What happened? Roughly:
- The two main political parties in Greece (PASOK and New Democracy, center left and center right, respectively) spent many years transforming the Greek economy into a unique ‘low tax high public spending’ model, in which there was a generous social welfare state but no tax revenue to pay for it. (Shipping, for example, which is where most of Greece’s very wealthy earn their money, was exempt from taxation).
- So it was funded through borrowing, mostly from French and German banks. The left-wing government won entry to the EU currency union by defrauding the European Union, partly through paying Goldman Sachs to convert part of its debt into derivatives, which it didn’t have to declare to EU officials.
- Eurozone membership allowed Greece to borrow money at extremely low rates, so the center-right government went on an insane borrowing binge for four years before the global financial crisis.
- In the wake of the GFC it became apparent that Greece had been misreporting its economic statistics for years, that its public debt levels were unsustainable and that it was in threat of default. The Greek economy went into a deep recession.
- Now, normally when countries go into recession they devalue their currency. Greece couldn’t do that though because it was a member of the European Currency Union. And normally when you’re in a currency union you’re also in a political union – like the United States – and wealthy members of the union simply transfer money to poorer regions. But there was zero political will in Germany and France to just transfer money to Greece, for obvious reasons.
- Enter the ‘Troika’. The International Monetary Fund, the European Central Bank and the European Commission undertook a series of loans to bailout the Greek government and prevent it from defaulting on its debts (which were, remember, mostly to German and French banks). The Troika made the loans contingent on a radical restructuring of the Greek economy.
- These were the famous ‘austerity measures’. Lower government spending. Wide-scale privatization of state assets. New taxes. The austerity measures would cause some temporary pain, the Troika admitted, but according to all of their forecasts they would lead to a rapid recovery as bond markets rewarded the Greek government for making such tough choices, and business confidence soared.
- The austerity measures were implemented, slowly, against a backdrop of massive protests, public strikes and rising political support for far-right fascist political parties. The recession worsened. Unemployment increased. More and more businesses went bankrupt.
- The deepening recession put the Greek government in danger of default again. They went back to the Troika who agreed on another bailout loan on the conditions of even harsher austerity, the first round obviously not having been implemented properly, but the second guaranteed to lead to a recovery and robust growth.
- The second package was passed through the Greek Parliament, amidst a backdrop of rioting and looting in central Athens. The second round of austerity measures were implemented: the economy continued to collapse. A UK economist described the outcome in 2012:
Since the beginning of 2008, Greek real GDP has fallen by more than 17pc. On my forecasts, by the end of next year, the total fall will be more like 25pc. Unsurprisingly, employment has also fallen sharply, by about 500,000, in a total workforce of about 5 million. The unemployment rate is now more than 20pc. . . . A 25pc drop is roughly what was experienced in the US in the Great Depression of the 1930s. The scale of the austerity measures already enacted makes you wince. In 2010 and 2011, Greece implemented fiscal cutbacks worth almost 17pc of GDP. But because this caused GDP to wilt, each euro of fiscal tightening reduced the deficit by only 50 cents. . . . Attempts to cut back on the debt by austerity alone will deliver misery alone.
- The social consequences have been devastating. The suicide rate has soared. Youth unemployment is at 65%. HIV rates are up 200%. 20% of the shops in Athens are empty and the city is filled with homeless. 400,000 people in Athens eat at soup kitchens every day; about ten percent of the cities population.
- The two centrist political parties were voted out of office, replaced at the beginning of the year with Syriza, a radical left-wing party. Because the government is unable to meet its debt repayments Syriza went to negotiate a third rescue package with the Troika, who after careful consideration decided that the Greek economy needs more austerity.
- Syriza campaigned on an anti-austerity platform, so they’re putting the new austerity offer to a referendum, something that has deeply offended the Troika. A ‘no’ vote seems likely to trigger Greece’s exit from the euro. No one knows what will happen then. One bank estimated the cost to the Eurozone at about a trillion dollars. (Greece is defaulting on a $1.6 billion debt repayment to the European Central Bank).
So there’s plenty of blame to go around here. The politicians who ran Greece from 2000-2009 shouldn’t have borrowed all that money that they couldn’t pay back. The banks shouldn’t have loaned it to them. The EU should have anticiptaed the problem that lack of currency control would cause troubled countries.
But the real blame seems, to me, to be with the Troika. A bunch of the world’s most brilliant economists have contrived to take a moderate sovereign debt crisis and used their expertise to wreck a developed economy, inflict extraordinary misery on millions of people and initiate the break-up of the Eurozone, triggering a global market panic.
Keynes used to say ‘The economy is not a morality play. It is a series of technical challenges.’ Unfortunately, Europe’s economists turned out to be the worst people imaginable at solving this challenge.