Effects of Credit Crunch & Ensuing Recession on Political Economy Decisions: Bulgaria and Greece Essay

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Recession is a period in an economy that is characterized by general economic downturn or decline. Typically, recession is defined as the general decline in the gross domestic product (GDP) for a period of two or more than two quarters consecutively. Recession will in most cases be witnessed through significant decline in stock markets, downturn in the housing market and great increase of people who are not employed.

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When recession takes a long period in an economy it is referred to as depression. There has never been agreement on what causes recession but those to blame in more than one time are the people in the positions of leadership and power and in this regard the president or the governor of central bank or the whole administration at the time in question.

On the other hand, credit crunch is described as the economic situation where capital for investment is hard to get and lenders such as banks and other investors become cautious of lending their money to organizations. This in turn results to an upward surge on the prices of the products with debts on borrower’s side.

Credit crunches can also be taken as extensions of a period of recession. During credit crunches companies cannot be able to make any borrowings since the lenders are wary of defaulters or bankruptcies. When there is contraction in credit supply, it leads to long period of recession and economic recovery becomes very slow (Stilwell 1983).

Bulgaria and Greece are some of the countries in the world that have been faced by recession and credit crunches in the recent past. Bulgarian gross domestic product (GDP) shrieked to 3.5% in 2009 first quarter. The countries economic growth went down to 5% in the period from January to end of March 2009 and contracted further to 1.6% in the last quarter of the same year.

That marked the first time Bulgarian economy was dropping annually after 1997 when it experienced similar shocks. That significant drop in GDP was clear evidence that Bulgaria had an economic crisis with imports and exports shrinking by about one third in the first three months of 2009.

Exports in Bulgaria had shrunk by almost 17.4% whilst the imports had contracted by a significant 21.1%. What the data obtained showed was that industrial production had shrank by 12.4%, 5.4% was witnessed in the consumption sector with the service sector of the economy slowing by 2.5% in the first quarter of 2009(Mudida 2003).

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In Greece, the countries output in economy for the year 2010 dropped by 2% down from what the government had predicted to be the drop of 1.2% to around 1.7%. The central bank in Greece announced that recession in the country would be worse because of what the government had put in place to cut on public spending.

Greece economic down turn had to be discussed in a summit for the European Union so as the union could come up with ways of mitigating the effects in the country belonging to the euro zone. The budget deficit in Greece was 12.9% of the Gross Domestic Product in the year 2010. In the same year, pressure had been intensified on Greece government by the financial markets for refinance to a tune of 50 billion Euros (Hallwood and Mac 1986).

The credit crunch/recession in the two countries have significantly affected the political economic decisions in that both governments have to incur huge expenditure in the process of boosting demand in a situation where there is great reduction in income brought about by less revenues due to low tax collections. The deficit generated in both Greece and Bulgaria w as tackled with many implications in the long term.

In the early 2010, the Greece government had to announce a series of measures aimed at reducing the huge deficit that was surpassing 13% of the gross domestic product making it four times the range allowed by the eorozone membership rules.

This made it had to make political economic decision in Greece because pressure had developed on the countries currency. In both Greece and Bulgaria, credit crunch lend to decisions aimed at freezing the salaries of the civil servants and other public officers.

The governments also reduced salaries for the public servants. Employment in both countries was freezed leading to little or no employment in the public service and the civil service. In Greece, there was a decision to increase retirement age by latest 2015 to 63 years. In both cases, taxes on key products like alcohol, petrol and tobacco was increased significantly (Killick 1981).

These political economic decisions to resuscitate the economies were not as popular with the masses and due to ensuing pressure, people went into strikes as they tried to resist the changes the government was considering for implementation. People protested the announcement s on various measures the government was taking which were not going down well with them stopped.

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These measures were pushing them to further financial meltdown but the governments could not stop the economic decisions. In Greece, the forecast on national debt for 2010 was going up to 125% of the gross domestic product and unemployment rate projections reaching an all time high at 9.7 %( Hyman1989).

The situation in Bulgaria was hard for political economic decisions due to migrations which were witnessed during the credit crunch period. This migration was not affecting the skilled laborers who previously migrated but also the unskilled laborers due to lack of jobs and others losing the available ones. Note that many Bulgarians lost jobs during the period of recession and went to Spain, which is a nation with many immigrants from the country.

This even led to the creation of the ministry for Bulgarians living abroad by the regime elected to power in summer 2009 due to the mass exodus by the Bulgarian nationals to other neighboring countries looking for jobs and better salaries. Economic growth in both countries was very slow and actually declining during the period in question (Hardwick, Khan and Langmead 1994).

Recession in both Greece and Bulgaria affected every sector of the economy and called for sustainable decisions to be made in establishing and supporting policies geared at an economic advancement and growth. This is a critical rule in mitigating the effects of credit crunch. There is need to compare policy decisions experiences between the various political economic decision makers.

