Inter-relationship Between Economies: The Country and The World

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By Shubhalakshmi Bhattacharya

The economy of a country depends upon the government of the country as well as the foreign relations of the country. Therefore, major economic decisions taken by a country not only impact the citizens of the country but also have an impact on the world economic system. This article delves into the interdependence between a national economy and the global economy and the relationship between the two. An excellent example of this is the economic crisis that plagued Greece since 2009.  

The Greek government and the mismanagement carried out by it was one of the main causes of the economic crisis that took place within Greece which it has been trying to recover from till this date. Moreover, the fact that Greece was a part of the Eurozone played an equally key role as being a member did not allow Greece to have complete control of its monetary policy. Due to this, even while key policy decisions were taken by the Eurozone which did not align with the goals of the Greece economy, there was not much that could be done and this therefore led to severe repercussions.  Moreover, due to the global finance crisis which took place in 2009, there wasn’t too much importance given to the problem with Greece which then resulted in the problem growing much bigger before being noticed.

As mentioned earlier, the fact that Greece was a member of the Eurozone also had severe implications with regards to the economic crisis that took place in the country. Greece was allowed to join the Eurozone in early 2001 and had not qualified to be a part of it when the initial list of candidates was drawn up since Greece failed to meet the economic requirements that were put forth in the Maastricht Treaty. Under the EU Stability and Growth Pact, the terms mentioned that the economies of the new members had to converge with the Eurozone members to an extent. Due to this, the convergence was only followed after a particular criteria was met which included low inflation among four other pointers. It was allowed to join the Eurozone despite the fact that it had a budget deficit which was well in excess of 3% of the GDP and therefore did not comply with the criteria used to determine membership. Moreover, their government debt was also in excess of 100% of the GDP while the criteria mentioned that the government debt levels should not cross more than 60% of the GDP. By converging an economy with that of the Eurozone, the country would then have restrictions placed on it and would not be able to make certain monetary policy decisions, and in case the country’s economy was not doing well, it could not do much to rectify that since it was bound by the decisions of the Eurozone. Due to these reasons, it was counterintuitive to allow Greece to join the Eurozone when it did not fit the criteria and this somewhat undermined the credibility of the European project when it had bent the rules to allow Greece to become a member.

For Greece, it became a major economic constraint to be a member of the Eurozone. If it had not been a member and had not agreed to the single currency policy of the Eurozone, it could have devalued its currency in order to increase its exports and therefore bring itself out of the economic crisis it was in. It would have helped devaluing the currency as that would have led to a decrease in the pressure put on the interest rates of Greece. However, since the interest rates of the Eurozone were decided by the ECB and they had no motive for decreasing the Euro and destabilising the currency, they did not take these steps. In situations like these, it becomes important to understand that the priority is not a single member but concerns the members in totality since the mandate of the Eurozone and other organisations cannot possibly be to cater to the economy of each individual member. Due to this, the original issues that the economy of Greece was already dealing with increased in magnitude.

By the time the crisis unfolded, there were debts maturities and budget deficits which needed to be refinanced with more bond assurances but investors didn’t want to risk refinancing and buying these bonds without the surety of some form of reward.  Since Greece had no adjustment mechanism and had a lack of control over its monetary policy, it resulted in a contraction in the GDP and a steep decline in the living standard which were further supplemented with austerity programmes that the country was made to undergo in order to help restore the economy as well as pay the bailouts paid in order for the country to continue to function.  The most logical path forward would be to leave the Eurozone in order to bring about some changes to the monetary policy. However, leaving the Eurozone meant that Greece would have to deal with its economic crisis as an independent country and that would have led to a situation wherein the bailouts for the Greece would not have come from the European nations.

The economic crisis within a country also has an impact on the global economy as stated above and it did so with respect to Greece as well. Since the beginning of the debt crisis in 2010, most international banks had sold off their Greek bonds in order to remain unaffected by the crisis within the country. However, the Eurozone amidst the crisis, still did not want Greece to cease to be a member. This is because some of the banks of the members of the Eurozone had loaned money to Greece and were entwined with its economy. If Greece left the Eurozone, it would lead to their country’s economy also destabilising. If Greece were to default on its loans, it would also mean a loss in the billions for the European banks and Governments. It would also be a possibility that people might want to sell their Euros in favour of another currency, thus making those currencies much stronger.

It becomes crucial to explore the relationship between the economy of a country and that of the global economy to understand the impact a decision on one has on the other.

Sources

  1. Arora, S. (2017). [online] Data.conferenceworld.in. Available at: http://data.conferenceworld.in/IFUNA4FEB17/19.pdf [Accessed 22 Jul. 2018]
  2. Kindreich, A. (2016). The Greek Financial Crisis (2009–2016) – Financial Scandals, Scoundrels & Crises. [online] Financial Scandals, Scoundrels & Crises. Available at: https://www.econcrises.org/2017/07/20/the-greek-financial-crisis-2009-2016/ [Accessed 21 Jul. 2018].
  3. Prasad, E. (2010). Why the Greek Debt Crisis is a Problem for the Entire World Economy. [online] Brookings. Available at: https://www.brookings.edu/opinions/why-the-greek-debt-crisis-is-a-problem-for-the-entire-world-economy/ [Accessed 21 Jul. 2018].

 

Shubhalakshmi Bhattacharya is a third-year law student at the Jindal Global University.

Featured image source- voxeurop

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