Over the past week, Greece has been hogging the headlines when it comes to debt crisis. However, there is concern that there are a number of other countries ‘where credit defaults swaps are unusually high, suggesting there is risk in terms of default’. Greece’s deficit stands at 12.7% (£259bn), which is over 4 times higher than EU rules allow and its debt levels are expected to reach 120% of GDP this year if help is not given. Furthermore, if Greece’s debt problems are not tackled, there is a worry that other countries with big deficits, such as Portugal and Spain will become vulnerable. Public spending in Greece had been rising for some time but the tax revenue hadn’t increased to match this. As government spending rose and tax revenues fell, the growing debt was inevitable.
What is just as concerning is the cost of servicing this debt. This is costing Greece about 11.6% of GDP and the Greek government has estimated that it will need to borrow €53bn this year to cover budget shortfalls. Strikes by public-sector workers have also affected the country, as figures show that the unemployment rate has increased to 10.6%.
However, there are now reports that an agreement has been reached at the EU summit to rescue Greece and help it tackle its debt problems. Herman Van Rompuy, the European Union’s President, said that an agreement had been reached. The news was immediately welcomed by jittery markets, with the euro regaining some of its losses. Initially, it was thought that British taxpayers would be a part of any bailout package, but Alistair Darling, said there was no plan to use UK taxpayers’ money to support Greece. When asked about the comparison of the UK with Greece, Alistair Darling commented that:
“I don’t think you can compare the UK with Greece. We have different policies. We have a very good track record and, most importantly, the maturity of UK debt is much longer.”
The EU summit was officially meant to cover medium-term European economic strategy, but it was dominated by the Greek crisis. Germany and France are likely to stand together and pledge to come to Athens’s aid by guaranteeing Greek solvency, but only time will tell whether this will happen or will work.
EU leaders reach deal to rescue Greece from debt crisis, President Barroso says Telegraph, Bruno Waterfield (11/2/10)
Mervyn King on Greece, Britain’s deficit and a hung Parliament Telegraph (10/2/10)
FTSE rises amid Greece rescue hopes The Press Association (11/2/10)
Greece’s unemployment rate hits 10% BBC News (11/2/10)
Debt crisis: Experts see more skeletons tumbling News Center (11/2/10)
EU deal ‘agreed’ on Greece debt woes BBC News (11/2/10)
Greek bailout deal reached at EU summit Guardian, Ian Traynor and Graeme Wearden (11/2/10)
Greek bailout would hurt Eurozone – Germany’s Issing Reuters (29/1/10)
Greece must meet deficit target to get aid Reuters (11/2/10)
Could bailout be on the cards for Greece BBC News (10/2/10)
Germans must start buying to save Europe’s stragglers Financial Times, Martin Wolf (10/2/10)
Thinking the unthinkable BBC News Blogs, Stephanomics, Stephanie Flanders (11/2/10)
Angela Merkel dashes Greek hopes of rescue bid Guardian, Ian Traynor (11/2/10)
Greece faces devaluation, default or deflation. Next stop the IMF Guardian, Larry Elliott (11/2/10)
Germany demands austerity, not bailout, for spendthrift Athens Guardian, Ian Traynor (11/2/10)
See also the Guardian podcast in the news item, Debt and the euro
See too the news item from October 2008, The eurozone – our economic saviour?
Questions
- What is the cause of Greece’s debt problems?
- According to the European Central Bank chief economist Otmar Issing, a Greek bailout would weaken the euro and hurt the reputation and image of the eurozone. How can we explain this?
- What do we mean by servicing a debt?
- How could Greece’s debt problems cause problems for other countries with large debts, such as Ireland, Portugal and Spain?
- Which country is better off: the UK or Greece?
- Who will be the loser from a bailout?
- Are the EU rules about debt and deficit levels a good thing or are they too restrictive to be helpful?
- What are the arguments for and against the ECB increasing its target rate of inflation, say to 4%, as a means of stimulating recovery?
With the majority of developed countries now moving out of recession, many people will think the worst is over. But for some countries and some people, there may be worse to come. The single currency in the eurozone was introduced in 1999 and in December 2009, the eurozone saw its highest level of unemployment at 10%. There are now 23 million people unemployed across the 16 countries that make up the eurozone and many of those people reside in Spain, where unemployment has reached a 12-year high of 18.8% and is even expected to reach 20%.
Interest rates in the eurozone and in the UK have been maintained at 1% and 0.5% respectively, and inflation has seen a rise in both places. Whilst in the eurozone inflation remains well below the inflation target, in the UK there has been a rapid rise to 2.9% to December 2009 (see Too much of a push from costs but no pull from demand)
While Spain is suffering from mass unemployment, Greece is struggling with the burden of a huge budget deficit. The former European Central Bank Chief Economist, Otmar Issing, has said that any bailout of Greece would severely damage the Monetary Union and “The Greek disease will spread”. With concern that Greece will not be able to service its debt, there is speculation that the country will be forced out of the currency bloc. However, the chair of the single currency area’s finance ministers said that Greece will not leave the eurozone and does not believe that a state of bankruptcy exists.
