Economics III Final Draft

DR. RAM MANOHAR LOHIYA NATIONAL LAW UNIVERSITY

2015-16
FINAL-DRAFT
Economics-III
Evaluation of Greece Economic Crisis and Lessons for India
Submitted to:

Submitted by:

Dr.Mitali Tiwari

Arnab Roy
3rd Semester (Roll. No. 42)

Assistant Professor (Economics)

Section: A

Economics III Final Draft

TABLE OF CONTENTS:
CHAPTER 1__________________________________________________________________4
Introduction_________________________________________________________________4
Background_________________________________________________________________4
Research problem____________________________________________________________4
Research methodology________________________________________________________4
Objective___________________________________________________________________5
Tentative Chapterisation______________________________________________________5
CHAPTER 2: THE WHOLE STORY_____________________________________________5
CHAPTER 3: TERMS OF THE BAILOUT________________________________________8
CHAPTER 4: EFFECT ON EUROPE_____________________________________________9
Worsening of relationship between France and Germany___________________________9
Germanys growing isolation within the EU______________________________________10
Weakening of the Brussels Commission_________________________________________10
It is making the EU introspective______________________________________________10
CHAPTER 5: EFFECT ON USA________________________________________________11
CHAPTER 6: EFFECT ON INDIA______________________________________________11
Effect on Exports____________________________________________________________11
Capital Movement___________________________________________________________12
Stock markets______________________________________________________________12
Indian economy_____________________________________________________________13
CHAPTER 7: LESSONS FOR INDIA IN POINTS_________________________________13
Reduce Spending in the Army_________________________________________________13
Focus on Make India Campaign_______________________________________________13
Put be a ceiling on the number of welfare projects undertaken______________________14
Exploit the new financial institutions like the BRICS bank and the AIIB_____________14
CONCLUSION_______________________________________________________________14

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Acknowledgements
First 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.

Economics III Final Draft

CHAPTER 1
Introduction
In 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
anxious public finances, and subsequent revelations about falsified statistical data drove up
Greeces borrowing 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. 1 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.

Background
This 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 problem
i.
ii.
iii.
iv.

What is the Greece Economic Crisis?

What were the terms of the bailout?
What was its effect on other countries and especially on India?
What are the lessons India can learn from this?

Research methodology
1 http://www.academia.edu/5157806/Introduction_of_Greeces_Debt_Crisis
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The study of this project shall involve doctrinal research methodology. Study of this project will
be done through books, articles, magazines, journals and internet database.

Objective
The 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 Chapterisation
This project shall be chapterised roughly into the following heads:
1.
2.
3.
4.
5.
6.

Chapter 2: In this I have discussed the events that led to the crisis.
Chapter 3: In this I have discussed the solutions offered and put into place.
Chapter 4: In this I have discussed the effect on European Countries.
Chapter 5: In this I have discussed the effect on USA.
Chapter 6: In this I have discussed the effect on India.
Chapter 7: In this I have discussed the lessons India can gather.

CHAPTER 2: THE WHOLE STORY

Greece 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.2 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.3 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.
2 http://oru.diva-portal.org/smash/get/diva2:797941/FULLTEXT01.pdf
3 http://www.bankersadda.com/2015/07/greek-debt-crisis-essay.html
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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 so4.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 mind too much.
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, Greece really wanted 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
4https://en.wikipedia.org/wiki/Greek_government-debt_crisis
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came Economic Downturn and Tax Fraud. 5This 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.
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
by Euclid 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 of New Democracy and was succeeded by acting
leader Vangelis 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 the first round of measures ("prior actions")
required by the creditors, including changes to pensions and taxes, by 229 to 64 despite 21% of
5http://www.economist.com/blogs/freeexchange/2012/09/tax-evasion-greece
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Syriza MPs voting against, and some violent protests. The cabinet was reshuffled. The Prime
Minister, Alexis Tsipras resigned and proclaimed elections for 20 September.

CHAPTER 3: TERMS OF THE BAILOUT

The 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.6 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
the International 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
the struggling 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.7 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].
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
6 http://www.theguardian.com/world/2015/aug/12/greece-bailout-terms-eurozone-policymaking-powers
7 http://www.wsj.com/articles/greece-creditors-reach-deal-on-bailout-terms-1439274470
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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 EUROPE

The 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. 8 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.

Worsening of relationship between France and Germany

There 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 EU

8 http://www.nytimes.com/interactive/2015/business/international/greece-debt-crisis-euro.html?_r=0
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Second, 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. 9 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.

Weakening of the Brussels Commission

Third, 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 introspective

Fourth, 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.
9 http://www.usnews.com/opinion/economic-intelligence/2015/07/01/us-will-feel-economic-impactfrom-greek-eurozone-crisis
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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 USA

While 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 billion in 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 cash pouring into 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 can perpetuate decreasing exports,
undermine

corporate

earnings

and

run

the

threat

of

currency

war.

CHAPTER 6: EFFECT ON INDIA

Although 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 Exports
Europe 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
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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 Movement
After 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 the RBI to 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 markets
The benchmark BSE Sensex dropped 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 crisis

Indian economy
Assocham said Indian economy is not really centric to Greece directly but if European Union is
impacted due to this then India could be affected.

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CHAPTER 7: LESSONS FOR INDIA IN POINTS

Although, 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 Army

Like 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 Campaign

This 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 undertaken

But 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
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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
AIIB
The stranglehold of international financial bodies like IMF over member nations undermines
their spirit of freedom in economic decisions. New institutions such as the BRICS Development
Bank and Asian 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.

CONCLUSION
Todays the continual crisis situation in Greece will be a result of major threat for the total world.
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.

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REFERENCES
1. 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-eurozonepolicymaking-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-crisiseuro.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-economicimpact-from-greek-eurozone-crisis

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