Greece has faced it all, a small scale humanitarian crisis, a series of strict austerity measures, giving up on an independent monetary system and the best of all, it became the first developed country that failed to make the debt repayment to IMF. When we hear all this, the first thing that comes to our mind is that it would have been terrible fiscal management. But was it the only reason that led to the Financial Crisis in Greece?
Let me start from the very beginning. Tracing back to the 1980s, Greece had a major problem with tax evasion. The self-employed workers used to underreport their incomes and the laws weren’t tight enough to control this. The productivity of Greece was also low as compared to other European Union nations. Along with these loopholes, Greece had a populist government, which by definition embodied the will of its people to be in power. Due to this, the government led by Andreas Papandreou, went on spending beyond the means, borrowing relentlessly. High expenditure on social security schemes, and high wages, with the tax revenue so low. Obviously, this led to a high budget deficit and inflation rates and the growth of the country began to shrink. The roots of the Financial crisis in Greece were laid due to these structural problems back then.
Now, when the EU launched Euro in 1991, Greece had two options- either adopt Euro and accept the fiscal reforms or accept the chaos it was already in. With the expectation that adopting Euro would open the avenues for better financing, a larger market, and growth for the country, Greece finally adopted Euro in 2001. But here’s the twist, Greece lied to do so. Greece with a government debt of 97% of GDP, fudged its accounts to fulfill the Maastricht Criteria, according to which only the countries with 60% public debt were allowed to adopt euro.
As soon as it became a part of the Eurozone, Greece became a safe place to invest in the eyes of the investors. This positively affected the interest rates and also the transaction cost reduced due to the now unified currency. Greece took advantage of the cheap interest rates and started its borrowing spree once again, and soon its debt rose to 112% of GDP. It seems that the expectations of growth were met. Greece was doing well with all the borrowing, the growth rate was increasing, it went all the way from 3.9% in 2002 to 5.7% in 2003. Unfortunately, the good time was cut short, in 2004, along with the huge costs of holding Olympics, the Greek government openly admitted that it had fudged its budget figures to get into the eurozone. From about 5%, the growth rate plummeted straight to 0.6%. To recover from the high debts, austerity measures were imposed and taxes on alcohol and tobacco were increased from 18% to 19%, which brought fortune to the country as the growth rate went up to around 5% at the end of 2006.
But Baam! Greece’s roller-coaster ride ended with a long period of downfall in the growth rates when it fell to the trap of the 2008 financial crisis. With its already weak nature, lying capacity, and mountains of borrowings, this was bound to happen. Athens’s stock exchange plummeted. Greece was already in a mess, but it became messier when in 2009 it revealed to the world that their actual budget deficit is actually more than double what it has shown, not 6.7% but rather 15.4%. Credibility went to junk, creditors flee the country, borrowing costs soared high and the already low tax revenue fell. Due to the financial crisis, the country’s two largest earners- shipping and tourism bore huge losses which added a cherry to the already falling cake.
The difficulty was immense because by adopting the Euro, Greece gave up its independent monetary policy. Had it not done so, it could have devalued its currency, the drachma, by printing more of it. This would have made their exports cheaper and lowered interest rates for borrowing. But due to the single currency and multiple economies under a single umbrella of the monetary system, someone had to suffer and the weak fell prey to it. The German-dominated European Central Bank pursued a monetary policy that suited them. Germany acted out of self-interest and made Greece situation worse making it further go deep into a Financial Crisis.
To keep the strength of Euro intact, Troika, the decision group consisting of the European Commission, IMF, and the European Central Bank, came to the rescue by bailing out Greece, in return for some austerity measures which demanded pension, wage cuts, and higher taxes. Several bailouts were offered, and simultaneously the disciplinary reforms. However, the reforms proved disastrous for the Greek economy and its people, with unemployment rising to an all-time high of 25%, high taxes and low wages, their incentive to work fell. There were protests and violence across the country.
The outraged citizens then voted Syriza. Why? Primarily because the citizens who were bearing the brunt of the austerity measures wanted to give them a chance, thinking they might reverse the situation. Yes, Syrizan government did retaliate by missing the 1.6 Billion Euro debt repayment in 2015, to which everyone thought that this maybe a signal that Greece is going to default. With a debt of 181% of GDP, Greece obviously was bound to become bankrupt. Soon after, even this government came on their knees and accepted the next bailout, along with the reform deal. The same reforms that caused the economy to shrink by 25%.
We can definitely say that the fiscal mismanagement caused the Financial crisis in Greece. But what aggravated the problem was Greece’s blunder of hiding the true picture, rather than solving its fiscal issues first. The mix of political, economic, external issues trapped Greece in a vicious circle of debt and reforms.
Written By: Srishti Chhabra
(Srishti is a third-year Economic Honors student at Shri Ram College of Commerce)