The FINANCIAL — The Greek crisis cost Georgia more than USD 20 million between January and May 2015. The area hardest hit was in the reduction of remittances by over 15 million. Meanwhile, a decline is being seen in export and the number of Greeks travelling to Georgia. While Greece suffers from the worst economic crises of modern times, Georgia faces losing USD 220 million.
Greece, which failed to make a scheduled debt repayment of about EUR 1.5 billion (or USD 1.7 billion) to the IMF, defaulted on 30 June. The IMF, however, does not use the term default. It instead places countries that miss their payments in what it calls arrears. A default, even when it is not called one, is an event that can have serious repercussions on a country’s economy and relations with other nations. Defaults can upset financial markets, create uncertainty for other lenders, and generally crimp economic activity.
Following Russia, Greece is the second largest country by volume of remittances to Georgia. During the first five months of 2015, the volume of money transfers from Greece declined by 22% in comparison with the prior-year period. “The ongoing crisis in Greece contributed to it. Further deepening of the crisis will worsen the employment rate and accordingly, income. How Greece will overcome the crisis and what the rate of its economic growth will be will contribute to further change of the volume of money transfers from Greece to Georgia,” Zaza Chelidze, PMCG Consultant of Statistics, Economy and Public Administration, told The FINANCIAL.
Greece is a direct investor country to Georgia. Although, the amount of the investments is not that large, and the overall volume of FDI from Greece has been decreasing significantly recently. In Chelidze’s words, the reduction of remittances, investments and export will negatively impact on consumers’ expenditure on healthcare and education. “It will enhance poverty and will negatively impact on the GEL exchange rate,” he added.
Total export to Greece amounted to USD 13,752,400 in 2014. Remittances amounted to USD 205 million, and travellers – 21,464, worth USD 5.7 million. If the Greek crisis worsens, the Georgian economic loss might sum up to more than USD 220 million.
During the first five months of the current year, remittances from Greece to Georgia declined by USD 15 million. Export dropped by over USD 5 million. The number of international travellers from Greece also decreased by 900, worth over USD 241,000. According to GeoStat, the average expenditure per visitor makes up USD 268.
Export to Greece amounted to USD 9,498,900 during the first five months of 2014. The figure has decreased by almost half during the same period of the current year, totalling USD 5,043,700. The top exported products to Greece are: fertilizers, ferroalloys, nuts, fruit and vegetable juices, vegetables, mineral waters, and furniture and its parts.
Contrary to the small amount of export, import from Greece made up USD 32,891,000 during the first five months of 2014. The figure has slightly declined this year, totalling USD 29,878,600. Fuel and fuel products are the top imports from Greece to Georgia. Their volume made up USD 24 million from January-May 2014, and USD 22 million from January-May 2015.
Georgia has never been an attractive destination for Greek investments. During the past decade the largest volume was recorded in 2010 when the sum amounted to USD 4.5 million out of a total USD 814 million, so just 0.55%. Greek FDI totalled (-) 649,500.
A total of 5,132 international travellers visited Georgia from Greece during the first five months of 2015, down from 6,032 from the prior-year period (or 15% less).
According to the official website of the Greek Embassy to Georgia, the main Greek companies operating as investors or exporters in Georgia are the following: Xylotrans, Askana Ltd (Silver & Baryte Ores Mining Co. S.A.), ERGO 3 – Georgia Ltd. Ponto Star, DICA, Shop of Fur and Leather, Eleones, and Vitex.
There were 28 companies established by Greek and Georgian owners during the first quarter of 2015.
“The Greek crisis affects Georgia to the extent it affects the stability of the European economy in the medium and long run. Although Greece is only a small country within the EU, the key phrase to understanding the gravity of the situation is “investors’ expectations”. It is not so much what happens to Greece, but what may happen to other countries in Europe that makes the outcomes of the current Greek crisis so worrisome for many Europeans,” said Yaroslava Babych, Academic Director of ISET Policy Institute (ISET-PI ).
“On the one hand, defaulting on debts and exiting the euro will have negative consequences for Greece (inability to borrow on international markets, lack of investment, increase in prices of imported goods). On the other hand, exiting the euro may also provide a temporary boost for the severely depressed Greek economy. The new currency that would take the place of the euro will almost inevitably depreciate massively, making Greek goods and services (tourism) a lot cheaper for foreigners,” said Babych.
In Babych’s words, any Eurozone country in dire economic straits may have the temptation to abandon the euro and adopt their own currency just to get this temporary economic stimulus. “Many people fear that if and when Greece exits the euro, this will create a dangerous precedent and tempt other indebted countries with high unemployment rates (e.g. Portugal, Spain, Ireland, Italy) to follow in Greece’s footsteps when things get tough”.
