Greece avoids the exits from the euro zone?

The Greek government announced in the October， 2009 that the annual budget deficits/GDP ratio and the public debt/GDP ratio were far above the ceiling of the EU’s regulation and the 2009 budget deficit forecast of 12.7 percent of GDP， which was more than double the previous estimate of 6.0 percent. In December of the same year， the big three credit rating agencies slashed the Greece’s sovereign debt rating， and the Greek sovereign crisis broke out.

The Greece sovereign crisis ignited the fire of European sovereign debt crisis. Portugal， Ireland， Spain and other countries also announced the problem of the serious budget deficits. Portugal climbed the annual budget deficits/GDP ratio from 5.9% to 8% in November， 2009 and Spain declared that the deficit was out of expectation in January， 2010. And the dilemmas also occurred in Belgium， Hungary and Holland. Even the countries in the better economic status like the Germany and France had the budget deficits above the ceiling problem. Thus the Europe saw the contagion of sovereign debt crisis.

To drag the country from the predicament that the debt was out of the repayment ability， Greece reformed the financial structure and tightened the fiscal policy， and at the same time the European Union also applied some bailout loans. As for Greece， the government issued five-year national bonds of 11.3 billion Euros in January， 2010 and then in July another 130 billion Euros to support the country to the end of the 2012. Afterwards the government increased the taxes and reduced the expenses of government and the public welfares.

However， the demonstrations of citizens were constant， in order to oppose the tight fiscal policy. Under the pressure of disagreement among parties and the public， the risk of the Greece’s split of EU increased. The election on June 17， 2012 following the May election which was a failure attempt to form a new government， was seen as an exactly paramount vote on whether Greece would stay in the euro zone. In this election， New Democracy， the Party advocating the bailout policy and hoping to remain on its European path， won and was the first Party with 129 seats， while the radical left antibailout Syriza party only got 71 seats. The result eased the world’s fears of Greek’s quit. However， the frequent demonstrations against the financial reformation and the unsteady of the new government both increase the uncertainty of the Greek future.

How Greece crisis influenced EU-China trade?

After the reform and opening up， the volume of trade between European and China is highly increasing. Nowadays， China exports the light industrial and textile products to Europe and imports mechanical and electrical products from Europe. As the table below shows， the volume of export and import was growing and the volume of 2011 reached 14 times of that of 1995. Besides， the export grew faster than the import， which led to the trade surplus of China. (See Table 1)

Before the European sovereign debt crisis， the trade relationship between China and European Union was getting tighter. Before 2004， the biggest trading partner of China was Japan. However， EU replaced Japan and remained as the biggest trading partner of China since 2004. The prosperous development of EU-China trade in return leads to China’s replacement of the United States to be the biggest trading partner of EU in July， 2011. (See Table 2)

After 2009， the economic and trade exchange between EU and China was affected by the Greek sovereign debt crisis. As the following diagram shows， the growth of the trade volume is slowing down. Except for a sharp decrease of the trade volume because of the regular Spring Festival trade recession， the volume reduced great deal in the October of 2010 and 2011. (See Figure 1)

The possible impact of the austerity policy

Macroscopic

First， the consumption ability of Greece and EU will be lower. To meet the condition that the European Union and the IMF required， Greek government has the obligation to cut spending of 11.5 billion euros (about 14 billion US dollars) during the year of 2013 and 2014. The consequence is obvious— Greece will be mired in recession， so the purchasing power and hence the consumption and investment will reduce. Obviously， the exportation to EU and Greece will be negatively influenced. (See Figure 2)

Second， in order to reduce the government debt and to increase the government income， the only way Greece could solve its debt problem would be with savage spending cuts and tax increases， measures that avoid the national bankruptcy. However， according to the basic economic formula GDP=C+I+G+X-M， once the expenditures is cut， the decreasing of the growth speed of GDP and the purchasing power will push the Greek economy to the cliff of severe recession. As the figure provided below， Greece is trying hard to increase the taxes for the debt crisis， which will in return reduce the public income， increase the social contradictions and finally do harm to the social harmony. All the consequences will affect the trade relationship between EU and China. (See Figure 3 and 4)

Third， the EUR/USD exchange rate will go to a low position under the effects of recession and the poor market confidence in Euro. The trend of EUR/USD exchange rate had been going down since the economic crisis in 2008. (See Figure 5) We can expect euro’s depreciation after austerity policy is implemented， which will facilitate the export and on the other hand inhibit the import of countries in euro zone. So China will be forced to reduce export to EU countries and probably increase the import， which will exchange China to have the trade deficit.

Microscopic

Greece mainly imports electrical machinery， transport equipment and base metal and the articles of base metal from China. By comparing the top 10 commodities that Greece imports from China and the counterparts that EU imports from China， the ratio of the trade volume of the former and the latter reaches 3.7% for transport equipment， 1.6% for base metal and articles of base metal， and 1.4% for footwear， umbrellas and other light industrial products. (See Table 3) Because Greece is in the severe recession， the government probably increases the tariff and reduces the volume of importation， which is the only method to protect the national industry and to improve national economy. So the three items of Chinese products will be in the shadow， lose the competitive power and reduce the volume of exportation sharply.

Next， the loss of the three industries in China cannot be avoided. We calculated the various commodities’ ratio of volume of exportation to Greece and to the whole world， finding that the transport equipment has the heaviest proportion， which almost reached 0.5%. And it was followed by footwear， umbrellas and other light industrial products and the miscellaneous manufactured articles， which were expectd to be approximately 0.4%. In conclusion， the transport equipment industry will be affected most by the policy.