Greece and Hungary: two irresponsibly different economies.

Abstract: I pretend to illustrate with this essay, how did these two economies managed to be in the dangerous hole they are now, being both of them in different levels a hazard to the European Union. Also, I would like to indicate the latest policies that have been introduced with the objective of saving the weak economies in the euro zone, and whats the moral of the fable. Key Words: Economic seizure, European economic breakdown, Greece & Hungary. In 2001 Greece changed its currency for the Euro, which at everyones eyes was a huge upgrade for their status, escalating to be part of one of the worlds most important economies. The problem was that they felt too comfortable with that situation, knowing that the European Union would be a support for their economy they began to borrow and borrow without any kind of restraint. In November of 2009 the governments started to panic, the reason: Greeces public deficit and debt explosion. Both of these numbers (12.7% and 113.4% of its GDP, respectively) were very above the standards permitted by the European Union. The public deficit exceeded four times the amount ruled by the European Union and the dept was two times bigger than Greeces own estimates. To make the problem even worse, Greeces old government lied about their actual numbers because they didnt want to disappoint other European fellows, so they made their financial situation look a lot better than it actually was. In December 2009, the new government in charge announced desperate fiscal measures (because of its Eurozone membership, Greece isnt allowed to depreciate its currency to spur growth) to save the country from default and bankruptcy. Of course, the European Union couldnt let Greece wander around without any kind of help, because of the fear that Greeces economy would have a massive effect and weaken the Euro; also they feared a possible domino effect towards other members.

Since the announce of its potential default, Greece has been facing a lot of austerity in order to get the help it needs by the European Union, the banks and the IMF. Greece has been

relying on a package of more than 110 billion Euros and an agreement from banks to take off a 50% value of its dept. This help has only been provided because Greece accepted (not easily) austerity measures to stop negative numbers and to restore confidence from the investors. Sadly, help didnt work. By the end of 2010, Greeces economy risked defaulting on its public debt. Implications on Greeces society will be mentioned further in the paper. To continue with the sad data, Hungary comes to my mind when I think about one irresponsible member of the European Union. Since the collapse of the Soviet Bloc, the Socialist Party had ruled the country until 2010. It was a very unpopular party with an unpopular prime minister with unpopular decisions. The world crisis made Hungary a victim, but the government made it worse, they also lied in their numbers so no one could tell that they had problems. For better or for worse, the bubble exploded and by the end of 2010 they were already facing a fiscal dept similar to the 79.6% of their GDP. I would like to mention that I think Hungary is irresponsible, but not at the level of Greece, and I want to defend this argument: -In Hungary the housing bubble and the inflation always remained low. In addition, the banking sector is healthy and there are not problems with mortgages. What actually caused the anemic slowdown of its economy was that Hungary began its economic transition before its former communist neighbors (between 1997 and 2006), opening its markets to foreign investment, which made them vulnerable in the world financial crisis. So the government lied, but it also made its part. Continuing with numbers, Hungary benefited itself by receiving help (20 million euro) from the European Union destined to every country that its a member but doesnt have euro as a currency. They have adopted a bunch of austerity plans to prevent the situation of getting any worse, and they have applied monetary policies to their advantage. Unfortunately, the austerity program was anything but successful, and Hungary despite its efforts now presents a debt of 82% of its GDP. The fact that the loans that were made to Hungary were in euro and Swiss francs will be a problem, because of the fast depreciation of the forint. This is evidently also affecting the purchase power of their population. The consequences of both Greeces and Hungarys irresponsible behaviors are domestic and international.

Domestically, Greece with the bad management of solutions to the crisis and with its outrageous austerity program has a lot of problems with its society. Massive strikes have been occurring because of the unemployment (close to 16%), because of the new tax on private properties, because of the wage cuts and because of the lack of transparency of its institutions. To add up its problems, the Communist Party has been organizing strikes with the purpose of telling the authorities that they dont have to pay for the consequences of a crisis that they attribute to capitalism. What I think matters about the strikes, is the deep meaning of them. The population isnt supporting the governments measures of reducing 10% its expenditure. It the worst-case-scenario this lack of support could evolve to a political crisis. On the other hand, Hungary experiences its own domestic issues as well. Fingers are being pointed between the old and the new government to figure out who is the responsible of the problems theyre facing now, which affects directly governments credibility. Their way to improve the economic situation has been handled different than in Greece or even Ireland; they refuse to compromise under the pressures of the international arena. The government wants to reduce its public deficit, but it doesnt want the problems Greece has been facing with its society.

