A Greek Tragedy

This year Greece prepares to enter its 9th consecutive year in recession. This is the longest recorded recession in a developed country since records for this sort of thing. In the mean-time, a 2015 study found that almost a fifth of the country’s population could not pay for food. Unemployment rose from 7.5% in 2008 to 23.1%. The problem also shows no signs of ending anytime soon. So how did we get here?

It is hard to remember now the go-go optimism at the turn of the century when the word “European miracle” was on everyone’s lips and the Franc, the Deutschemark were bowing out in favor of the Euro. But between these heavyweights, there was the little Drachma, the much more volatile Greek currency which in 2002 also gave way to the Euro.

Graikijos_drachmos.jpg

Greek Drachmas

But there was a problem. Greece never really belonged to this club. Economically and culturally it remained very distant from the industrious Germany. Greece enjoyed what was euphemistically called a “Mediterranean attitude”. The welfare state supported large sections of the population, tax avoidance was common, pork barrel spending by politicians to buy votes was accepted and for many industries work hours were considerably more relaxed than other parts of Europe. As early as 2000, the debt to GDP ratio had hit 100%. This meant that if the country spent every penny it made for a whole year leaving nothing for itself (no food, electricity or anything) it might just be able to pay off its debt.

Banks understood this and were hesitant about lending money. But with EU membership, the concerns relaxed. Somehow everyone assumed that just because Greece was a member of the Eurozone, it was as safe as Germany or would be backed by other European governments in case they couldn’t pay their debts. Banks rushed to offer loans at low rates. Greek governments, delighted by this good fortune borrowed heavily and spent with profligacy. There seemed no end to the money flow. To pay back money, the government had only to ask for more money. By 2009, the debt to GDP ratio had risen to 127%.

To keep within the monetary union guidelines, Greek governments repeatedly misreported economic statistics. To be fair, Greece wasn’t the only country doing this. Italy did some figure fudging too. Furthermore, banks knew what was going on. In fact, the Greek government actually took help from banks including Goldman Sachs to hide its debt levels.

eurozone

Eurozone

In this case, why did the banks keep lending when they knew the money wasn’t secure? Well one possible reason could be that they expected the other EU governments to back Greece up and secure their loans. So it made sense to keep lending so long as they could stick somebody with the bill. In a twisted way they were right.

Finally, the financial crisis hit. Banks suddenly became very reluctant to lend to anybody. For Greece, this was the exceptionally bad as it suddenly found that it was unable to even pay the interest on the loans it had already taken. The full nature of the Ponzi economy was laid bare.

But this went beyond a national problem. The German and French banks which had lent money to Greece could not be allowed to suffer or collapse by their own governments for fear of what this would do to their own domestic economies. So a troika was formed consisting of the International Monetary Fund (IMF), the European Commission (EC) and the European Central Bank (ECB) to offer a “bailout” package for Greece. The word “bailout” though is misleading. If anything, they were bailing out the banks.

They “gave” money to Greece to pay back what it owed to its creditor banks and in exchange became the main creditors of Greece themselves. They then forced a set of draconian “reforms” on the Greek economy to curtail public spending until Greece could repay its debt. The effect of these austerity measures was immediate. Pensioners found their futures uncertain, civil servants and teachers faced wage cuts or unemployment. A vicious cycle arose where people didn’t have money to spend leading to low demand leading to businesses shutting down leading to more unemployment and poverty.

Greeks protest austerity measures

So what is the state of affairs today?

After repeated rounds of “bailouts”, on February 20, 2017, the Greek finance ministry reported that the government’s debt load is now €226.36 billion after increasing by €2.65 billion in the previous quarter. The GDP itself has shrunk by almost 30% since this crisis began while the debt to GDP ratio remains high. Almost half the youth is unemployed and the overall poverty rate is about one third. Think about that, one in every three businesses have shut down and every other youngster doesn’t have a job.

Greek_debt_and_EU_average_since_1977

Debt to GDP Ratio for Greece and the EU as a whole

Some companies have done well despite the economic headwinds. The BBC interviewed the founder of a software company that made educational tools for children with learning disabilities. The company has been so successful that it has taken the opportunity to move its main office from Greece to the US!

Over the years, the startup scene in Greece has improved tremendously. Tech investors are realizing that a decade of depressed salaries have created a very low cost talent pool within Europe and are keen to search for opportunities. But as the founder himself himself remarked

I am not sure the startups can save the world . . . This is not the only way to save Greece.

There is also a new twist. Greece’s 3 main creditors, the IMF, the EC and the ECB are at loggerheads about the way ahead. The IMF seems ready to bow to economic reality and accept that Greece will never be able to repay its loans. The Europeans don’t see it that way. Led by German finance minister, the consensus view is that Greece must be made to pay back its debt even if it takes decades to do so.

greekCrisis1

So what can Greece do now? Many economists like Paul Krugman have always insisted that entering the Euro was a bad idea. It would make sense they argue, for Greece to leave and bring back its own currency. It could then fall back on the option used by so many developing countries of inflating away its woes. This is a time honoured way in which countries have dealt with such situations in the past.

What this means is that Greece would issue its own currency at the rate of say 10 drachmas = 1 euro. All Greeks would be paid in drachmas and buy their goods in drachmas. While this could mean that things bought from outside Greece would be more expensive, it would also mean that things inside Greece would be easier to access for the Greeks themselves.

In the view of such economists, the Greeks would be best advised to leave the Euro and strike out on their own. But popular opinion inside Greece is against such a move. There is a strong sense of national pride and to leave would appear a humiliation. Also according to Roger Bootle, there has been so much propaganda over years about the perils of leaving the Euro that “both expert and popular opinion can barely see straight”.

In a few months, Greece will have to negotiate yet again for another extension to this seemingly endless cycle of pain.

References

https://en.wikipedia.org/wiki/Greek_government-debt_crisis

http://www.bbc.co.uk/programmes/p04ygc09

https://www.forbes.com/sites/dougbandow/2017/01/05/greece-heads-into-another-economic-crisis-time-to-finally-exit-the-european-union/#1445e955607b

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