Written for Rocknmomma.com by my husband, Tas.
August 3, 2015
Are Calmer Seas Ahead For Greece?
It’s been about three weeks since an accord was struck with Greece and it’s European creditors. For now, the lack of media attention may lead to the perception the Greek financial crunch has somehow abated. The question is whether or not this bailout (Greece’s third) is the right antidote for a broken economic system?
After spending almost a month in Greece on a family vacation, I realized just how little I knew about the economic tumult that has hit this small but beautiful nation. The more I dig, the more I find I don’t know, and the more I understand how precarious the future of the European Union is.
In my search for more information, I have not located one single or unified source identifying Greece's history, players, and current issues and events leading up to her demise. I have therefore created my own personal summation:
⁃ GDP (Gross Domestic Product) - The monetary value of all the finished goods and services produced within a country’s borders annually.
⁃ EU (European Union) - A politico-economic union of 28 member states located primarily in Europe. While formally established in 1993, the European Union became “official” on January 1, 1999 when the Euro “€” currency was introduced. The Eurozone now represents roughly 500 million people. The United Kingdom, for trade purposes, is part of the European Union.
⁃ Euro (€) - The official currency of Europe. Today, €1.00 is worth approximately $1.10. Most of the members of the European Union are part of the Euro currency. However, some countries like the United Kingdom, Denmark, and Sweden decided to stick with their own legacy currencies.
⁃ ECB (European Central Bank) - Europe’s bank for banks, equivalent to the Federal Reserve Bank (or Fed) in the United States.
⁃ European Commission - The executive body of the European Union responsible for proposing legislation, implementing decisions, upholding EU treaties and managing day-to-day business of the EU.
⁃ IMF (International Monetary Fund) - An international organization headquartered inWashington DC. Made up of 188 countries working to promote global monetary cooperation, financial stability, and international trade. One objective of the IMF is to lend (with historically high lending standards) to countries needing economic assistance.
⁃ Troika - A tripartite committee made up of the European Commission, ECB, and IMF that has organized loans to the governments of Greece, Ireland, Portugal, Spain and Cyprus.
⁃ Contagion - The spreading of Greece’s financial malaise to other European countries with similar economic problems including Spain, Italy, Portugal, and others.
⁃ Austerity - Tough to define. In its simplest form the word means spending less than you earn. While this may sound prudent, any reasonable economist will agree that during a recession (or in Greece’s case a depression) it is sound policy to run deficits to stimulate job creation and economic growth. Lower economic spending during a recession can fuel unemployment and stunt growth, leading to greater, not smaller, deficits. The US government did the exact opposite of austerity in 2008, when it ran larger deficits to avert financial meltdown.
⁃ Syriza - The left-wing party elected into power in May, 2104. Greece’s prime minister is Alexis Tsipras, age 40, known for his refusal to wear a tie. Tsipras was elected on a platform to renegotiate the austerity measures that have taken Greece’s economy into its 7th year of depression.
⁃ Grexit - A scenario where Greece exits the Euro currency and returns to a modified Drachma (its old currency). Greece would have the freedom to regulate its money supply (and print money) at will. A vast majority Greeks want to stay with the Euro and oppose Grexit. It is the austerity measures the Greek people oppose, not the breakup of the Eurozone. If Grexit were to take place, the event would be unprecedented. The only other nation in modern history to introduce a new currency is Iraq, and it took over a year, full cooperation from the US government, and many airplanes filled with paper currency to do so.
Greece Basic Statistics:
⁃ Population - 11 million.
⁃ €320 billion - approximate size of Greek government debt.
⁃ €180 billion - Greek GDP in 2014.
⁃ Unemployment rate - 26%. Youth unemployment (people in their 20’s) approximately 60%.
⁃ Greek government debt to GDP - 177%
⁃ Greek GDP as a percentage of Europe - 1.5%.
⁃ Greek government debt as a percentage of total European government debt - 2.6%.
⁃ Nearly 75% of Greek workers are employed in the service sector. The economy is highly dependent on tourism and shipping. Aside from its beautiful topography, Greece lacks most natural resources necessary to promote industry and manufacturing.
