The Greek debt crisis. Bailout agreekment. Grexit.
Much of the world’s (or at least the West’s) news and brainpower seems to be occupied by the current situation in Greece. Though it is primarily an economic matter, the images broadcasted across the globe make it clear that it has developed beyond that – becoming political, social, emotional, generational and more.
Now, economics is by no means my forte, but I was becoming frustrated with not being able to form an opinion on such a key issue, simply because I wasn’t informed enough. So, in two posts, let’s see if we can wrap our heads around this Greek debt crisis and, if you think I have completely misunderstood what is unfolding, please let me know in the comments! The first post will look at the underlying causes for the economic crisis and the second will consider the resulting crisis.
Now, for me, the problem becomes that while I understand most of the symptoms of the economic crisis, some parts of the underlying condition seem extremely complicated. Nevertheless, a number of incidences stand out to me as critical to the development of Greece’s debt crisis. Namely, the economic decisions of the 1980s, the passivity afterwards, 2008’s Global Financial Crisis and a post-2008 decline in trust.
At the start of the 1980s, the Greek government was attempting to get its fiscal position ready for EEC membership, which was seen as crucial for economic success and political stability. However, once Greece had become part of the European Economic Community, there was less pressure to strengthen and improve the economy. This coincided with the election of Prime Minister Papandreou and a socialist, PASOK government, the combination of which led to radical changes to social, economic and cultural policies. Papandreou remained at the helm for most of the 80s, during which time Greece entered a period of stagflation, loss of international competitiveness, and increased debt and government spending.
The problem with increasing public spending was the fact that Greece struggled to raise funds to support it. This was due to a whole range of reasons: First, patronage, bribery and other types of corruption cost approximately 8% of GDP every year. Second, the tax system allows for structural tax evasion, which has been suggested to cost Greece an enormous 30% of GDP. Lastly, Greece’s lack of international competitiveness meant it was not able to make enough money through international trade. However, despite so severely misjudging Greece’s economic capabilities, Papandreou remains popular amongst many Greeks – largely due to his reforms which included an overhaul of the tax system, attempts to modernize the position of women and marriage, and wealth redistribution measures focused on pensioners and low income earners.
The beginning of the 1990s brought with it some significant retraction with regard to fiscal policy, largely in preparation of becoming part of the eurozone, resulting in Greece’s debt stabilizing relative to the country’s GDP. However, while the policies ensured the debt wasn’t further increased it was also not significantly reduced and remained approximately 100% of GDP, despite strong economic growth. Next to that, inflation remained above eurozone average, continuing to damage Greece’s international competitiveness. One aspect of the Greek economy attempted to be tackled was the public spending on wages and pensions but, despite slight reversals in the 1990s, this has continued to increase. Thus, while some improvements were made to the Greek economy, the previously created problems were not resolved.
My understanding is that the fiscal policy of the 80s and the inaction afterwards are the roots of the contemporary crisis. It seems curious that decisions made almost thirty five years ago have such bearing on the contemporary global economy. Moreover, Greek nostalgia for the time of Papandreou and the 1980s PASOK government’s change, suggests that despite the current crisis many would not change the majority of the decisions made at the time (though perhaps would change the inaction of the 1990s).
As we edge closer to 2008, the story becomes more complicated. Features of the Greek economy, remnants of the economic policy of the 1980s, meant it was in a less than ideal position when the Global Financial Crisis hit in 2008. Falling GDP and the resulting increasingly large deficits meant that Greece became unable to sustain such a large amount of debt and the lack of international competitiveness only added insult to injury.
In 2009, two years before he was required to, Prime Minister Karamanlis called an election – quite possibly because it was starting to dawn on the government just how severe the economic problems in Greece were becoming. The New Democracy party, led by Karamanlis, proposed a whole range of public spending cuts to reduce the deficit which had increased from 3.6% to 13.6% of GDP. PASOK, the party founded by Papandreou and now led by his son, proposed an increase in public spending to boost the Greek economy and, through that, increase revenue. A truly unrealistic option which, naturally, was much preferred by Greeks who saw it as a favourable alternative to austerity measures.
The new PASOK government, far from having a plan in place, blamed their predecessors for failing to reveal the extent of the economic crisis unfolding, increased public spending (thereby making the situation worse) and presented ever-changing plans to tackle the economic problems. This is where the fourth problem comes in; Greece’s worsening position and inability to develop an adequate plan resulted in both the rest of Europe and global markets becoming unsure and losing confidence in Greece’s ability to get out of its problematic situation.
Sources & Further Reading
Kathimerini on the public’s opinion on the last four decades in Greece
Olivier Blanchard defines his understanding of stagflation
Open Economy discusses the causes of the Greek debt crisis
An LSE paper on the macroeconomics of the debt crisis in Greece
Euractiv discussing a possible solution to Greece’s crisis
Henrik Larsen and Kim Olsen analyse the effect EU integration had on Greece
The Guardian discusses the increase of refugees to Greece due to the situation in Syria