Reference no: EM132621226

You need to prepare report of about 15 pages (Double Spaced) on the subject.

Write about Greece and special about the Fiscal Multipliers under extreme uncertainty. From the beginning Search for:

1. Significance of ownership of adjustment programmes
2. Fiscal multipliers for discussion by the IMF Blanchard

Highlights of the report:
• Europe can adjust. It has done so before.
• In the 1980s, Margaret Thatcher cured the "sick man of Europe."
• In the 1990s, Scandinavian countries reformed their bloated welfare states.
• From 2004 to 2006, Germany turned its struggling economy into a new growth engine for Europe through serious labour market and welfare reforms.
• And, in many respects, the transformation of most postcommunist countries since 1990 dwarfed even these successful examples of change.

Adjustment Progress Indicator

• All in all, Europe remains on the right track. Most countries continue to adjust to the challenges posed by the erstwhile euro crisis as well as the competitive pressures of globalization.
• As in previous years, the five peripheral countries that received support from European facilities (bilateral loans, European Financial Stability Facility or European Stability Mechanism credits often topped up by the International Monetary Fund), are the star performers in the adjustment ranking.
• This contradicts the occasional assertion that such support could tempt the recipients to slow down their adjustment.
• We find no "moral hazard." Instead, Greece, Ireland, Spain, Cyprus and Portugal have adjusted faster than all other countries in the sample. They had to do it. And they did it.
• But the 4 countries that succumbed to the euro-confidence crisis first, namely Greece, Ireland, Portugal and Spain, reduced their adjustment efforts significantly in 2015.
• Of the top five performers, only latecomer Cyprus did not let its adjustment efforts slip noticeably.

• Greece continues to lead the adjustment ranking, as it has done in the years 2012 to 2014.
• This time, however, its score for adjustment progress falls by a full point, the worst drop ever in the adjustment rankings for any fiscally challenged country.

• Whereas the less pronounced declines in Ireland, Portugal and Spain partly reflect a reduced need to adjust as previous efforts bear fruit, the lower score for Greece is the result of a major new shock. In 2015, Greece inflicted upon itself the worst-possible combination of reform reversals and confidence-shattering confrontation with creditors. As a result, Greece propelled itself back into recession.

Focus: The Greek Tragedy (p. 17-18)
‘Shattering fragile confidence by a confrontation with lenders was a costly mistake.'
• Although Greece went through more pain than necessary, its adjustment programme did work in the end. The recovery set in over the course of 2014.
• In late 2014, Greek corporate confidence had rebounded so fast that it even exceeded that of Spain.
• In 2015, the Spanish economy expanded by some 3.2%. Greece could have achieved the same.
• With the rise of political uncertainty in late 2014, capital started to flee the country. With threats to reverse many reforms and a confrontational approach versus the only willing lenders Greek had, the new Greek government that came to power in January 2015 exacerbated the situation.
• Until the end of the tenure of Yanis Varoufakis as finance minister in mid-2015, capital flight through the banking system as recorded in Greece's balances in the Target2 payments system reached €66 billion, equivalent to 37% of Greek GDP.

• For a country that had just emerged from one of the worst adjustment recessions on record in Western economies, shattering fragile confidence by a full-blown confrontation with the country's only willing lenders proved to be a costly disaster. Rarely before has corporate confidence plunged so fast and so badly in any self-inflicted disaster (see Chart 7 below).
• The damage is substantial. Counting only the fiscal costs, we come up with a rough guesstimate for 2015 and 2016:
o Lost growth: Instead of expanding by around 3% in 2015 and 2016, the Greek economy contracted by 0.3% in 2015.
o After a weak first quarter (-0.4% qoq), even a modest rebound later this year will not lead to any significant gain in annual real GDP.
o For 2016, Greek real GDP will be roughly 6.5% below what it could have been otherwise.
o Lost revenues: Lower tax revenues and extra spending will likely lead to a cumulative fiscal shortfall of at least €8 billion for 2015 and 2016 relative to a baseline of unchanged policies and the absence of a political confidence shock. Although tax hikes and an increase in arrears hide a significant part of the fiscal damage, these corrective measures in themselves pose a burden.
o Weaker banks: The need to recapitalise the badly weakened banks and the prospect of much lower potential revenues from a future privatisation of banks after the massive dilution of the public sector's share in the banks probably amounts to a fiscal hit of at least €12 billion and possibly significantly more.
o Lower real GDP, a slightly lower GDP deflator in response to renewed recession, the extra fiscal hit and the sizeable loss of potential privatisation revenues add up to the equivalent of at least 25% of Greece's likely 2016 GDP.
Without the confidence shock that derailed the Greek recovery, the outlook for Greece's debt-to-GDP ratio could have been significantly less challenging. To return to sustained growth and ease the heavy burden that currently has to be borne by the Greek population, Greece would need:
• A firm political commitment to stay in the euro and work with rather than against creditors; and
• Substantial deregulation as detailed in the August 2015 agreement with creditors.

Like other countries with weak administrative capacities, Greece could also benefit immensely from simpler rather than higher taxes in order to improve economic efficiency, growth potential and the tax take.

Attachment:- Greece and special about the Fiscal Multipliers.rar