like working as anyways they get stuff for free. This step did not increase the working capacity of the individual rather it started the operation of a vicious circle from unemployment to less inclination to work to no money to debts. [3: http://oru.diva-portal.org/smash/get/diva2:797941/FULLTEXT01.pdf] [4: http://www.bankersadda.com/2015/07/greek-debt-crisis-essay.html]

Greeces national income could not fund such welfare measures of the Government. Naturally, they took loans. Loans which they could never finally never pay off. The fact that Greece was an essential part of Europe added to its so-called reputation. The creditors did not ask twice before parting with their money. The only reasoning that Greece could provide itself when it asked about the payment of loans was: If all other countries in Europe can, I too can. It forgot the just one element regarding this which later turned out to be the most important: The other European countries make much more money than they actually do and they will continue doing so[footnoteRef:5].Thereby getting better interests which unfortunately could not be the case for Greece. But for a long time things seemed alright. When Greece's debt got too high he used a little accounting trick to say that he had more money than he did and that he could make those high credit card payments. As long as Greece didn't do this every day his credit card companies didn't mindtoo much. [5: https://en.wikipedia.org/wiki/Greek_government-debt_crisis]

Then Greece suddenly saw the other European Countries set up a cool club: Eurozone. Eurozone made it easy to do business with each other and that made is citizens (who were always behind Greeces mind while deciding policies) happy. Greece believed joining Eurozone would make it feel important, but when other members joined, they gave up some of their autonomy which meantif they got into trouble with their credit cards they couldn't do those accounting tricks that Greece did. Still, Greecereallywanted in. Deep down it knew that it had a problem and he needed to deal with it. However, it always felt that joining the Eurozone could solve all its problems. It could grow responsible and start managing tis funds well if it joined the club. To get into Eurozone, Greece needed to show the other members that he wouldn't wreck their party if he joined. He made the case that they could trust him.It submitted all lied data about its current debt positions and asked the other members to scrutinize them. Eurozone let Greece in. A lot of self-importance creeped into Greece as it thought it had become one of the best. However, he knew that it needed to tighten his belt. But, its citizens still counted on it to pay their bills. They had not developed the tendency to work and pay for its own due to the lackluster efforts of it citizens. Eurozone however did not approve of Greece spending so much money above his income, but Greece did it anyway. It felt it was an easy way to garner votes. This way it continued to rack up its debts.It didn't bother Eurozone or his creditors too much at the time. When Greece got in trouble he just took out another debt, and he used those debts to charge the payments for his old debts. Then came Economic Downturn and Tax Fraud.[footnoteRef:6]This let Greece in a very uncomfortable position. The national income decreased to almost 75% of its original value.Its debtors got scared.They had already experienced lending to clients which could not pay back and turned insolvent. They knew Greece struggled to get by, so they decided not to loan to him anymore. Greece couldn't get another credit to pay his back its debts. The main problem it faced was to make sure its citizens fare well and its national income rises. [6: http://www.economist.com/blogs/freeexchange/2012/09/tax-evasion-greece]

