Greek tragedies were the preeminent form of theater in ancient Greece, usually describing the fall of a protagonist to disaster through the combination of personal failing and circumstances beyond their control. The Greek debt crisis that began in 2009 follows a similar pattern as the theatrical tragedies, with Greece serving as the protagonist in an ongoing story of economic recession, political upheaval, and social revolt. Greece’s economic crisis was a shock to the supposed economic and political stability of the Eurozone. After all, just a year prior to the outbreak of the economic collapse, Greece’s economy was thriving. Fresh off joining the Eurozone in 2001 and hosting a wildly successful Olympic Games in Athens in 2004 which introduced the world to modern Greece, everything appeared to be running smoothly. However, this optimism was to be short-lived. The global financial crisis started in the United States in 2008 with a collapse of the subprime lending market and then developed into a full-blown international banking crisis with the crash of banks all around the world. The financial crisis hit Greece in 2009, triggered by structural problems in the Greek economy and the discovery of corruption, fraud and faulty data on the debt levels and deficits of the Greek government. This led to a loss of confidence among fellow European nations, leading to strict economic regulations, constricting austerity measures, and three separate bailouts. Private investment stopped, debt increased, and unemployment reached unprecedented levels of nearly 25% as Greece struggled with its international image, economic stability, and ability to provide social services and jobs for its citizens.[1] The debt crisis in Greece was a multi-causal phenomenon, with many factors contributing to the economy’s failures. Chief among these factors are successive government’s failures to regulate and modernize the Greek economy, the prevalence of corruption, fraud and tax evasion throughout Greek society, and the structural weakness displayed at both the European and domestic levels.[2] This essay will argue that Greece was especially susceptible to economic disaster based on their antiquated economic and political structure and the failure of previous administrations to foresee and prepare for a potential economic collapse, but the Eurozone exacerbated the crisis through poor policy choices and a decisive lack of preparedness in advance of Greece’s economic collapse.

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Greece’s Structural Failures:

            International concern surrounding Greece’s finances emerged in October of 2009, when George Papakonstantinou, the new finance minister under recently elected Prime Minister George Papandreou, announced the tripling of government debt for 2009. The debt figure, which accounted for 3.6% of Greece’s GDP, was found to be inaccurate, and was upgraded to 12.8% of the GDP, then again to 13.6% in 2010.[3] This led to the questioning of the credibility of Greek financial data, with even Papandreou referring to the National Statistic Service of Greece as a “joke.” Following these disturbing revelations, the Greek statistics agency was made fully independent, but the damage had already been done.[4] Greek bonds were downgraded as Greece’s sizable foreign debt matured, and since Greece was part of the Eurozone, the ability to balance their accounts by devaluing their currency no longer existed. Foreign investors pulled out of Greece in droves, Greek banks were suddenly stuck with billions in bad loans, and as Greece’s bond ratings dropped, the interest rate on their payments rose, therefore enlarging the debts. Papandreou made an agreement with the Troika, the combination of the European Commission, IMF, and ECB, to undertake harsh austerity measures in exchange for €110 billion in loans.[5] The austerity measures imposed by the Troika, which included massive budget cuts and an increase in Greece’s value added tax, only made Greece’s situation worse, as they depressed demand and led to higher unemployment. Its weak political and economic structure made Greece a vulnerable subject to economic failure, as did the government’s negligence on matters of tax evasion, corruption, and fraud. Greece’s unnecessary spending following its inclusion into the Eurozone, such as the massive expenditure on the Olympics, are a prime example of the poor fiscal decisions made leading up to the economy’s collapse. Yet while Greece could have done a better job preventing such a catastrophic collapse, the EU and the international community share some of the blame.

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Lessons for the Eurozone:

            When confronted with the Greek crisis, the Eurozone governments and the EU displayed slowness, division, and ineptness, with their first response being that Greece should work out its problems itself. As relayed by The Guardian, the IMF now agrees that Greece’s debt should have been restructured much earlier than it was, which would have allowed Greece to use its interest savings to recapitalize their banks, cut taxes, and reinvigorate investment.[6] Instead, heading the advice of the Troika, Greece’s government dismantled its collective-bargaining system, leaving workers unprotected.[7] The 2010 bailout deal and austerity measures only exaggerated the debt, with Greece borrowing just to fund its interest payments instead of pushing the money back into the economy. In summation, the EU and the Troika were ill-equipped to deal with the debt crisis, lacking the capacity for a quick reaction, conducive policy, and centralized action.