⁃ Other European stats:
⁃ Spain… Population 47 million… Unemployment 24%… Debt to GDP 94%.
⁃ Italy… Population 60 million… Unemployment 13%… Debt to GDP 133%.
Bailout / Political History:
⁃ There have been 3 Greek bailouts:
⁃ May 2010 - €110 billion. Prior to this bailout, much of the outstanding Greek debt was held in ‘private’ hands, including Greek, German, and other foreign banks. This bailout started the process of transitioning debt from mostly private institutions (banks) to the IMF, the ECB, and other government entities. In the months leading up to this bailout, interest rates in Greece skyrocketed severely limiting the Greek government’s ability to borrow. At the time, interest rates in Italy, Spain, and some other European countries also escalated.
⁃ March 2014 - €130 billion. The first bailout funds ran out. Additional money was lent in installments under the conditions the Greek government hit economic goals and completed structural changes to its economy.
⁃ July 2015 - €86 billion to be disbursed over three years. This bailout was what made headlines a few weeks ago. In return, Greece agreed to further increasing austerity measures, including more pension cuts and higher taxes.
⁃ June 2015 Elections / Referendum (Nai or Oxi). Just prior to this election, Greece did not agree to the austerity terms proposed by the Troika. As promised during his campaign, Alexander Tsipras insisted on renegotiating the terms of existing Greek debt. Tsipras also proposed to hold a special referendum for the Greek public to vote whether they accepted the terms of the bailout. It was a way for Tsipras to vindicate his decision. Just prior to the election, when Greece did not agree to austerity terms, the ECB cut emergency liquidity assistance to Greek banks which led to closures. ATM withdrawals were limited to €60 per day, and lines formed. Tourism dropped precipitously, and the Greek economy came to a near standstill.
⁃ July 2015 - Ultimately the Syriza party ignored the June referendum and acquiesced to the demands of the Eurozone. A deal was reached, and Greece has been out of global headlines since.
Aside for humanitarian reasons, why does Greece’s debt problem matter if the country is such a small part of the EU? Why doesn’t the EU just restructure the debt and move on? Why doesn’t Greece default on its debt and leave the Euro and go back to the Drachma, its former currency?
In sum, many countries have defaulted on or restructured debt. Argentina defaulted on its government debt in 2002, and has since recovered. Iceland defaulted in 2008 and has since recovered and is growing now at a faster rate than continental Europe. Puerto Rico is in the process of defaulting right now.
What makes Greece so different from other nations?
Very simply, Greece’s economic problems are not unique, they are prevalent in many other European nations.
Spain, Portugal, Italy, and even France have similar problems, though in a milder form. Greece’s creditors, led in large part by Germany, have fought adamantly to push austerity on Greece because they did not want to set a dangerous precedent for the rest of Europe. If the Troika had succumb to requests from Greece, other struggling European countries (Spain, Italy, and Portugal) might demand better terms. The crisis has bifurcated eurozone countries. Germany has opposed further aid to Greece, while France and Italy have expressed a desire to provide further assistance. To quote the a former Finance Minister of Greece, “Grexit (threat of expelling Greece from the Euro) is used to create the fear to force Paris, Rome, and Madrid to acquiesce.”
The challenge in Greece is not that that Greece is unwilling to repay the debt, it is that Greece is quite simply not capable of repaying the debt. Any bailout is merely a mirage. Greece requires debt restructuring, not further austerity. Austerity will push Greece deeper into depression and higher unemployment, which in turn can lead to lower government revenue and, ironically, make it harder for Greece to repay its debt in the future.
From the first bailout in 2010 to the most recent, none of the bailout ‘solutions’ have directly dealt with the real problem - the outstanding debt is just too big relative to the Greek economy. Greece should have not borrowed money last month, just like Greece should have not borrowed money in 2010. The bailouts mislead both Greeks and the European taxpayers who will be left paying the tab.
Unless the Greek debt is realistically restructured and the economy gets back on track, no amount of bailout money will solve the problem. The country will only sink further economically. But this is not happening in Greece, and the charade continues.
While Greece may dwindle from global headlines, the underlying problems still exist and will reappear again soon.