So, what’s behind rising unemployment, rising inflation and rising budget deficits and how are they likely to affect the eurozone’s recovery?
Eurozone inflation rises to 0.9% BBC News (15/1/10)
Unemployment sector remains beat in Eurozone pressuring price levels FX Street (29/1/10)
greek bailout would hurt Eurozone – Germany’s Issing Reuters (29/1/10)
Eurozone unemployment rate hits 10% BBC News (29/1/10)
Greece will not go bust or leave Eurozone Reuters, Michele Sinner (27/1/10)
Eurozone unemployment hits 10% AFP (29/1/10)
New rise in German job loss total BBC News (28/1/10)
Spain unemployment nears 12 year high Interactive Investor (29/1/10)
Questions
- How do we define unemployment? What type of unemployment is being experienced in the eurozone?
- Why do you think unemployment levels have risen in the eurozone and in Spain in particular? Illustrate this on a diagram.
- What are the costs of unemployment for (a) the individual (b) governments and (c) society?
- What explanation can be given for rising levels of both unemployment and inflation?
- Inflation in the eurozone increased to 0.9%. What are the factors behind this? Illustrate the effects on a diagram.
- Greece’s forecast budget deficit for 2009 is 12.7% of GDP, but Greece has said it will reduce it to 8.7% of GDP. How does the Greek government intend to do this and what are the likely problems it will face?
- Why could bailing out Greece hurt the eurozone?
Trade relations between the USA and China have deteriorated recently. There are two key issues: the exchange rate and trade protectionism.
The Chinese currency, the yuan or renmimbi, since 2005 has been officially pegged to a trade-weighted basket of other currencies. In recent months, however, as the dollar has fallen relative to other major currencies, so too has the yuan. It seems as if the peg is with the dollar, not with the basket. From March to December 2009, the exchange rate index of the dollar depreciated by 16 per cent. Yet the exchange rate between the yuan and the dollar hardly changed. In other words, the yuan depreciated along with the dollar against other world currencies, such as the euro, the pound and the yen. The trade advantage that this was giving to the USA with other countries did not apply to China.
Complaints continued that cheap Chinese goods were flooding into the USA, threatening US jobs and undermining US recovery. The Chinese currency was argued to be undervalued relative to its purchasing-power-parity rate. For example, the July 2009 Big Mac index showed the yuan undervalued by 49% against the dollar (see Economics 7e, Box 25.4 for a discussion of the Big Mac index).
The USA, and other countries too, have been putting diplomatic pressure on the Chinese to revalue the yuan and to remove subsidies on their exports. At the same time various protectionist moves have been taken. For example, on December 31 2009 the US International Trade Commission voted to impose tariffs on the $2.8 billion worth of steel-pipe imports from China. The tariffs would be between 10.4% and 15.8%.
The following articles look at these trade and exchange rate issues. Are we heading for a deepening trade war between the USA and China?
Currency contortions The Economist (17/12/09)
Beijing dismisses currency pressure Financial Times, Geoff Dyer (28/12/09)
China aims for 10pc growth and won’t appreciate yuan The Australian (29/12/09)
Wen stands firm on yuan China Daily (28/12/09)
China’s premier says banks should curb lending BusinessWeek, Joe McDonald (27/12/09)
China insists will reform yuan at its own pace Forexyard, Aileen Wang and Simon Rabinovitch (31/12/09)
US slaps new duties on Chinese steel Financial Times, Alan Rappeport (30/12/09)
Chinese Steel Pipes Face Heavy U.S. Duties BusinessWeek, Daniel Whitten (31/12/09)
The US-China Trade War Is Here The Business Insider, Vincent Fernando (10/12/09)
Year dominated by weak dollar Financial Times, Anjli Raval (2/1/10)
Questions
- Explain what is meant by the ‘purchasing-power-parity (ppp) exchange rate’.
- Why is the yuan (or ‘renmimbi’) undervalued in ppp terms?
- What are the the implications of an undervalued currency for that country’s current and financial account of the balance of payments?
- What would be the implications of a revaluation of the yuan for (a) China and (b) China’s trading partners?
- Discuss Premier Wen Jiabao’s statement, “The basic stability of the renminbi is conducive to international society”.
- What forms of protectionism have been used by (a) China and (b) China’s trading partners? Who gains and who loses from such protectionism?
Back in 1993, the EU imposed tariffs on bananas imported from countries which were not former colonies of EU countries. These former colonies are in Africa, the Caribbean and the Pacific (the ACP countries). This meant that the main countries bearing the tariffs were banana producing countries in Central and South America.
“In 1996, Ecuador, Guatemala, Honduras and Mexico, together with the US, formally complained to the World Trade Organization (WTO) about the tariffs. Since then the WTO has repeatedly ruled that the EU tariffs are unfair, but little has changed thanks to continued discussions and arguments between the major players.”