Eurozone, with the IMF, stepped into help. They didn't want to see Greece fail; if he did it might hurt all of them. Greece owed some members of this Eurozone a lot of money. So they lent Greece the cash he needed to stay afloat. But that didn't make a big, important member happy: Germany. The other members and Germany made demands. Among others, they demanded that it needed to ensure it got paid what he was due, and Greece could no longer think about its citizens welfare before repaying the loans.Greece took the money to make his payments for another five years. But he didnt his citizens off like were the terms of the loan and therefore does not get the support and extension of loans. Admittedly, Greece's citizens threatens to beat him up if he cuts them off. Eurozone worries about Greece. They make sure that if he can't pay they won't hurt. They buy insurance in case Greece can't pay, and they sell off Greek debt to cousins with a taste for risk.Then came the time for payment of loans. IMF, which helped Greece needed a payment. But Greece can't/won't make it. Greece couldnt bring himself to cut-off his family. He didn't like the conditions imposed by the creditors but he struggled to tell the club "no." So it let its citizens decide; they yelled "NO!" in their loudest voice, largely as a symbolic act of defiance. Subsequently, after the referendum, the Finance Minister, Varoufakis resigned and was replaced byEuclid Tsakalotos. The Greek parliament approves the government proposal about bailout plan. 251 MPs vote for the proposal but 17 MPs of government coalition did not support. Antonis Samaras resigned as leader ofNew Democracyand was succeeded by acting leaderVangelis Meimarakis. Greece and Europeans creditors struck deal for 86 billion euros bailout over three years, though it must be approved by the parliaments of all of the Eurozone member states. The Greek Parliament approved thefirst round of measures("prior actions") required by the creditors, including changes to pensions and taxes, by 229 to 64 despite 21% of Syriza MPs voting against,and some violent protests. Thecabinetwas reshuffled. The Prime Minister,Alexis Tsiprasresigned and proclaimedelectionsfor 20 September. CHAPTER 3: TERMS OF THE BAILOUTThe Greek government is to surrender powers over vast areas of economic and social policymaking to its eurozone creditors under draconian terms agreed for a new three-year bailout.[footnoteRef:7] The 29 pages of conditions concede ultimate authority over much of Greek policymaking to the eurozone and establish a system of quarterly reviews of the reforms by the troika of institutions the European commission, the European Central Bank (ECB) and theInternational Monetary Fund (IMF) representing the creditors. It specifies that the EC, ECB and IMF are to be involved for all the actions relevant for the achievement of the objectives of the memorandum of understanding before the terms are finalized and legally adopted. The terms for the bailout worth 85bn (61bn) foresee a radical overhaul of the Greek economy, stipulating major reforms of health, welfare, pensions and taxation systems, alongside more ambitious privatization schemes. It also awards the troika decisive influence over reforms of thestruggling banking sector. The Greek reform package entails 57 separate measures, included in 40 pieces of legislation to be voted on by Greek parliamentarians. The bailout agreement stipulates that the conditionality will be updated on a quarterly basis, taking into account the progress in reforms achieved over the previous quarter and in each review the specific policy measures and other instruments to achieve the broad objectives outlined here would be fully specified in detail and timeline.[footnoteRef:8] The document also talks about the increase in privatization of Greece with an ambitious programme and increase in influence over the banking sector of the troika. The document states: No unilateral fiscal or other policy actions will be taken by the [Greek] authorities. All measures, legislative or otherwise, taken during the programme period, which may have an impact on banks operations, solvency, liquidity or asset quality should be taken in close consultation [with the troika]. [7: http://www.theguardian.com/world/2015/aug/12/greece-bailout-terms-eurozone-policymaking-powers] [8: http://www.wsj.com/articles/greece-creditors-reach-deal-on-bailout-terms-1439274470]

According to the document, external consultants are to be sent in to advise Greeces national bank on bad debts and asset management, while the board of the Greek authority dealing with banking revival is to be co-appointed by the troika to counter suspected cronyism and political interference. It also provides for a new procedure for the selection and appointment of members in the executive board and general council which will be designed by the end of September 2015 implying a greater role for the [troika] institutions than in the past.CHAPTER 4: EFFECT ON EUROPEThe euro crisis will be there for many years. The underlying causes, such as southern Europe's lack of competitiveness, cannot be remedied overnight; Greece, Italy, Portugal and Spain face years of low growth, severe curbs on public spending and perhaps social unrest.[footnoteRef:9] Many people on other continents now wonder whether the euro is forever, and they also think the EU's hesitant and discordant response to the Greek debt crisis raises questions about the quality of Europe's leadership. The euro's malaise is damaging not only the EU's global standing, but also its ability to act effectively, in at least four ways. [9: http://www.nytimes.com/interactive/2015/business/international/greece-debt-crisis-euro.html?_r=0]

Worsening of relationship between France and GermanyThere have been differences of personality and of economic philosophy, with France's impulsive President Nicolas Sarkozy and Germany's dour Chancellor Angela Merkel seeming to wind each other up. At times Herman Van Rompuy, the European Council president, has had to beg them to talk to each other. The Germans have pushed for stricter rules on budget deficits, with severe penalties for countries that borrow too much. They have even talked about a new treaty that would allow for miscreants to be expelled from the eurozone. But the French have emphasised the need for governments to discuss each other's policies and performance as well as imbalances within the eurozone. The French government opposes a new EU treaty, and Paris and Berlin have also clashed on whether to involve the IMF, on whether the European Central Bank (ECB) should buy governments' bonds and on whether the key forum for economic governance should be the euro group or the wider EU. It is true that at each stage of the crisis France and Germany have in the end found a compromise - which they have then obliged the other member states to swallow. But the coolness between Merkel and Sarkozy matters. The EU can achieve very little - including in foreign policy - without France and Germany working together effectively.Germanys growing isolation within the EUSecond, the Greek crisis has highlighted Germany's growing isolation within the EU. Ever since reunification, Germany has gradually been asserting its interests more forcefully, in the way that Britain and France always do. This year, many member states - and the European Commission too - have criticised Germany for not doing more to stimulate demand in the eurozone, and thus help the southern Europeans to grow at a time when they are slashing public spending.[footnoteRef:10] German politicians respond that higher domestic consumption would do little to help southern Europe, and that public opinion in Germany constrains them from aiding profligates. Many Germans feel they are being asked to become less competitive. They are not entirely on their own in these arguments; the Dutch, Finns and Austrians all support the German emphasis on budgetary discipline. But a lot of Germans, hurt by criticism that they regard as unfair, are keen not to subordinate their interests to those of 'Europe'. Never before in the history of the EU has Germany been so disconnected from most of its partners. [10: http://www.usnews.com/opinion/economic-intelligence/2015/07/01/us-will-feel-economic-impact-from-greek-eurozone-crisis]