The governments strategy to reactivate its economy has been played in a more free way. They derogated a reform to the pension system, allowing the government to accede to the assets of this account in order to be able to sell them afterwards and use the money to ease the deficit. They also took other measures such as tax on banks, crisis taxes, cuts in agricultural subsidies, reduction of natural gas and distance-heating compensations, freeze resources in ministries, freeze family allowances and reducing the general rate of sick-pay from 70% to 60%. Beyond maintaining the deficit target, the government has also been working in creating new jobs, promoting economic growth and enhancing Hungarian competitiveness. Of course not all the population is happy about these cuts, but at least they are less angry than the Greeces one. One strong issue that has been making everyone in Hungary angry is

the loss of purchase power caused by the depreciation of its coin towards pretty much every other currency relevant to them. Nevertheless, its evident that the situation could be worse. The international issues related to the crisis of these two economies will be managed together in this paper. As a brief introduction, I would like to begin with pointing out that Greece pressured its partners to come to its rescue by arguing that its government didnt have enough money to pay the pensions some people need to survive. Its government argued as well that they wouldnt be able to pay the wages of its bureaucracy. These statements were more a threat than a petition for help because they knew its economy is deeply linked to other European economies, and the European Union would never permit this catastrophe that included millions of European citizens to happen.

International consequences of the bad management of their debt have ended up in numerous commitments made not just by themselves, but by the entire European Union community. Germany and France insist that fiscal union is the best way to regain market trust, badly shaken by the escalating financial crisis. The euro countries also need enough money to guarantee that they can pay the massive debts that have resulted from running budget deficits year after year. Euro leaders put off until March a decision on whether to provide money on top of a 500 billion-euro bailout fund for euro countries. European leaders did agree to add 200 billion euro to the International Monetary Fund to help ailing countries. Only 17 of the 27 European Union countries use the euro, and its stability has been threatened by the massive national debts of some of those 17 (Steinhauser, 2011). What once began as a union of powerful nations, now results in an uncomfortable relationship that ties strong countries with weak ones. Great Britain is now facing isolation because it vetoed a revision of the Lisbon treaty, because its government will never be in favor of the new treaty that involves sovereignty loss, only 23 out of 27 are in favor of the new deal.

There isnt a unique solution that can make everyone happy. I believe that if it wasnt because Germany and France have the euro, they wouldnt be struggling so hard to preserve it and to aid other weak economies. Its all a matter of interests, as always. Money, efforts, resolutions, and actions are being provided to irresponsible economies, that dont only include Greece and Hungary, and this is provoking loss of cohesion among the most Union. You cant expect to give incentives to spend money to doubtful governments because what you will have in return will be doubtful results. Its like winning the lottery and dont expect people to go crazy with the money. As more countries join the Eurozone, Great Britain will have less space to defend itself, and this could end up in a divorce between them and the European Union. I would just like to point that this is completely unbearable! How come this turned out this way? How did the most powerful and responsible economies ended up financing other countries irresponsible actions? How come what seemed as the most promising economical union in the world, ended up being a hazard to foreign investors? To give my own answer to these questions, Im providing the moral of the fable. In 1961 an economist named Robert Mundell came up with an idea of a model named Optimal Currency Area (OCA), which said that: In particular, countries which share strong economic ties may benefit from a common currency. This allows for closer integration of capital markets and facilitates trade. The case for separate currency areas clearly holds good only if the impact of a shock varies between areas: i.e. is asymmetric. If the impact were to be the same on all, the exchange-rate changes needed for adjustment would be the same for all, in which case separate currencies would serve no purpose. OCA theory indeed implies that any two countries generally experiencing symmetric shocks, and trading significant proportions of their GDP bilaterally, should fix their exchange rates. (Mundell, 1961). powerful countries of the European

The paragraph is small but it says a lot. An economic integration on an OCA requires basic fundamentals: fiscal federalism, similar industrial structures, lots of trade within the area, similar monetary transmission mechanisms, flexible labor markets and symmetric economic shocks. For me, the moral of the fable consists in sticking to the fundamentals. In which way Greeces fiscal federalism was reliable from the start? Also, in which way Hungary reacts symmetrically as France, or lets says Germany to macroeconomic changes? I do believe the European Union will solve its issues and it will re-emerge after a couple of years as a powerful economic union. But maybe, these problems could have been avoided if the founding members wouldve pay more attention in whom else was joining. Its not a matter of discrimination; its just a matter of time. Im not saying that these countries wouldve never been able to join the European Union; Im just saying that they could have waited longer in order to be ready to face problems as strongly as founding members.

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Mario Adrin Prez Daz

ID: 133703

Cultura de la Informacin

Greece and Hungary: Two irresponsibly different Economies.

Mayo 2012