Over the years the disputes between the EU and the APC countries on one side and the Latin American countries and the USA on the other have become known as the ‘banana wars’ (see Web cases 24.5 and 24.6 in Economics 7e MyEconLab). The WTO has ruled against the EU on several occasions, but to little effect as appeals have been lodged and talks have continued. At last, however, agreement has been reached – and without the WTO. This should see EU tariffs on Latin American bananas cut from 176 euros per tonne now to 114 euros per tonne over a seven-year period.
So are the banana wars over? Will EU consumers gain? And what will be the effect on Latin American and ACP banana producers? The following articles examine these questions.
Ending the longest trade dispute in history: EU initials deal on bananas with Latin American countries EU Press Release (15/12/09)
The EU-Latin America Bananas Agreement – Questions and Answers EU Press Release (15/12/09)
Lamy hails accord ending long running banana dispute WTO Press Release (15/12/09)
EU ends ‘banana wars’ with Latin America EU Observer (15/12/09)
Bananas dispute at the World Trade Organisation Reuters Factbox (15/12/09)
Banana prices to fall after longest trade dispute in EU history settled Telegraph (16/12/09)
End of banana wars brings hope for Doha Financial Times, Joshua Chaffin (16/12/09)
EU cuts import tariffs in a bid to end ‘banana wars’ (video) BBC News (16/12/09)
EU cuts import tariffs in a bid to end ‘banana wars’ BBC News (15/12/09)
Banana wars: the fruits of world trade BBC News, Nigel Cassidy (15/12/09)
EU, Latin America Proclaim End to “Banana War” Latin American Herald Tribune, Marta Hurtado (15/12/09)
Settlement should help Chiquita Business Courier of Cincinnati, Dan Monk (15/12/09)
Banana deal offers hope for global trade talks Sydney Morning Herald, Alexandra Troubnikoff (16/12/09)
Pact Ends Long Trade Fight Over Bananas New York Times, Stephen Castle (15/12/09)
Banana deal offers hope for global trade talks Sydney Morning Herald, Stephen Castle (15/12/09)
EU banana dispute ends in favor of Latin American exporters Deutsche Welle (15/12/09)
Questions
- Who has gained and who has lost from the tariffs imposed on non-ACP producers over the past 16 years?
- How might the agreement over bananas impact on the stalled Doha round talks?
- What is likely to happen to banana prices in the EU over the coming months? Use a diagram to illustrate your answer.
- Are the banana wars likely to be over now?
According to Sir Liam Donaldson, England’s Chief Medical Officer, swine flu is on its way back. However, vaccinations are now available to the most vulnerable people, including front-line medical staff, people with chronic health problems and pregnant women. But, what about every-day workers? Surely, these are people that need protecting too, as they are the ones who contribute to the economy. How do you prioritise?
A key question is how much swine flu has actually cost the UK economy. Here, we’re not just concerned with the cost of the vaccines, but also the opportunity cost of that money, the lost output from illness, the human suffering – both of the victims and of their relatives and friends – and, of course, the impact on business and the economy. Some of the countries worst hit by the outbreak of swine flu have faced particular problems, such as protectionist trade policies and a significant fall in business through tourism.
So, will the vaccine prove cost effective for the government, or is it more about the moral obligation to provide it? These articles look at some of the recent developments in the worst pandemic in years.
Mexico economy squeezed by swine flu BBC News (30/4/09)
Swine flu vaccine on its way to GPs Grimsby Telegraph (21/10/09)
Exclusive – WTO protectionism report to feature swine flu bans Reuters (12/6/09)
Flu bill ‘may hit fire plans’ Teletext (27/10/09)
Swine flu vaccination under way BBC News (21/10/09)
Swine flu costs have put dent in profits, Amerigroup says Pilot Online, Tom Shean (27/10/09)
Swine flu gives Pharmaceutical Companies a New Edge Top News, Tangaroa Snell (26/10/09)
Economic cost of swine flu could be around $3 trillion to $4.4 trillion Today’s Zaman (Turkey) (2/11/09)
Swine flu mass vaccination programme launched Guardian (21/10/09)
Full list of swine flu cases, country by country Guardian (updated daily)
Doctors plan mass swine flu jabs for under-18s Times Online (1/11/09)
Questions
- What is the opportunity cost of swine flu? How could you illustrate this on a diagram?
- Vaccines are going to those at risk first. Why is this particularly relevant in terms of the economic problem?
- What is protectionism and what are the main forms? Discuss the advantages and disadvantages of protectionist policies in the context of swine flu.
- If the government had to decide whether or not a swine flu vaccine was worth producing, how could they have done this? Outline the process by which costs and benefits can be weighed up. Are there any drawbacks to this method?
- How have businesses been affected by swine flu? Think about those who have benefited as well as those that have lost.