Weakening of the Brussels CommissionThird, the euro crisis has weakened the Brussels Commission, whose power - relative to EU member governments - has been in slow decline for about 20 years. When the financial crisis struck in 2008, it was the larger member states that led the EU's response, partially sidelining the Commission. And though the Commission helped to design the 500bn package agreed in May of this year, the EU governments will control the largest pot of money, the European Financial Stability Facility. The IMF and the ECB will play a role in setting the conditions that apply to those borrowing from the facility.It is making the EU introspectiveFourth, the euro crisis is making the EU introspective. For the past ten years the emphasis on treaty change has forced European leaders to spend too much time and energy on institutions and procedures. The EU's hesitant and muddled response to the Greek debt crisis has set off a game of mutual blame. Europe may have to endure several years of emergency summits and bail-outs, sowing discord and undermining trust between the member states.None of this means the euro or the EU will fall to pieces. For all their imperfections, Merkel and Sarkozy are the best leaders Europe has got and they will find ways of working together. Germany will in the end do what is necessary to keep the euro stable, and EU governments will grudgingly accept that they need the Commission. Crises on other continents will also force EU leaders to raise their eyes to the wider world.CHAPTER 5: EFFECT ON USAWhile most believe the Greek crisis is limited to the EU and its member states, the U.S. cannot ignore a Greek collapse or exit from the EU. The U.S. economic relationship with the EU constitutes the largest in the world, resulting in$276 billionin exports to the region. Further Greek turmoil could cause a relative appreciation to the already strong U.S. dollar, which, combined with soaring interest rates in Europe, could make U.S. exports more expensive and unattainable to EU member states. Additionally, a Greece default would disrupt financial market stability and have a negative impact on the American cashpouringinto the European stock market. Likewise, Greeces action could cause fellow small EU economies to follow suit. As the U.S. economy continues to recover, an appreciating dollar canperpetuatedecreasing exports, undermine corporate earnings and run the threat of a currency war.

