Greece today is still reeling from its reckless financial decisions from decades earlier.
On September 29th, 2008, Greece, along with the rest of the world, saw its economy fall into turmoil. But while the world has (relatively speaking) seen its economies slowly stabilize since, Greece has fallen further into the abyss. That’s because the financial crisis of ’08 didn’t cause the economic downfall of Greece; it exposed its underlying problems that its leaders had been putting off for decades.
The crash of the Greek economy was decades in the making, and can be traced back to the mid-1980s. After decades of rapid growth in the region, the GDP started to level off, and inflation was reaching concerning levels. To combat this, the Greek government implemented expansionary fiscal policies, where it lowered taxes and increased government expenditure.
This fiscal route of deficit spending was a controversial attempt to put a halt to the sputtering GDP and rising inflation, and wasn’t seen on this level since Franklin Delano Roosevelt used it to fund his New Deal. It was a high-risk, high-reward policy implementation, but did little to help the GDP or domestic inflation, while still failing to spur economic growth. And so the downside of this kind of spending reared its ugly head. The national debt skyrocketed, and by 1994, Greece’s public debt as a share of GDP was pushing 100%.
But as important as these fiscal policies were to the collapse, it was monetary policies that ended up being the main cog of the crisis. Because of the still sky-high domestic inflation, interest rates had risen to the point where investors had bought up so much of the domestic currency, the drachma, that Greece had to artificially increase the amount of currency in circulation.
And so it goes without saying, but the ’80s were the worst economic period Greece had seen in decades. Per capita GDP growth plummeted to 0.23% per year in the ’80s, compared to 4.64% in the ’70s and 7.9% in the ’60s, while unemployment topped out at 6.7%, a 250% hike from the turn of the decade.
With the value of the drachma plummeting, along with the rest of their financial problems, Greece thought it’d be best to sweep these problems under the rug by joining Eurozone, and switching to the Euro.
But in order to join Eurozone, Greece had to become more economically self-sufficient, and comply to the guidelines set by Maastricht Treaty of 1992. This meant decreasing their public debt as a share of GDP to under 60%, among other things. So, for much of the 1990s, Greece doctored their economic statistics to meet the guidelines of Eurozone, and by 2001 they had been admitted.
But the acceptance was something you’d call a pseudo-admission, as their annual deficit and public debt didn’t come close to the standards set by the Maastricht Treaty. Government officials later admitted that the numbers were curved in order to ensure acceptance. Nonetheless, the switch the Euro provided hope to a country in desperate need of it. The idea was that switching to a currency whose monetary policies were controlled by the European Central Bank would grow the economy and encourage investment through lowered interest rates and lowered inflation.
And believe it or not, this actually “worked” for the period between 2001 and 2008. Investors soon saw Greece as a safe place to invest due it being on the same currency as most of Europe. As a result, the interest rates plummeted, which caused increased spending among consumers.
A mini economic “boom” ensued. Inflation had normalized to the Euro area annual inflation, government bond prices had reached that of Germany, and the annual deficit was teetering around 3-5%, after hovering at 25% a decade prior. It seemed as though the switch to Euro had provided the economic stability and growth that Greece so desperately coveted.
But while the short term economy saw a temporary boost, Greece was still neglecting their underlying fiscal issues. It was inevitable that they’d eventually come to fruition and come back to bite. So the stock market crash of 2008 hit like a ticking time bomb.
Growth stagnated, and with various markets on the decline, Greece was forced to inform the world that it had indeed been manipulating and understating its deficit for well over a decade. The announced 12.6%+ deficit was a far cry from the previously announced 6%. As a result, bond prices soared, and Greece was blocked from all financial markets almost immediately. With nothing to keep the economy stable, Greece was plummeting towards bankruptcy in 2010 before the European Central Bank (ECB) and International Monetary Fund (IMF) provided the first two bailouts, worth a total of over €250 million.
The lenders made it so that Greece would cut out virtually all government spending and programs, and implement some of the highest tax rates in the world to compensate for the deficit. So the money raised through bailouts and increased taxation have been paying off bonds from foreign governments and private investors, rather than a domestic stimulus package. Greece is stuck in a place where its citizens are paying sky-high tax rates, only to have that money go overseas rather than recirculate in the economy.
So before anything that resembles a recovery can take place, the government will have to rid of the mountain of binding debt currently attached to it. The first two bailouts and increased tax rates still weren’t enough for the country to get off of austerity policies, or desperate measures to control public debt. By then, the recession that comes with austerity policies was in full force. The GDP had fallen by 25%, and the unemployment had reached 26% by 2012, the same unemployment rate that the US had experienced at the height of the Great Depression.
But rather than Eurozone relaxing the provided bailout money due to its small impact, a record third bailout was put in place in 2015 to avoid total economic collapse. That being said, this may be the last of its kind. The IMF, one of the biggest lenders in the first two bailouts, was hesitant to fund a third. The rest of Eurozone had the vote on whether to fund the €86 million bailout, without guarantee that IMF would back it.
But in all likelihood, if the situation were to stay dire, or even worsen, and Greece needed an unprecedented 4th bailout, Eurozone and IMF would end up funding it. Acclaimed economists worldwide have predicted that a total collapse of the Greek economy would trigger a worldwide crisis on par with the global crisis suffered after the fall of Lehman Brothers.
Today, despite the record three separate bailouts, Greece’s economy is still stagnated. The international debts still haven’t been paid off, the public debt is sitting at 130% of GDP, and unemployment has been hovering around 20% for years.
However, as dire as the situation is, and how grave the threat of total collapse is, Greece’s currently state is having very little impact on the rest of Europe, and rest of the world. Even before the recession, the Greek economy also accounted for about 2% of Eurozone. And on the world stage, its influence is even less. For example, US exports to Greece account for only .001% of its GDP.
So as it stands, Greece is still reeling due to its reckless financial decisions from decades earlier. And while the situation is devastating for its citizens, it’s having almost no impact on the rest of the world, and will only do so if bailout lenders sever bailout funding.