There is also the need to make decisions which are sustainable in boosting the rate of employment in the countries and in so doing reduce the effects of the recession on the nationals. Other effects of recession were seen in the low living standards of the people in both countries.

The political decision makers were to make apt decisions to raise the living standard of the people by providing them with quality food and other basics, which they required. Due to the fact that there is economic decline when recession hits a country the following effects are witnessed in the political economic decision making (Gatheru and Shaw 1998).

The economies experienced major set backs which slumped product and service market. It become hard for those goods and services to be sold as the power of the people to purchase came down due to salaries, which were at the lower end and the consequent insufficiency of funds or income.

This distorted the market with goods and services not being available to those who need them. During recession, political economic decisions become difficult as production of goods and services comes down and this results in prices hiking making manufacturing firms result to selling the products available at low prices and at times for prices, which are throw- away.

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This leads to great losses on the part of the firms. If the consumers of products lack the power to purchase then businesses suffer. Credit crunch is really dreaded by consumers and the producers at equal measure. The less the level of production in a firm, then the less the amount of profits for those who produce, and this translates to difficulties in trying to run the businesses (Wood 1995).

During recession, political economic decisions are affected by the shrinkage of the stock prices. Investment is more affected and industries involved in production suffer because investors try to avoid the companies that seem vulnerable during the recession time.

Companies that manage to withstand the period are the large one with the small ones having to withstand the tough times at that period and may even end up closing down the business all together. Credit crunches in both countries could have resulted to depression if it had persisted for long. The situation got a boost through the intervention of the countries who are members of the euro zone and the European Union.

During a state of depression, negative effects are felt in stock markets and the high levels of people unemployed. During this time, the government spends a lot of money in bailing out the affected companies with public expenditure suffering major down turns.

Faced with recession, the national debts were very high and especially for the Greece economy which was at 120%, this meant that there was less money for the government to budget on spending for major development and so the recession brought about less development in both Bulgaria and Greece. No economic decisions could be made to spend due to the huge national debt (Golfield and Chandler 1981).

Lack of employment cannot be over-emphasized in the two countries, as many are the people who were kicked out from their jobs. When left without jobs then they are unable to make ends meet because the goods and the services they need to support themselves are out of their reach. Banks also suffered major set backs in both countries and they had to depend on the governments to survive the tough times.

The governments had to result in using public money to boost the banking institutions. Definitely, recession has pronounced effects on any economy for both development and growth. Those who want to invest are hesitant, those who do the production of goods are not in a position to do so and consumers cannot purchase what they want due to lack of income resulting from unemployment.

It is also important that government boost each other by comparing notes on policy matters and experiences. They also can find the solutions to the problems, which are common in fighting recession. They also are supposed to identify the economic practices that enable development and more importantly supervise and coordinate international and domestic policies (Sardoni 1987).

During recession the inflations rates are very high and this as the case was in Bulgaria in 2009 going to 2010 and in Greece in 2010. The prices of goods and services, which were way above most people’s reach. Income distribution in many sectors at primary, secondary and tertiary level was also very poor due to fears of possible losses during credit crunch.

In conclusion, countries have to come together in aiding each other for the sake of economic development and in mitigating the effects of economic climb-down as witnessed in both Greece and Bulgaria in the recent past. The two countries were able to start recovering after they were helped do so by there neighbors since if a countries economy declines, then it affects the whole region where that country involves itself in trade or otherwise (Stilwel 1983).

References

Gatheru, W and Shaw, R. 1998. Our Problems, Our Solutions: An Economic and Public Policy Agenda for Kenya. Nairobi, Institute of Economic Affairs.

Golfield, S and Chandler, L. 1981.The Economics of Money and Banking.8th Edition. New York, Harper and Row.

Hallwood, P and Mac Donald, R.1986. International Money: Theory Evidence and Institutions. New York, Basil Blackwell.

Hardwick, P, Khan, B and Langmead, J. 1994. An introduction to Modern Economics. 4th Edition. Essex, Longman.

Hyman, D. 1989. Modern Macroeconomics: Analysis and Applications. 2ndEdition. Homewood, Irwin.

Killick, T. 1981. Policy Economics: A textbook of Applied Economics in Developing Countries. London, Heine man.

Mudida, R. 2003. Modern Economics: principles of macro and micro-economics. Nairobi, NRB: English press.

Sardoni, C. 1987. Marx and Keynes on economic recession: the theory of unemployment and effective demand. University of Michigan, Wheat sheaf Books.

Stilwell, F. 1983. Economic recession: impacts and policy responses. Australia, Sixth National Conference of Labor Economists.

Wood, J. 1995.The critical assessments: critical assessments of leading economists. New York, Routledge.

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