Greece Economic Crisis: The Role of Fiscal and Monetary Policies for Sustainable Growth
Introduction
In EMU, the monetary policy is usually assigned to the ECB, while the fiscal policy is the remit of each EU member State as an individual. The aim of the treaty on the functioning of the European Union and the provisions on fiscal and monetary funds is to protect the value of the single currency as well as laying down the requirements from national fiscal policies. At times, threats and financial stability have a tremendous influence on both monetary and fiscal policy (Riley, 2012). During the crisis, some of the weaknesses in the national fiscal policies and EMU methods of governance have come to light. For starters, it was evident that financial stability, incentives and rules for sound fiscal as well as macroeconomic policies seemed to be insufficient. The EMU framework lacks a framework for the prevention, identification, and correction of macroeconomic imbalances. A stable monetary policy and sound fiscal and financial stability policies are an essential foundation for sustainable growth and employment opportunities in the euro area. This calls for an improved policy framework which will address the identified weaknesses.
The Need for a Stronger Policy Framework
The framework must-have features that maintain a price stability-oriented monetary policy and incorporate provisions that ensure financial stability and crisis management. It should also safeguard sustainable public finances and economic policies.
During the past few years, the combination of sustained fiscal imbalances and a financial crisis has seen a substantial breakdown in the institutional framework and the allowed barriers between the two policies. Unfortunately the pressure comes from both sides. For instance the governments have been pushing central banks to cross their monetary boundaries thus stepping into areas that are not acceptable for an independent central bank (Riley, 2012). There has been a lot of pressure directed to the central bank some have led the banks to engage in fiscal actions.
The Greek Economic Crisis and the Eurozone
From the look of things, in the past two years, Greece has been on the verge of an economic crisis. This issue has invoked the idea of Greece quitting the European Union. The euro crisis can be solved, but the problem is that it will take a long time to solve. The EU member states have it wrong since they think the solution to the Euro crisis is a deeper economic and political union which has a single fiscal policy (Riley, 2012). Transfers should be made from the North to the South, and the mobility of labour and capital should be increased. As a matter of fact, the solution lies within the fiscal and monetary policy. There have been conflicting ideas between Germany and France on the meaning of fiscal union. Unfortunately, the row between the two countries does not seem to have a near end.
Challenges Faced by Greece in Meeting Expectations
Greece is unlikely to meet the requirements or, rather, the expectations that were imposed by leaders. The main challenge that Greece face is that the imposed plan is unpopular as well and the country is being rocked by several rounds of large protests. Governments have fiscal policy and monetary policy as the only available tools. The fiscal policy focuses on the use of government expenditures and revenue to influence economic activities in the country. On the other hand, monetary policy concentrates on the manipulation of the money supply. This is done through interest rates so as to promote economic growth. The monetary policy suggests that the government should keep interest rates lower in order to promote steady economic growth. All these policies can help improve labour productivity and reduce costs, hence leading to an increase in export demand as well as domestic.
The Impact of Fiscal and Monetary Policy in the Eurozone
Governments use both fiscal and monetary policy to manage economic growth and stability. However, it is different from the Eurozone since it encompasses a range of countries that have different economies. Some countries have larger economies while others have smaller economies; thus, it is clear that the policies do not work out the same (WordPress, 2011). The crisis-ridden economies of Greece cannot be coordinated in the same way as it would be for Germany. The European Central Bank faces the challenge of finding the perfect line to walk between the two countries. Greece is a member of the Eurozone; therefore, the European Central Bank has cut off one of the two policies that would be used to generate a solution to the economic crisis. Although the Greek government has been using the fiscal policy, it becomes hard to use the monetary policy as it is limited. This limitation is serious since the Greek government no longer has the control of their currency.
Leaving the Eurozone will not right the wrongs. In fact, it looks Eurozone like Greece will continue to remain at the bottom of the Eurozone countries while Germany will continue being in the lead. The only options left are reaching an agreement with the troika or quitting the Eurozone.
Objectives of Greece’s Fiscal and Monetary Policies
The primary objective of Greece’s monetary policy is to make sure that it achieves primary stability. After the evaluation of this objective, it seems that Greece will be achieving an inflation rate below 2% in the medium term (WordPress, 2011). On the other hand, the fiscal policy objective has been to decrease the federal budget deficit so as to pay the huge government debt. In order to achieve a budget deficit of 2.6 %of the Gross Domestic Product, government functions are being streamlined so as to quicken the privatization of government property. Their tax systems have to be modernized to reduce the rate of tax evasion. The deficit can also be addressed through the induction of faster economic growth rates.
Supply-side policies will help Greece’s economy recover since they help restore competition. The supply-side policies that will work for Greece are reducing the power of trade unions, lowering the tax rates on labour and reducing labour market regulation demand (Pettinger, 2011). If an economy is in a liquidity trap, supply-side policies can be effective in improving long-term expectations. If Greece is able to realize effective supply side improvements, it will be easy to gain confidence in having a stable and effective economy.
Conclusion
In summation, Supply side policies should be combined with other economic tools for better results otherwise it will be useless for Greece to rely on the supply side policies alone. It will be possible for Greece to get through the economic crisis if it sticks on the right policies. Fiscal policies and stability-oriented monetary policies will mutually reinforce a sustainable economic growth.
References
Pettinger T. (2011) The Role Of Supply Side Policies In A Recession. Retrieved from http://www.economicshelp.org/blog/4401/economics/the-role-of-supply-side-policies-in-a-recession/ On 27th March 2014
WordPress (2012) The Greek Option: Monetary and fiscal. Retrieved from http://worldpoliticsblog.wordpress.com/2012/10/07/the-greek-option-monetary-and-fiscal-policy/ On 27th March 2014
Riley G, (2012) Managing the economy- Government Fiscal Policy. Retrieved from http://www.tutor2u.net/economics/revision-notes/as-macro-fiscal-policy.html on 27th March, 2014
Frequently Asked Questions
What is the primary challenge Greece faces in its economic crisis?
Greece faces significant economic challenges, including high government debt, fiscal imbalances, and limited control over monetary policy due to its membership in the Eurozone.
How do fiscal and monetary policies differ in addressing Greece’s economic crisis?
Fiscal policy involves government expenditures and revenue adjustments to influence the economy, while monetary policy focuses on controlling the money supply through interest rates to promote economic growth.
Why is Greece’s limited control over monetary policy a major issue?
Since Greece is part of the Eurozone, it cannot independently adjust its currency or interest rates to manage economic recovery, limiting its ability to stabilize the economy effectively.
How can supply-side policies help Greece recover from its economic crisis?
Supply-side policies, such as reducing labor market regulations and lowering taxes on labor, can restore competition and improve long-term economic expectations, aiding in Greece’s recovery.
What role does the European Central Bank play in resolving Greece’s economic crisis?
The European Central Bank is responsible for managing monetary policy in the Eurozone, but its policies must balance the needs of larger and smaller economies, such as Germany and Greece, which face differing economic conditions.