“Even if right now these countries have no desire to exit the Eurozone, investors may become more cautious and start lending less. The investors’ behaviour may trigger severe recessions in already weak economies, leaving them no choice but to consider a euro exit,” said Babych.
“Needless to say, any turbulence in the European market will affect the Georgian economy – by virtue of the EU being one of Georgia’s largest trade partners,” she added.
Greece became the epicentre of Europe’s debt crisis after Wall Street imploded in 2008. With global financial markets still reeling, Greece announced in October 2009 that it had been understating its deficit figures for years, raising alarms about the soundness of Greek finances.
Suddenly, Greece was shut out from borrowing in the financial markets. By the spring of 2010, it was veering toward bankruptcy, which threatened to set off a new financial crisis.
To avert calamity, the so-called troika – the International Monetary Fund, the European Central Bank and the European Commission – issued the first of two international bailouts for Greece, which would eventually total more than EUR 240 billion.
“The Greek crisis is perhaps the single greatest threat to European political and economic solidarity today. It underscores the political and economic difficulties of creating a common economic zone across vastly different markets and societies. The consequence of a Grexit from the Eurozone would mostly be of social construction. However, the real threat lies in contagion, and could destabilize the debt structures of more economically relevant countries like Spain and Italy. This contagion could also cause a recession-inducing lack of confidence across world markets,” said Сhase Johnson, Development Coordinator and Research Fellow at ISET.
“Greece is a small portion of the Eurozone economy, and is much more a monetary liability than it is an asset for Europe writ-large. Political posturing, and the continually escalating rhetoric, has made the crisis of larger consequence than it should be. What this shows us is that states and their interests are still the predominant factor in contemporary political economy, more so than supranational structures. If there was greater solidarity among EU members in creating economic policy, this would just be a reallocation of resources. The reality is quite different. Wealthy and fiscally austere northern states wish to see the same practices from their southern partners. You don’t see the United States trying to turn Alabama and Idaho into mirror economic images of New York and Texas, but that is what Germany wishes to see for Greece. Differences seem to be irreconcilable, even though a small shift in policy by Germany, the European Central Bank, or even the IMF would give Greece crisis-ending liquidity. The game of chicken continues and the cars are near collision point, when it did not have to go this far,” said Johnson.
“The crisis is very serious and painful for Greece and the EU as well. The current Greek Government was absolutely incapable of responding to the challenges that the country had. Instead of painful, but useful steps, it still continues making populist and even more damaging decisions. Probably it will finally lead to Greece’s exit from the Eurozone. It is impossible that Europe and European states will get used to blackmail from any government, especially Greece’s, which makes up just 2% of Europe’s whole economy,” said Chelidze, PMCG.
As Chelidze said, European countries are psychologically and institutionally prepared for the exit of Greece from the Eurozone. In his words, it will worsen the social and economic situation of Greeks. “In the short term it will cause a very difficult shock in this country, but there is no other way out of this political situation”.
The most valuable lesson to be learned here is that you cannot have monetary union without a fiscal component, believes Johnson. “The issuance of Eurobonds would end the crisis tomorrow but it is a political bridge too far for the Commission and the European Central Bank. Another valuable lesson for Georgia and other EU states is that austerity does not work. Not only does austerity result in lost value in government indicators, it also means that the austere government’s ability to collect debt-servicing revenue is diminished. Too often governments or entities decry indebted nations for their spending problems when often, in reality, they are revenue-collecting problems, and austerity is a direct threat to revenue collection. At the request of their creditors, Greece has cut pension payments and governmental services in order to try and make payment targets, but they never have the funds to pay each time one is due. It does not make sense to cut pieces off the economy and then try to make astronomically high debt payments. This has also opened the door to left-wing populists like the Syriza movement, who won so easily because of their promise to restore the services promised to Greek citizens. What Commissioner Junker has called a ‘betrayal’ and ‘egoism’ would be better characterized as political realities outside his control and understanding. EU states would be well served by looking beyond policy and election cycles at ways that more cooperative economic relationships can happen in the long run, this would prevent short-run attractive options like austerity from inflating small crises into big ones.”
“Greece’s economic crisis is one of the best examples of what can be caused by the actions of an irresponsible and populist government,” said Chelidze. “Also, it is important that it is likely to be a bad experience for Europe and the Eurozone. This is likely to slow down further growth processes of the Eurozone. They will try hard to prevent similar mistakes,” Chelidze told The FINANCIAL.
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