            Germany, as arguably the Eurozone’s most powerful nation, has absorbed much of the blame for the poor handling of Greece’s debt crisis. Germany’s export-oriented trade policy meant that they could not relieve much debt from struggling nations like Greece. Instead of encouraging domestic spending on imports from other EU members, Germany ignored its hegemonic responsibility by refusing to offer Greece debt relief and pushing for harsh austerity measures and drastic social reforms that worsened Greece’s economic situation.[8] The Eurozone also did an extremely poor job at regulating and cleaning up its banks, which have few safeguards against excessive cross-border lending.[9] Prior to the debt crisis, rating agencies awarded Greece high ranks, which enabled the country to borrow excessively, and this easy access to credit encouraged Greece to expand its welfare benefits, social services, and government programs.[10] However, once the crisis started, the rating agencies quickly downgraded Greece and drove up their borrowing costs. The Greek debt crisis taught the Eurozone and the Troika that quick and effective economic policies that are conducive to economic growth are key to helping reduce the effects of economic crises, and that the most powerful Eurozone countries must do more to protect the organizations weaker members.

            Another lesson that the Greek debt crisis has taught not just the Eurozone, but also the world, is that austerity measures are dangerous to the economic and social health of nations experiencing economic crises. The first round of austerity measures on Greece imposed major cuts in state spending and drastic economic and political reforms, while the second round cut spending on education, the reduction of social services, and the reduction of maintenance of infrastructure and collective facilities.[11] In the case of Greece, the measures exacerbated the divide between the wealthy and the poor within society, driving feelings of resentment and fear that spurred populist political upheavals. They also widened the inequality that exists within the Eurozone, as the societal divide between Germany and Greece has never been larger. While austerity measures are useful for balancing bank accounts, they’re awful at shrinking the widening inequality caused by the debt crisis and led to an enormous migration of Greeks, many of whom are the most educated and skilled, out of the country.[12] With the loss of a generation’s worth of economic growth comes the potential for a long period of economic starvation, as Greece’s already struggling pension system will be robbed of its most productive members.[13] The austerity measures only undermined growth and raised unemployment by making it more difficult to shrink the principal on debt. As detailed by Balaam and Dillman, this debt cycle “drives up the cost of borrowing, which in turn generates the need for more borrowing” and causes investors to further lose confidence in Greece’s economy.[14] A Keynesian approach would have been much more beneficial to Greece’s economy by stimulating economic growth through state spending, attracting foreign investment by forcing creditors to take a reduction on some of their loans.

            Almost everything that could have gone wrong for Greece, did, and now, with a sputtering economy, massive debt, and a depressed and largely unemployed society, the future looks bleak. The consequences of this worldwide scorn were considerable, and beyond the economic effects of the crisis, it has had serious political and social ramifications. The political reactions within Greece were far from homogenous; some called for Grexit, a departure from the EU, while others for stricter austerity measures. The most apparent change in Greece’s political climate following the crisis has been the sudden rise in popularity of radical political parties like the left-wing populist party Syriza and the neo-Nazi Golden Dawn Party.  The actions of the Greek government and the Eurozone powers carry more importance than ever, and will determine whether Greece can recover from the debt crisis or if its economic, political, and social issues will continue to further the plot of the tragedy.

 

[1] Featherstone, Kevin. "The Greek Sovereign Debt Crisis and EMU: A Failing State in a Skewed Regime." Journal of Common Market Studies 49, no. 2 (2011): 193-217. Accessed March 12, 2017. doi:10.1111.

[2] Featherstone, Kevin.

[3] Ibid.

[4] Ibid.

[5] Ibid.

[6] Eichengreen, Barry. “Greek Debt Crisis: Lessons in Hindsight.” The Guardian, Guardian News and Media, 14 June 2013, www.theguardian.com/business/2013/jun/14/greek-debt-crisis-lessons.

[7] Ibid.

[8] Balaam, David N., and Bradford Dillman. Introduction to International Political Economy. Routledge, 2018.

[9] Featherstone, Kevin.

[10] Ibid.

[11] Eichengreen, Barry.

[12] Ibid.

[13] Ibid.

[14] Balaam, David N., and Bradford Dillman.

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JSIS B 332 POLITICAL ECONOMY OF INTERNATIONAL TRADE AND FINANCE

Theoretical and historical analysis to explore the causes and effects of the rise and decline of four major international trade and monetary regimes. Foundations and emerging features of the new international trade and monetary regime and its implications for the world economy.