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Public finance is a branch of economics that is concerned with paying for common activities, administering and designing such activities, Holley U, 2002, pp 17. It is sub-divided into the various functions it serves concerning what the member organizations or countries should be doing and the means for catering for all the expenses they incur.
According to, Holley U, 2002, pp 78, it ensures proficient distribution of resources, allocation of income and the stabilization of macroeconomics. According to the public finance theory, goods and resources are allocated well among member countries of a particular association with the thought that such goods and resources will be spent well.
On the contrary, some members spent their goods and resources poorly and this results to poor income. Public finance management involves generation, allocation and management of resource expenditure. Public finance management is an essential part of any in any organization. Since European Union is an organization, it must be concerned with Greece's failure to stop the debt to GDP from increasing, Holley U, 2002, pp 189.
The European Union is deeply concerned with increasing debt to GDP ratio in Greece. This union is performing many activities to ensure that Greece becomes able to stop the debt to GDP from increasing. The public finance theory states that there is a need to strengthen the economic governance framework in the member countries of the European Union. According to the public finance theory, the member countries of the EU have the objectives of budgetary discipline and economic growth. It ensures that each of the member countries has a long-term growth in order to improve the quality of its finances.
Greece's financial situation is unsustainable. It requires huge sums of money to avoid increasing its already substantial debt to the GDP ratio. Even though the country is getting help from the foreign taxpayers, Greece is finding it difficult to lower its increasing debt. The EU must therefore do its best to ensure that Greece stops its increasing debt to the GDP ratio.
Formerly the economy of Greece was one of the fastest in growth. Its fastest growth of that time can be associated with the flooding of foreign capital in the country. According to O'Hagan J, 2005, pp 199, the increase in debt to the GDP ratio is caused be the successive Greece governments that ran large deficits to the business community sector employments, pensions and other social benefits such as education and health. The global economic crisis has great effects on the economic position of Greece with two of its prominent industries being affected by the economic downturns, O'Hagan J, 2005, pp 193.
The European Union is very much concerned with Greece's failure to stop its debt to the GDP ratio from increasing because Greece is a member country and therefore the EU must control its financial expenditure. The EU must ensure that the government of Greece gives the right report about the country's official economic statistics. Moreover, the EU is concerned about Greece's level of financial borrowing that is leading to the increase in GDP debit ratio.
Successive Greece governments were involved in financial borrowing without being open to the EU superintendents. In addition, Greece also involved itself in other irregularities that were evident in other members of the EU such as Italy. Greece has high debt to GDP ratio that is estimated to be 13.6%. This is one of the highest GDP debt ratios in the world, O'Hagan J, 2005, pp 234.
The EU has the feelings that Greece is not capable of refinancing its debt to the GDP ratio. According to the EU, the economy of Greece is facing significant problems including the increase in unemployment, ineffective bureaucracy, corruption and avoidance of tax payments. Greece is one of the member countries of the EU that has a low index of economic freedom. This is caused by the high ranks of opinionated and financial corruption and stumpy international competitiveness as compared to other EU nations.
Since Greece is a member country in the EU, this union has to ensure that Greece does not fail to stop its dept to GDP ratio from increasing. GDP debt ratio is higher in Greece compared to other EU countries. The rise in GDP debt leads to the rise in borrowing costs hence the severe economic crisis.
According to the rules of the members of the EU, GDP debt of any member country should not go beyond 3%, Takishi A, 2007, pp 70. The 13.6 % debt to GDP of Greece makes the EU to be very much concerned with the Greece's failure to stop its debt to GDP from increasing. The EU has to ensure that the debt to GDP ratio in Greece stops rising. The effect of the decrease in economy of Greece is small to the other member state because the economy of Greece represents a small portion of the EU economy. The great danger of the decrease in Greece economy and the rise in debt to the GDP ratio is that it may make investors to lose faith in investing in any country within the Eurozone. Greece is at a very poor fiscal situation and this explains why the EU is concerned with stopping the debt to GDP ratio from increasing.
What action may be taken to control the debt?
In order to stop the debt to GDP ratio in Greece from increasing, EU is required to do various things. The EU leaders need to perform specific action that will see the economic position of Greece rise significantly. The EU leaders have a plan of considering the restructuring of Greek. The plan involves helping Greece to reduce its debts and this may find the country spending even more funds from the EU economy. Since Greece will get more funds from the EU, the reduction of the GDP debt in Greece will be minimal.
The EU will offer loans at lower interest rates together with the rescheduling of previous bailout funds and this means that EU will only be helping a country that has mismanaged its allocated finances. The EU will restructure a plan for the debt to GDP in Greece and help this country to buy back its own debt at a cheaper price with the help of some billions of money from the EU'S bailout fund, Takishi A, 2007, pp 45. Moreover, the EU will also lengthen the payback period of the EU loans that have been given to Greece to help it stop its debt to GDP ratio from increasing, O'Hagan J, 2005, pp 188.
Without external help or restructuring, Greece cannot improve its financial position. Greece's debt to GDP ratio is high and may still increase if some action is not taken to increase its economic position. Greece requires lots of money to stop its huge debt to GDP from increasing. In addition, the bailout funds that are to be disbursed to Greece are still very low and therefore they cannot help this country to improve its economic power.
Due to the high cost of borrowing, Greece cannot get to the market to raise the extra amount required to repay the borrowed funds. In this connection, the EU must help this member country to restructure in order to make its financial position comparable to those of the other member countries.
According to Grant W, 2010, pp 97, The EU leaders have the right to help Greece to restructure because it is one of their member countries. Without the help of the EU, the debt to GDP ratio in Greece will continue rising and this will affect the faith of investors towards the countries of the Eurozone. The decision of EU to restructure Greece will help the banks in Greece to access funds from the central bank at a cheaper rate. Moreover, the restructuring of Greece will help it to increase its bonds attractiveness to the investors hence raising its economy.