Economic and political impact of the greek economic crisis for the euro-zone

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Coursework 2010-2011

“Critically Discuss the Economic and Political Impact of the Greek Economic Crisis for the

Module: Political Economy of the European Union
Lecturer: Cornelia Junge
Code: EC0902A

Anne Onclin 1005446

Table of Contents

1. Introduction ………..1
2.The Euro-zone system 2
2.1. Introduction and the five criteria 2
2.2. The problems of thissystem 3
2.3. The current situation 4
3. The economy of Greece 5
3.1. The causes of the crisis 6
3.2. The current situation 7
4. The political and economic impact of the Greek economic crisis on the Euro-zone 8
5. Conclusion 10
6. Bibliography 11

1. Introduction

In early 2010 sovereign debt crisis affected several countries located in Europe. The countries situated in theEuro-zone were called PIIGS, a grouping acronym used by some economists in order to refer to the following five countries; Portugal, Italy, Ireland, Greece, and Spain.
According to Ambrose Evans-Pritchard, the international business editor of the Daily Telegraph, those countries are responsible for the weakening of the trade performance of the Euro-zone bloc (Unknown a ).

The Greek economic crisisrepresented the beginning of different crises: fiscal, political and social ones. It also caused a tragic crisis of confidence.
All those crises are the answers to two of the largest issues for Europe: “the future of the democratic welfare state” and “the usefulness and the power of the single currency used by 17 countries” (Samuelson 2010 a).

In attempting to understand the political andeconomic impact of the Greek crisis on the Euro-zone it is necessary to examine some significant points more precisely; firstly the Euro-zone system, its setting up, its problems and the current situation and secondly it is important to have a look on the Greek economic situation.

3. The Euro-zone system

4.1 introduction and the convergence criteria

Europe stands for afifth of the world economy but its challenge is not only economic, it is likewise political and social (Samuelson 2010 b).
The creation of a single currency for this world-power was suggested by Jacques Delors, the president of the European Commission, in 1988.
That consisted in a three-stage plan to reach full economic union, including the establishment of a European Central Bank and a singlecurrency.
This plan became part of the Maastricht Treaty in 1992 (European Commission 2010).

The euro was adopted in 1999 by 11 countries. Greece adopted it in 2001 later than the others because of its economic deviances (Arvanitis 2000).

To join the single currency, Members States are meant to meet five convergence criteria which are listed below.
First of all the inflation is not allowed toexceed more than 1.5%, the average of the three countries with the lowest inflation.
Secondly, the long-term interest rates may not vary by more than 2% above the average of the 3 countries with the lowest inflation.
What budget deficit concerns, it must be below 3% of the GDP. Moreover, the public debt may not exceed 60% of the GDP and finally the exchange rates must remain within 2.25%fluctuation with respect to all European currencies (European Commission 2010).

4.3 The problems of this system.

The euro area is not an optimal currency area, in other words the costs of the single currency outweigh the benefits. The degree of mobility, the government intervention and the degree of economic convergence are too weak between those countries to make the singlecurrency functional and successful. (Pettinger 2010).

The countries constituting the euro area are economically diverse; it is easy to see huge differences existing in terms of employment, growth, inflation and business cycles.
For instance, the unemployment rate in Spain is, according to Eurostat, around 20.7 percent whereas in Germany it is around 6.7 percent (Eurostat 2010).
The GDP growth is...
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