CHAPTER 6: EFFECT ON INDIAAlthough the government spokespersons have claimed that India is insulated from the crisis, it will be very foolish to think so. Although there might not be an immediate effect or a direct effect, it is needless to say that this crisis will have an indirect effect on India. The possible effects can be broadly underlined as follows:Effect on ExportsEurope is India's largest trading partner with USD 129 billion of merchandise engagement in 2014-15. India's merchandise export has not been in prime health this year and the crisis in Europe will only deteriorate the prospects. Exports are down from this country. It must be remembered in this context that as a single entity, Europe is India's biggest trading partner with two-way trade of E72.5 billion or Rs 530,000 crore last year.Indias software and engineering exports may take a hit and the country may also face larger capital outflows due to a weaker euro. Commerce Secretary Rajeev Kher said exports from India would be impacted negatively if the European Union is hit from the Greece crisis, although he ruled out any major direct impact of the prevailing Greek situation. Engineering exporters body EEPC India said the economic crisis in Greece will impact engineering exports from India as European Union is the largest destination for such shipments. The industry body said it sees indirect impact from the UK, Italy, Turkey and France.Capital MovementAfter Greece doesn't meet its deadline, the interest rates will rise all across Europe because the economic health of countries like Spain and Italy is also not very good (so financial institutions will not lend easily). All this will have an outcome on the Euro. And at the present moment even experts are unsure about how the foreign investors will relocate their portfolios. This will result in capital inflow and outflow in and out of India. While capital inflow is good as it brings money into the country, capital outflow is undesirable as assets move out of the country. But we'll have to wait and watch for now.Finance Secretary Rajiv Mehrishi said the economic crisis in Greece may trigger capital outflows from India and the government is consulting theRBIto deal with the situation. Greece crisis does not have any effect directly on India. But interest rate may firm up in Europe. In case of firming up of interest rate in Europe, there can be outflow of capital from India.Stock marketsThe benchmarkBSE Sensexdropped by more than 600 points in early trade on the eve of the crisis, but managed to recoup some loses later on selective buying in the beaten-down counters and settled the day lower by 167 points at 27,645.15. The benchmark BSE Sensex rebounded over 117 points in early trade on Tuesday, after two sessions of losses, on value-buying by investors in select blue-chips amid a recovery at Asian markets despite the ongoing Greece crisisIndian economyAssocham said Indian economy is not really centric to Greece directly but if European Union is impacted due to this then India could be affected.CHAPTER 7: LESSONS FOR INDIA IN POINTSAlthough, as discussed above, India might not feel the effects of the Greece crisis, however, there are some huge lessons that India can learn from this crisis. Among a lot of lessons, a few important ones are underlined here:Reduce Spending in the ArmyLike Greece, much of India's defence budget goes into maintaining an oversized Army, with little investment in resource development. If India wants to avoid the hard choices that Greece is having to make, it needs to make changes now, when the going is good. Indias defence budget too spends far too much on personnel expenditure as opposed to operations, equipment, training and stores. Unlike First World militaries, where much of the expenditure is dedicated to significant value additions in the education of their personnel, Indias money goes into the basics of maintaining an oversized Army and the consequent pensions of that Army, much like Greece. With the introduction of the new mountain divisions (and in spite of the scale back of these plans), this situation is likely to exacerbate, with even less funds being available for the critical training required to bring our soldiers into 21st century warfare.Apart from that the fact that India is now going to implement the OROP scheme, may further add on to the already troubled Indian economy.Focus on Make India CampaignThis also an equally sobering lesson on why the Make in India campaign must not lose focus by sacrificing indigenization to job-creation. If and when push comes to shove, the fact remains that almost of our defence budget will effectively be futile expenditure in employments, pensions and social security schemes as well as an investment in the economic revival and human resource development of another country (through defence imports). If Greece is being forced to make hard choices with its back to the wall, and India wants to avoid this, the latter needs to make more gradual and manageable changes, when the going is good.Put be a ceiling on the number of welfare projects undertakenBut the Greek pension model is a prime specimen of a welfare initiative gone wrong. Financing the pension package using public funds and the state exchequer proved fatal for an economy in regression. Along similar lines, the Indian government has undertaken numerous insurance and pension schemes for varied sections of the populace. This bid for inclusive growth must incorporate adequate checks and balances to cushion all adverse effects on the economy. It is possible through a transparent disclosure of how the government makes use of these funds.Landmark legislations have been stalled in parliament due to political disagreements. As each fiscal year passes, the government of the day will be put to test. For sustainable growth, it remains pertinent that the nitty-gritty of keys bills like GST, Land Acquistion etc. be examined and quick resolution to the periodic deep freeze of parliamentary sessions be put to rest.Exploit the new financial institutions like the BRICS bank and the AIIBThe stranglehold of international financial bodies like IMF over member nations undermines their spirit of freedom in economic decisions. New institutions such as theBRICS Development BankandAsian Infrastructure Investment Bank(AIIB) are viable alternatives for India to ease its dependence on the Bretton Woods organizations. Active and sustained participation could redirect our credit needs to these non-Western agencies.CONCLUSIONTodaysthe continual crisis situation in Greece will bea result of major threat for the totalworld. The fallen of Greece will be the threat to EU for the survival in the future. Thats why EUs Countries main target by any how to develop the Greece situation. As EU has invested a huge amount of financial support for the betterment of Greece, the default of Greece may create a collapse of EU from the world. The global business will be sufferer vastly, as there is no way to exclude the role of EU in the total world economy. There might be a lot of effects of this crisis on the world economy. This might even change the face of world economy. However this crisis does not do a lot of harm to India. It might just turn into a benefit which India may garner under these circumstances. On the other hand, India can really learn a lot of things provided for in the project and ensure that it is never in the receiving end. REFERENCES1. Introduction of Greeces debt crisis available at http://www.academia.edu/5157806/Introduction_of_Greeces_Debt_Crisis 2. Greek Debt Crisis An Introduction to the Economic Effects of Austerity available at http://oru.diva-portal.org/smash/get/diva2:797941/FULLTEXT01.pdf 3. Bankers Adda: Greeces debt crisis: Essay available at http://www.bankersadda.com/2015/07/greek-debt-crisis-essay.html 4. Greece governments debt crisis available at https://en.wikipedia.org/wiki/Greek_government-debt_crisis 5. Tax Evasion in Greece: A flagrant available at http://www.economist.com/blogs/freeexchange/2012/09/tax-evasion-greece 6. Greeces bailout terms to give Europe vast powers over economy available at http://www.theguardian.com/world/2015/aug/12/greece-bailout-terms-eurozone-policymaking-powers 7. Greeces creditors reach agreement on bailout terms available at http://www.wsj.com/articles/greece-creditors-reach-deal-on-bailout-terms-1439274470 8. Greeces Debt crisis available at http://www.nytimes.com/interactive/2015/business/international/greece-debt-crisis-euro.html?_r=0 9. US will feel economic crisis after Greece crisis available at http://www.usnews.com/opinion/economic-intelligence/2015/07/01/us-will-feel-economic-impact-from-greek-eurozone-crisis 8