The Greek Debt Crisis Explained

Key Takeaways

  • The economy of Greece is back in the spotlight as an impending repayment deadline on its outstanding debt becomes due in July. Talks on refinancing these with further bailout funds are once again stalled. Seven years on, the Greek debt crisis continues to be unresolved.
  • The root cause of Greece’s economic crisis can be found in the profound structural economic inefficiencies that were borne out of the 1980s depression the country suffered through. As the country came out of brutal fascist military rule, the country embarked on a public sector-led economic boom that sowed the seeds of the crisis the country faces today.
  • Many argue that Eurozone membership is to blame for the current debt crisis. Nevertheless, we disagree: Euro membership in fact provided a means, by way of both funding and structures, to spur the Greek economy’s development. Unfortunately, the opportunity was not taken advantage of.
  • Instead, Eurozone membership created a way of sweeping the problems under the carpet, and caused artificially low borrowing costs that allowed the various governments of past decades to continue the expansionary public sector policies of the previous periods.
  • The straw that broke the camel’s back and precipitated the current crisis was the global financial meltdown of 2008. But in many ways, the economy of Greece was already insolvent before then.
  • Despite the immediate future looking bleak, we believe the Greek Debt Crisis can still be resolved. If the underlying structural problems that have plagued the economy since the 1980s are finally tackled, the situation could turn around. These reforms must be centered around five key areas:
    1. Fixing investment and business scale disincentives
    2. Reducing the size of the public sector’s contribution to the economy
    3. Addressing labor market inefficiencies
    4. Improving the legal and judicial systems
    5. Curtailing the size and role of the “shadow” economy
  • If something is not done soon to address the situation, it risks deteriorating from an economic crisis to a humanitarian one.

Here We Go Again: The Economy of Greece Is Back in the Spotlight

Those following the news will no doubt know that Greece has for several years now been battling through a severe financial and economic crisis that has had profound consequences for the Greek economy and population, and at times threatened the stability of the Eurozone (and consequently the global financial markets).

After months of being out of the spotlight, Greece has recently returned to the fore as an impending repayment deadline on its latest batch of rescue-package loans becomes due in July. In scenes all too familiar, talks on the next installment of bailout money are again stalled as the parties argue over ineffectiveness of the reform agenda, the need for debt relief, the IMF’s reluctance to participate in the bailout package, and several other issues. In other words, we’re back where we started.

As we continue to follow the latest twists and turns in this unfortunate story, we thought it made sense to take a step back and assess the situation from a higher vantage point. This aim of this article is to give readers a high-level overview of the Greek Debt Crisis, outline what has happened since the crisis officially began, and provide some thoughts on what is needed for Greece to get out of this mess.

Greece Crisis Explained: How Greece Got into Its Current Mess

Greece’s modern history is strongly connected to its membership and participation in the European Project. Greece has been part of the European Economic Community (the precursor to the European Union) since 1981, but struggled to join the Euro, the Eurozone’s common currency, as some of the conditions of entry were stringent. Nevertheless it succeeded in 2001, and in a televised New Year’s message, Costas Simitis, then prime minister, pronounced that “inclusion in EMU ensures for [Greece] greater stability and opens up new horizons.”

In many ways, Eurozone membership has been beneficial for Greece. A look at GDP growth since membership (Chart 1) shows how the economy has grown nicely since acceding to the monetary union (only to radically revert its course after the Global Financial Crisis of 2008). More importantly, one can see how Eurozone entry was followed by a fairly healthy dose of “economic catch-up” relative to other Eurozone countries (GDP per capita relative to the EU average appreciated from the mid-80% mark in 1995 to the mid-90% mark right before the Global Financial Crisis), an encouraging sign regarding membership’s effect on the Greek economy.

With the benefit of hindsight though, membership has had some negative unintended consequences that can arguably be considered to have contributed to the current crisis—put simply, membership of the Euro plastered over the more deep-rooted and severe economic malaise that the country was experiencing.

A Mentality Change Is Needed

Despite the slew of negative news, we continue to believe that the situation could turn and eventually improve. But for this to happen, a number of things need to come together. Most of the important reforms that the country needs to undertake have already been enacted, if not implemented. Some of these, like opening up closed professions (more than a hundred with stringent entry restrictions and administratively set pricing eroding overall competitiveness) are slow burners and will take time to seep through.

However, despite the various structural reforms that we’ve highlighted above, Greece’s uniqueness lies in that it never truly embraced the need for reform, which it undertook only grudgingly, partially, and with much delay. What is fundamentally needed is a government that will take ownership of the reform agenda and instill a modicum of stability and good execution.

Perhaps a bit odd—but in our view, informative—example of the deficiencies in the current political class relates to the prevalence of smoking in public, and even enclosed public spaces. One walk around Athens is very revealing—most visitors cannot believe that smoking in public places is actually illegal. TV footage of the health minister smoking while addressing parliament, for instance, did not raise any eyebrows amongst Greeks. Clearly, this is not of any economic consequence, but its value lies as an illustration of the disregard Greeks, including the country’s government, harbor for their own laws. It is thus no wonder that the first review of the third Adjustment Programme was completed more than a year behind schedule. Continued delays and uncertainty compound the cost.

In a recent event, Deputy Economy and Development Minister Stergios Pitsiorlas perhaps summed it up best, with, “I believe that the biggest structural change that must be made in our country is a change in culture and this concerns us all.”

Ultimately, putting politics or economic theory aside, most will agree that this crisis needs to come to an end. At the end of the day, recent years have taken a severe toll on the Greek population. Greece is now the third poorest country in the EU, behind Bulgaria and Romania, and recent Eurostat data shows that more than 22% of the population were “materially deprived” in 2015. And while poverty figures have been dropping sharply in the ex-communist Balkan states, Greece’s numbers have doubled since 2008.

So unless something is done soon, the Greek situation may evolve from an economic crisis to a humanitarian one.

This article has been edited for length and clarity and the summarized version has been published with the permission of @TOPTAL  You can see the original, un-edited text of the article with all links, comments and graphics here.

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