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Impact of Financial Crisis on the Economy's Performance - Case Study Example

Summary
The paper  “Impact of Financial Crisis on the Economy’s Performance”  is a forceful example of a macro & microeconomics case study. The financial crisis has a long-term impact on the economy’s performance and is followed by a wave of the government defaulting on its debt obligations…
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Extract of sample "Impact of Financial Crisis on the Economy's Performance"

Financial crisis has a long term impact on the economy’s performance and is followed by a wave of government defaulting on their debt obligations. The process leads to economic downturn, lower government revenues, increase in the government deficit and debt which finally transforms into government defaults. The process continues till a sovereign debt crisis engulfs the entire nation which is being witnessed in Greece. The government looked at different bail out options and the use of austerity measures to deal with the crisis had impacted the economy negatively. This paper analyzes the economic condition of Greece by examining the manner in which the austerity policies adopted by the government of Greece has affected the economic and social life of people. This will thereby help to broaden the horizon and help to understand the manner in which the economic implication for Greece is very high. Greece which is currently facing the sovereign debt crisis was helped by the Euro zone members and the IMF so that Greece could be bailed out and the economy could withstand the debt crisis. On May 2, 2010 the IMF and Euro zone members provided a Euro 110 billion financial package so that the due to the contagion effect the financial crisis don’t spread to other regions like Portugal, Ireland, Spain & Italy (Chrisafis, 2011). This was backed by another package of Euro 500 billion by the European Union but for little help. The overall impact was very little and the government thereby used the policies of austerity so that the falling economy could be prevented. Austerity policies are enacted by the government as a policy of deficit financing where the spending made on public service programs is reduced due to deficit financing (Perlo, 2012). The Greece government adopted the policy of austerity with the objective that it would help them to reduce their debt deficit and will ensure easy financing for other projects. The government and the policy makers had undermined the impact of austerity policies which thereby had a negative impact on the social and economic position of the economy. The Greece government through the austerity policies reduced the government expenditure on public utilities, roads, public health, education, retirement benefits, jobless benefits and so on (Perlo, 2012). The impact was negative as instead of pursuing expansionary policies which would have helped to generate more employment it led towards a reduction in employment levels. The austerity policy was used after consultation with the IMF but instead it resulted in the worsening of the scenario and made it difficult for the economy to deal with it. The IMF had estimated that the austerity policy would lead to a contraction in the economic output by 5.5% but instead the contraction was 17%. The IMF also expected the unemployment level to rise and would be 15% by 2012 but instead it went to 25% (Roos, 2012). The situation instead of improving the social condition of the society further worsened. This led towards protest and the common man was left with no option but to come out open in the streets. The protest between the protester and the police thereby left hundreds of people who were injured and dead (Austerity, 2012). The condition of the society and economy on the whole worsened and has pushed then further into recession and is likely to have a long term impact on the overall growth potential. The austerity policies have been developed keeping in mind the fact that the economy has to achieve a GDP surplus of 4.5% in the next 3 years. To achieve it the government through its policies of cutting down expenditure on public sector by 1.5% of GDP in 2012 and a savings of 5.5% in 2013 and 2014 (Chrisafis, 2011). The policies enacted are anti-expansionary policies and are against the policies developed by Keynesian which has impacted the social condition of the economy and has made people raise their voice against the government. The impact is so strong that between the period 2011 and 2015 it is estimated that 150,000 jobs will be reduced. This will have an impact on the society as people will be deprived of their source of income and will find it difficult to sustain their daily needs. The impact is being witnessed as 15,000 jobs were lost in 2012 (Franklin, 2012). This is in addition to the 20% reduction in wages. This raises questions and creates doubt whether the policies of the government have been enacted with the objective of benefitting the rich and ensuring that the period of recession sustains for a longer period of time. This will thereby create a difference between the different sections of the society where the rich section will benefit at the cost of poor (Franklin, 2012). This raises question on the credibility of the government and their reason of existence? The impact of the policy is being felt in the other section as well. The health sector which is considered as one of the most important area for the Greece government is witnessing a cut in spending. The government proposes not to spend more than 6% of the GDP on health care sector. This is depriving the poor and the needy of the required medical assistance and has impacted the health of the society. This is matched by reduction in every areas as the government looks to reduce doctors who are funded by 25%, 25% reduction in medical services goods and so on (Austerity, 2012). This will lead towards a condition where the society won’t be able to find the required medicine and will have an impact on the living age of people. The overall impact of the policies seems severe and is likely to lead towards a situation where the policies are going to impact the working environment and will have a long term impact on the economic and social condition of the economy and the society as a whole. The impact that the Greece economy is facing due to austerity policies has made the society even poorer. This is accompanied by the fact that unemployment has risen to over 16% and is witnessing a strong reduction in the salaries and a high tax rate (Roos, 2013). This is bound to impact the motivation of people and would further lead towards chaos. The policy of cutting down spending and not looking to develop the required parameters through which the area of deficit financing will be better dealt will impact the society further. This is going to increase the clashes between the government and the society. The society as a result is becoming poorer and the policies have impacted the social condition of the people. The situation demand strong interference and adoption of expansionary policies which will look towards reducing inflation, increasing jobs avenues, increasing investment and so on. Positives need to be generated so that people within the economy are able to find a framework through which their basic life of sustenance is developed and impacts them positively (Austerity, 2012). The government instead of taking a Marxist approach has to adopt expansionary policies aimed towards improving the GDP and thereby brining the required transformation through which the government is able to provide the basic infrastructure and support facilities to the local people. The paper thereby analyzes the manner in which the austerity policies have impacted Greece as a country. The impact is being witnessed in all areas and has moved the economy further into recession. Continuous reduction in public expenditure with increasing unemployment, reduction in health care facilities, and so on has made the society and the common man suffer. This has become imperative that the government looks towards finding a mechanism of dealing with the situation and is able to save the society and the economy. References Austerity. (2012). Austerity bill approved as Athens burns. Retrieved on October 3, 2013 from http://www.smh.com.au/business/world-business/austerity-bill-approved-as-athens-burns-20120213-1t07t.html Chrisafis, A. (2011). Greece debt crisis: The 'we won't pay' anti-austerity revolt. Retrieved on October 3, 2013 from http://www.theguardian.com/world/2011/jul/31/greece-debt-crisis-anti-austerity Franklin, H. (2012). Why Austerity isn’t working in Greece. Retrieved on October 3, 2013 from http://search.proquest.com.ezproxy.une.edu.au/docview/927127095?accountid=17227 Perlo, A. (2012). Austerity & the Economic Crisis. Retrieved on October 3, 2013 from http://politicalaffairs.net/austerity-and-the-economic-crisis/%3Cbr%20/%3E Roos, J. (2013). Strong Economic Medicine: The IMF’s “Mistakes” on Greece are Nothing New. Retrieved on October 3, 2013 from http://www.globalresearch.ca/strong-economic-medicine-the-imfs-mistakes-on-greece-are-nothing-new/5338454 Read More

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