June 7th, 2017
The first lecture during our study abroad tour to Greece was at the Bank of Greece and the accompanying Bank of Greece Museum. The Bank of Greece is the central bank for Greece; therefore, it can be compared with the United States' Federal Reserve.
We started at the museum where we were given a guided tour. This provided a brief overview of the Bank of Greece and the money that has been used in Greece over the centuries. It turns out, the Bank of Greece and the Federal Reserve have key differences. For one, it must be remembered that the Bank of Greece is operating within the Euro Zone and European Union and has guidelines and restrictions that the Federal Reserve in the United States does not have. Also, the Bank of Greece oversees printing notes and coins and monitoring monetary policies. The Bank of Greece only prints enough money to replace worn-out currency, though. Half of the bank belongs to the public sector while half belongs to the private sector so that the bank does not have the right to print extra money that could lead to inflation. In the United States, the Federal Reserve does not print money; the Treasury prints money. The Bank of Greece also prints documents with security features like IDs and Passports. A third difference between the Bank of Greece and the Federal Reserve is that the Federal Reserve monitors inflation and unemployment while the Bank of Greece only monitors inflation. Remember that less unemployment leads to higher inflation. When unemployment is high in the United States, the government will put money into the economy by investing. More money in the economy means inflation. Greece and much of Europe will not do this because they are leery of inflation. Reasons for this go all the way back to World War II. After WWII there was hyperinflation. Greece experienced hyperinflation of 500% while Germany experienced hyperinflation of 5000%! Money was worthless. Today Greece likes to keep low inflation rates, around zero, while the United States likes to keep inflation rates around 2%. This is not the only sign of Europe’s fear of inflation. There is talk of taking the one cent euro out of circulation for convenience, but there is also concern that this will cause inflation.
The lecture we attended at the Bank of Greece gave an overview of the crisis. The time period for the crisis is from 2009 through today. Greece has had two options for dealing with the crisis. They could exit the Euro Zone and discontinue the use of the euro. They could also go through a bailout. Initially, an exit from the Euro Zone would be easy, then there would be inflation. Greece chose a bailout. There were a couple of different causes of the crisis. For one, there was the development of the twin deficits. One deficit was between imports and exports while the other was in the private sector. Also, GDP was growing with the deficit so the deficit was hidden for a while. Through adjustments, the Greek economy has improved. Current account balances were in balance in 2015. Debt as a percentage of GDP went from approximately -10% to approximately 4%. Overall, Greece would like to improve competitiveness in labor and price to strengthen the economy. Headwinds encountered by Greece today include uncertainty due to delayed closing of the 2015 2nd review in 2016 and fiscal overperformance. It is hoped the 2nd review will be closed in June 2017 and reduced uncertainty will provide momentum for the economy. Strengths in the economy include industry/manufacturing, exports and unemployment. Unemployment is better but is still upwards of 23%. This percentage is higher for young people. Many people are in low paying part time jobs. Weaknesses in the economy include pessimistic consumers, low investments and the banking sector. The growth outlook is positive. Short term, government spending outperformed in 2017 so they have room to publicly invest this year. Also, the global economy is recovering from the recession, so exports and tourism are doing better for Greece. Long term growth is expected from increased productivity, but after investments improve. Regarding debt sustainability, the Greek debt decisions should be made now because of low interest rates. Then repayments of debts should be postponed for a later date after growth has occurred.
Discussion after the lecture brought up interesting points. Tax was loosely enforced before the crisis. Now tax rates are very high. Citizens are paying tax rates of up to 45% and higher while businesses are paying rates at an average of 75%. Meanwhile Greece is trying to attract foreign direct investments. This includes FDI from industries like tourism/hospitality, renewable energy, communications/transportation, shipping and food processing. Currently China is looking at Greece as a gateway to Europe for their products.
Implications on Greek consumers are significant. Many are unemployed or underemployed. They can only receive government assistance for so long. Among Greeks there is dissaving. This means they are making less money but unwilling to give up certain lifestyle aspects. Therefore, they save less money so they can spend the same as they were before the crisis. The high tax rate also significantly impacts incomes. One of the few breaks that Greeks are getting is rents are low right now. Low rents have allowed small business owners to stay open throughout the crisis.
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