Introduction
From the article “pensions are at the heart of the continuing row over Greece’s parlous finances” from The Economist, on the 29/0/15, Greece is trying hard to persuade their creditor that is has a feasible economic reform plan to avoid the country from going into bankruptcy and unlock emergency funds. Greece is facing a risk of going bankrupt in the next few months unless they secure a deal with their creditors to get a four-month extension to July, to the country’s bailout program. This is not the first of Greece’s list of restructurings to the IMF and other euro-zone governments hoping to secure the next country’s bail-out.
Some of the major comments are with regards to pensions. In 2012, Greek’s spending on pensions was the highest in Europe as a share of its Gross Domestic Product (GDP), at an astounding 17.5 %. This is contrasting with Greece’s main creditor, Germany, with expenditure on pensions worth 12.3% of the Gross Domestic Product in Germany. In comparison with Slovakia, one of Greece’s harshest critics, it is twice the share of pension expenditure allocated in the Gross Domestic Product (Print Edition, 2015).
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Greece’s extravagant expenditure on pensions has been a source of animosity with creditors from the North, ever since its rescue about five years ago. Recently in Germany, a pension reform raised the retirement age from 65-67 as from 2012 to 2029. This raise in the retirement age has limited Germany’s ability to go down into their pockets, to help Greece’s financial situation, a country whose workers retire at a much younger age with lavish pensions. Slovakia, withdrew its contribution to Greece’s first bailout in 2012 due to public anger on bailing out a spendthrift country (Print Edition, 2015).
Reforms to deal with the lavish pension payments in Greece
There have been a number of reforms in Greece since 2010 to try and reduce pension expenditure on the Gross Domestic Product, which was threatening to grow to 25% of the GDP by 2050.
• In 2013, the retirement age for both men and women was raised to 67.
• In 2012, the replacement rate, meaning, how much a person is compensated in relation to their prior earnings, was reduced from 96% to 54% (Print Edition, 2015).
The reforms haven’t yet been strictly implemented as it is still quite easy to retire early in Greece. Also, the link between the benefits received and the contributions made is very weak, and the system is not fair actuarially and Greece’s creditors desire to see hard proof that the systems will be tough enough. For example, Germany, insists very much that there is so much more to be done. Germany’s finance spokesman said that Greece’s reform list was lacking, that it was not a comprehensive reform list (Print Edition, 2015).
Greece, however, maintains that its reforms for 2015 are expected to yield 3 billion euros from activities that would negatively impact on the economic activities in Greece. An Athen’s official last week made a report that the reforms would leave Greece with a primary budget surplus of 1.5 % of GDP in 2015, and a growth of about 1.4 % (Print Edition, 2015).
The impact of Greece’s crises on the World Economy
With regards to Gross Domestic Product, Greece is the 27th largest economy in the world and the 33rd largest according to purchasing power. Its economy is developed being the 22nd highest living in the world. Greece has the 24th most globalized economy in the world as is considered a high-income economy (Reuters, 2015).
The Euro is a currency used in the European Union countries and their trading partners; hence the first effect of the Greek crises has been felt by the other 15 countries/economies in the Eurozone. Since the Eurozone countries agreed to assist the Greece, their taxpayers of the other economies have had to bear Greece’s burden (Reuters, 2015).
The problems with Greece’s economy are feared to have a severe domino effect on the international capital markets, which will affect the weak Eurozone members like Ireland, Italy, Spain and Portugal which will affect the balancing of books in the Eurozone. Countries with good rating with the Rating Agencies can raise funds at cheaper costs. The downgrading of Portugal, Spain and Greece is feared to bring an autonomous debt crisis leading to countries being unable to raise money to pay their bills. This fear has resulted in the increased interest rates that have led these countries be charged higher interests to be able to barrow in the open market.
Lastly, the Greek crisis has had an impact on the currency markets. A large number of the currency traders fear that countries which have large budget deficits, like Portugal, Spain, and Greece, might end up with a temptation to leave the Eurozone. A country that leaves the European Union could let its currency go down in value, hence making it more competitive. The competitive currencies could cause huge falling-outs in the financial markets due to investors fearing that other nations would follow suit, possibly leading to the disintegration of the monetary union itself (Reuters, 2015).
Conclusion
The Greek crisis has a great risk on the financial markets as explained above. The Greece government has to put in stringent measures to curb its unnecessary expenditure, especially on lavish pension schemes in the country that is fit for rich countries (Print Edition, 2015).
- Print Edition. (2015, April 4). Pensions are at the heart of the continuing row over Greece’s parlous finances. . The Economist. Retrieved from www.economist.com
- Reuters. (2015, Feb 15). Eyes of the world on Greece. The Economic Times. Retrieved from http://economictimes.indiatimes.com
