By Lucy Phillips
30 April 2010
The dire state of the public finances in Greece was confirmed today by a leading think-tank. It stressed, however, that the UK was unlikely to face such a crisis.
The National Institute of Economic and Social Research warned that ‘urgent’ action was needed to reduce government borrowing in debt-laden Greece, which is nearing an economic collapse. Its total public debt has reached €300bn (£260bn), or 115% of gross domestic product. European Unions officials have sought to agree on an emergency rescue package.
Greece plans to reduce the fiscal deficit from 13% of GDP to 9% by the end of 2010 through austerity measures such as public sector wage cuts. But NIESR senior research fellow Dawn Holland estimated that a 10% wage decrease for public sector workers, for example, would improve GDP only by 1.5%, or ‘not even half way to closing the balance they are hoping to achieve this year’, she said.
Martin Weale, NIESR director, warned that the EU needed to act quickly or else Greece could be forced out of the eurozone. This would have repercussions for other countries that hold a lot of Greece’s debt, such as France and Germany. He said provisions for ‘suspending members who get themselves in a mess’ should have been made when the eurozone was first established.
But the institute calmed fears of a similar crisis arising in the UK, which has a public deficit of £163bn. Weale said: ‘The UK situation is quite different for a number of reasons except in the fact that our magnitude of budget deficit is not very different from Greece..... It’s very unlikely the same thing would happen in Britain.’
He explained that the UK’s debt maturity was much longer, that the UK government had never defaulted and had, in fact, the ‘longest record of honouring its debt in the entire world’. In addition, the UK government would always be able to honour its debt by borrowing through the banking system because sterling is legal tender.
Holland added that Greece was a ‘special case’ because it lacked investor credibility. She said the Greek government had ‘consistently miscalculated important statistics related to the economy’, such as the size of its deficit.
30 April 2010
The dire state of the public finances in Greece was confirmed today by a leading think-tank. It stressed, however, that the UK was unlikely to face such a crisis.
The National Institute of Economic and Social Research warned that ‘urgent’ action was needed to reduce government borrowing in debt-laden Greece, which is nearing an economic collapse. Its total public debt has reached €300bn (£260bn), or 115% of gross domestic product. European Unions officials have sought to agree on an emergency rescue package.
Greece plans to reduce the fiscal deficit from 13% of GDP to 9% by the end of 2010 through austerity measures such as public sector wage cuts. But NIESR senior research fellow Dawn Holland estimated that a 10% wage decrease for public sector workers, for example, would improve GDP only by 1.5%, or ‘not even half way to closing the balance they are hoping to achieve this year’, she said.
Martin Weale, NIESR director, warned that the EU needed to act quickly or else Greece could be forced out of the eurozone. This would have repercussions for other countries that hold a lot of Greece’s debt, such as France and Germany. He said provisions for ‘suspending members who get themselves in a mess’ should have been made when the eurozone was first established.
But the institute calmed fears of a similar crisis arising in the UK, which has a public deficit of £163bn. Weale said: ‘The UK situation is quite different for a number of reasons except in the fact that our magnitude of budget deficit is not very different from Greece..... It’s very unlikely the same thing would happen in Britain.’
He explained that the UK’s debt maturity was much longer, that the UK government had never defaulted and had, in fact, the ‘longest record of honouring its debt in the entire world’. In addition, the UK government would always be able to honour its debt by borrowing through the banking system because sterling is legal tender.
Holland added that Greece was a ‘special case’ because it lacked investor credibility. She said the Greek government had ‘consistently miscalculated important statistics related to the economy’, such as the size of its deficit.
