Economics

42nd Parallel Blames European Institutions for Greek Economic Crisis

15 May, 2018

On May 5, 2018, Georgian Public Broadcaster’s TV program 42nd Parallel aired a story by Mate Gabitsinashvili, the program analyst, dedicated to the idea of European unity and the EU’s “anatomy of systemic crisis.” The major part of the story was about Greek economic crisis that was linked by the author to the policy of the so called Troika (European Commission, European Central Bank and International Monetary Fund). Gabitsinashvili claims that the policy of these institutions has led to economic collapse in Greece.

42nd Parallel links Greek economic crisis to the policy of the European Union and European institutions. The author does not provide information about huge budgetary expenditures in Greece, protectionism in its economic policy, tax evasion and other structural problems that have actually led Greece to economic crisis.

1990s: European Union

In 1994 the Bank of Greece became free of political control. If Greek budget deficit for 1994 was 5.1% of GDP, in 1994 it achieved a general government primary budget surplus of 4.2% of GDP.

  • The European Commission said on May 3, 2000 that the government deficit in Greece was reduced to 1.6% of GDP in 1999 and the average inflation rate during the 12 months to March 2000 was 2.0%. Greece met all targets set by the Maastricht treaty except for the ratio of gross government debt to GDP. However, it should be noted that government debts have exceeded the limits in other EU member states too. On January 1, 2001, Greece joined the Eurozone. The decision was supported by 70% of Greek population.

Falsified Statistics

  • In 2004, Prime Minister Konstantinos Karamanlis, who chaired the New Democracy party, decided to conduct a financial audit of the Greek economy, before sending revised data to Eurostat. The audit concluded that the PASOK administration had falsified Greece’s macroeconomic statistics, on the basis of which the European institutions accepted Greece to join the Eurozone. According to the European Commission, after joining the Eurozone, Greek government deficit had always remained above the 3% of GDP reference value.

Problems in Public Sector

  • Although, in 2001-2008 Greek economy grew average 3.9% per year, economic problems were quite obvious. This was most vividly reflected in public sector deficit. In 2000 the public sector deficit exceeded the target set by the Maastricht treaty and amounted to 3.7%. The figure increased to 10% and  further to 15% in 2008 and 2009, respectively.
  • Pensions proved to be yet another challenge. According to the 2011 study prepared by the Harvard Business School, which reviews the period before 2007, the Greek people retire at the age of 58, receiving 96% of incomes that they had before retirement. It should be noted that the retirement age in OECD member states is fixed at 63 years and only 61% of incomes are granted in a form of pensions. In 2007 Greek pensions constituted 12% of GDP – slightly higher than the EU’s average figure (10%). According to forecasts, by 2060 Greece would spend 24% of GDP on pensions.  

Tax-related problems  

  • Although per capita income (including children and unemployed individuals) was over EUR 20 000, two thirds of the employed persons declared only EUR 12 000, thus evading taxes. Only 6% of the employed persons declared incomes above EUR 30 000.

2008 Global Financial Crisis

The 2008 global financial crisis had its impact on Greek economy as well. Tourism and international trade dropped that led to the reduction of budgetary revenues in Greece.

  • It became clear shortly after the elections that the planned deficit ratio would be revised from 3.7% of GDP (the figure forecasted by the  previous government) to 12.5% of GDP.
  • During his meeting with European leaders in Brussels, Greek Prime Minister George Papandreou openly spoke about the  problems persisting in Greece. He said that not only was the Greek deficit twice as high as previously reported, but his country’s finances were also a mess. Corruption was pervasive and tax evasion, rampant.
  • The public debt increased to almost 150 percent of GDP in 2010 and more loans were needed to repay debts. Greece became completely dependent on international financial institutions.

So called “Troika”

  • The European Commission, the European Central Bank and the International Monetary Fund rendered financial assistance to Greece. Instead, Greece had to implement unpopular, though necessary reforms for its economic recovery, such as cuts to the public sector and social expenses, balancing the budget, state property privatization, etc.
  • Greece carried out structural reforms, eased regulations, but these steps were not enough for overcoming the crisis. Corruption was still persisting. Moreover, in response to the demand for “tightening the belts,” not only Greece did not reduce its budgetary expenditures, but it increased number of public servants by 70 000.   

Syriza and Tsipras

Greece could not overcome the crisis unlike other indebted EU members and required additional assistance of around 80 billion Euros. In January 2015 Parliamentary elections Greeks dissatisfied with status-quo voted for the radical leftist coalition Syriza, which blamed worsened social conditions on Troika’s demands and promised to give upon their implementation.The new government requested Troika to write down its debt and backtrack on most of the reforms launched in previous years.

The leader of Syriza and Prime-Minister Alexis Tsipras hoped that leading EU nations would not be risking the Eurozone unity and would yield.Greece would default on its existing liabilities unless no agreement was reached on the new bailout package, which could potentially result in its exit from the Eurozone. Tsipras called referendum to boost his bargaining power and received public support for the second time.

  • Greeks afraid of Drachma’s possible return started to immediately withdraw their bank deposits. The government ordered banks to shut down. Cash withdrawals from ATMs and international wire transfers were also restricted in a bid to prevent massive capital outflows and save the financial system from collapse.The real threat of food and drug shortages emerged, because importers could not pay their suppliers. Greece was on the brink of a humanitarian catastrophe.
  • Eventually, Athens agreed on all conditions of Troika it previously opposed. The long standoff with creditors left the Greek economy in even more dire conditions. The small growth achieved in 2014 was again replaced by downturn in 2015. Tourist season was disrupted, but the capital controls hit the banking system hardest.

What would have happened if Greece had left the Eurozone?

In the opinion of various politicians and according to forecasts of some economists, leaving the Eurozone would have led to social and economic breakdown in Greece. In particular:

  • Former Greek Prime Minister, Antonis Samaras warned that living standards could fall by 80% within a few weeks of exit.
  • Unable to borrow from anyone (not even other European governments), the Greek government would simply run out of euros.
  • The drachma would not be a popular currency in the world and therefore, it would be devalued by at least 50%, causing inflation.
  • In 2011, Eurozone leaders agreed to extend Greek loan repayment periods to 15 years and to cut interest rates to 3.5%.
  • With great probability, the country would not manage to avoid a collapse of its banking sector. Interest rates would have to double and all mortgages, business loans and other borrowing would become much more expensive.
  • Food and energy prices would go through the roof. That could mean a shortage of basic commodities, like oil or medicine or even foodstuffs.
  • The government would have to impose a freeze on withdrawals and on people taking money out of the country. This could lead to queues of ordinary Greeks trying to empty their bank accounts before they get converted into a new currency worth substantially less than the previous one.
  • A real threat of chaos and unrests would be created.