Economics newsletter edition #5

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JUNE 24, 2015

GREXIT: A STRONG POSSIBILITY?

DUBAI COLLEGE

UK AntiAusterity Protests

Freddos: A New Measure of Inflation?

In the UAE

DC ECONOMICS GREXIT With the most recent talks on June 22, the possibility of a Greek default on its Euro 1.6 bn repayments due to the IMF by end of June again seems less likely. In a typical ‘European response’ to dealing with crisis last minute, a resolution may well be found in the form of a restructure and extension of loans in return for a reform plan from Greece that is more agreeable to its official creditors - IMF, EC and ECB and other EU govts. Greece claims it requires the last tranche of the Euro 7.2 billion from its Euro 247 bn bail out programme to run the government and be able to pay wages and pensions to its employees. The package expires in 2015 and Greece has not received any funds since 2014. It has managed to stave off a default on its repayments so far by drawing on its reserve accounts with IMF and emptying out the surpluses and reserves of its municipalities, state owned enterprises and even hospitals. Greece is insolvent despite having generated a fiscal surplus of 0.6% of GDP for the first time in 2014 (which would otherwise indicate at least a reduced reliance on external debt). It has delivered on the stringent austerity conditions imposed by its creditors with reduction in wages, cutting of govt. jobs, reducing pensions and increasing VAT rates. Yet its debt has risen to over Euro 340 Bn with the sovereign debt to GDP rising from 109% to 177%, unemployment from 15 % to 28% and its real GDP has contracted by more than 25% since the financial crisis. As deflation set in as the crisis deepened, there was no new investment or growth that would have generate additional income through taxes and the few employed saw their disposable income and spending shrink with wages and pension cut. If deflationary conditions persist, increasing social benefit obligations will put pressure on the budgetary surpluses required to service debt and Greece’s debt will keep on rising. Economist such as Stiglitz and market analysts (JP Morgan) are unanimous in their view that the IMF, ECB and EC ‘’badly misjudged the macroeconomic benefits of the bail out programme they imposed on Greece’. IMF and ECB published forecasts for the original (2010) and second restructuring of Greek debt in 2012 have proved to be too optimistic in their assumption of the austerity measures in generating growth and surpluses needed for debt sustainability. In the absence of a mechanism within the European Monetary Union framework that does not allow a country to leave currency union, Greece will be forced out of the EU if it defaults on the Euro 6.7 bn repayment due to the ECB in July 2015. Sara Kachwalla

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Economics newsletter edition #5 by ben christopher - Issuu