How Did Greece Go Bust? A Lesson in Economic History That Shouldn't be Forgotten

It was a modest room with a couple feet wide plain wooden table. On one side, Greek Prime Minister Alexis Tsipras sat with a translator and German Chancellor Angela Merkel. On the other side sat French President Francois Hollande, surrounded by a small group of officials.


In this modest Brussels setting, major participants in the epic Greek debt crisis attempted to prevent a catastrophe that may jeopardise the euro's and even the European Union's survival (EU). Merkel and Hollande made a last offer of billions of euros in help to impoverished Greece in exchange for Tsipras agreeing to the economic changes needed by his country's creditors.


The individuals appeared fatigued, with rigid body language. The meeting lasted only a few minutes. According to Greek insiders close to the discussions, Tsipras had already resolved to summon an emergency cabinet meeting in Athens that evening. Even as he chatted with Merkel and Hollande, he was prepared to put Greece's destiny in the hands of the country's people. After months of negotiations, he had concluded the day before that he and Greece's creditors were unable to reach an agreement.


According to Greek authorities, when he went home to Athens later that day on a government jet, the young Greek leader agreed on the notion of a referendum. He'd been told that holding a full-fledged election would take too long. A referendum, on the other hand, may represent the desire of the Greek people.


He notified ministers of his idea, which was agreed by the cabinet, and he announced the referendum on late-night television. Some European leaders were taken aback by the suddenness of the action. Merkel and Hollande were informed by phone immediately before Tsipras made his announcement.


The vote is scheduled on July 5, but rumours surfaced on Wednesday that it may be postponed. If it goes forward, Greek voters will be forced to choose between giving in to their creditors and accepting severe economic changes, or going their own way. Some European politicians have stated that the latter approach will result in a choice to exit the eurozone, however, Tsipras disagrees.


Based on conversations with those close to the discussions, this story depicts how the debt crisis became a political one. Reuters was unable to obtain an interview with any of the primary actors on the record.


Greece is a prime illustration of the harm that austerity can do to a country's economy as well as its social fabric. Furthermore, government spending has been reduced from €120 billion in 2008 to €90 billion in 2014. This meant that cutting government spending by 25% in nominal terms was extremely unlikely. Furthermore, the Greek economy was burdened with additional issues, which contributed to reduced economic development.


Greece's competitiveness suffered as a result of increased inflation rates, and since it is a member of the EU, it was unable to devalue, resulting in a significant current account deficit (lower exports and reduced domestic demand).


Furthermore, Greece has no influence over its monetary policy. The European Central Bank (ECB) raised interest rates in 2011 and had previously rejected any kind of quantitative easing to assist bolster domestic demand in southern Europe.

 

The Reasons Behind It:


Injustice –

  • If individuals feel they are sacrificing for the common good (rivalrous and non-excludable), they are more willing to sacrifice good; however, Greece only sacrifices its best and most decent things, causing indignation. Pensioners must wait months for their first check and years for lump amounts earned unless they work for corporations like Hellenic Petroleum, where they receive them quickly and in full.

  • Further to that, it appears that no one goes to jail in Greece except the poor and immigrants, fostering the belief among the majority of Greeks that the government protects its own, which causes ethical people to become unethical and undermines any sense of a nation's people pulling together because they're all pulling in different directions.


Corruption –

  • Every year, Transparency International rates Greece as one of the most corrupt countries in the world, not only in Europe. The reason for this is that practically everyone is on the take, from tax collectors to politicians, physicians, attorneys, architects, engineers, clerks, driving inspectors, and anybody else who stands to earn by having someone else pay. Who is going to turn them in when practically everyone is corrupt?


Uncompetitive/Unproductive –

  • Less than half of the Greek population works, nearly half of those under 25 are unemployed, 25% of the estimated GDP (a measure of the size and health of a country's economy over a period of time (usually one quarter or one year)) is in the undeclared underground black economy, and the government spends 42 percent of its limited funds on social benefits. Furthermore, many Greeks work 40 hours a week, but not all of them work those 40 hours.


  • Greeks are less productive than their counterparts, producing only $35 per hour worked vs $55 in Central Europe. Greece ranks 61st out of 193 nations in the World Bank's Ease of Doing Business Index. Of course, handing out a 'fakelaki,' a little envelope loaded with bribery money, makes things simpler.

 

Sources:


https://greekreporter.com/2015/07/02/reasons-why-greece-went-broke-default-bankrupt-and-isnt-country-anymore/

https://www.economicshelp.org/blog/12814/debt/greece-austerity/


Additional Resource to Learn More:


https://economictimes.indiatimes.com/news/international/business/how-greece-went-bust/articleshow/47898143.cms


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