Does the news coming in from the European Union (EU) sound Greek to you? Between Salman Khan and all the economists on TV, are you confused whenever someone says “bailout”? We at Guardian20 feel your pain: here’s a chronological (and relatively maths-free) account of just how Greece came to sit atop a €320 billion debt that it has seemingly no way to repay.
Genesis and Warning Signs
In January 1999, the euro was adopted as a common currency by a group of EU nations for the first time; it is now the accepted currency for as many as 19 nations. There are certain obvious advantages to having one currency across a tightly-knit bunch of countries: ease of trade, increased international bargaining power in trade standoffs and so on. However, as several economists warned us back then, there is one big roadblock as well: democracy. None of the 19 EU governments are, at the end of the day, immune to the vagaries of electoral politics.
Therefore, they have found themselves in an unprecedented position; matters like budget and taxation are left to the individual governments, but all the really important stuff: money, immigration and so on are subject to consensus among the EU nations. This division of power has led to situations where there are contradictory mechanisms at play within some of the smaller EU economies, like Greece and Cyprus.
The way it worked was simply this: while the bigger EU countries like Germany benefitted from reduce trade costs, the weaknesses of the system were suffered by smaller economies like Greece, where labour costs were, in general, much higher (bear in mind that larger countries also attract more immigrants, which means an abundance of cheap labour). Thus, Greek’s trade deficit (the gap between a country’s income and its expenses) began increasing at an alarming rate. And while a country in such an untenable position always has a last-gap, pressure valve option of letting its currency depreciate, this choice is not on the table for an EU nation.
A Historical Burden
Greece managed to rid itself of a fascist military junta in 1974 and succeeding left-wing governments went a little overboard in restoring the balance to the sections of the society that had been cut off from the economy. As a result, the next 15-20 years saw heavy government spending on the military, public sector jobs, pensions and other benefits. It is understandable that in a country where doles or benefits for the unemployed are on the higher side, finding cheap labour is always going to be a problem; today, unemployment figures have crossed 25% in Greece, despite the benefits being rolled back in favour of “austerity measures”.
Another interesting fact here is that Greece, with about two-thirds of the population of Delhi, is the second-biggest defence spender in the world (by GDP percentage); only America spends a greater chunk of its GDP in arms. Unsurprisingly, America also sells Greece almost half of its considerable military cache.
These spending patterns give you a little bit of background as to why Greece found itself in the red.
The first major blow to Greece’s economy happened in 2008, with the beginning of the Wall Street crisis. In 2009, Greece announced that it had been understating its deficits for years: in economic terms, that’s what’s called a d**k move. Simply put, if you have a ten-dollar debt, you can’t go around announcing that you’re only five bucks in the red, so could someone please lend you a fiver? What this does is place the poor wretch (who did lend you the fiver) in the dock with you even as your own debt escalates.
By late 2010, most lenders had washed their hands off debts to Greece. There were those who betted on a comeback, buying Greek bonds and so on. They were the worst hit in the years 2010-15. By the end of 2010, it seemed as if Greece’s bankruptcy declaration was imminent. It was then that the big three: the International Monetary Forum (IMF), the European Commission (EC) and the European Central Bank decided to announce the first of the Greek bailouts, which eventually stacked up to around €240 billion at last count. (In the overall debt equation, Greece owes around €57 billion to Germany, €43 billion to France, €38 to Italy and €25 to Spain: its four biggest creditors.)
The Loan Ranger
Hindsight is always HD, as they say. But it has to be said that the bailouts hurt Greece badly. They now havea newer, bigger debt to pay off. The economy has shrunk every year for the past five years; all its engines have been roaring towards paying off their debt. The Wall Street crash of 2008 happened because rogue bankers were only too happy to lend any amount of money to people whose ability to pay the debt back was doubtful, at best. The Greece crisis can be partially explained by the EU’s trigger-happy loan of 2010: instead of acknowledging that Greece already had a bad loan, they lent them an even bigger amount, in effect behaving like some of the most disreputable banks the world has ever known.
The Big Questions
Greece is in no position to pay back its debt, which means that in all probability, it won’t. In a market economy, debt does not equal a guarantee that the lending party will necessarily recover its money. Debt equals risk, the risk that your money may not be returned and it’s this risk that is rewarded with a premium, namely interest. More than 50 years ago, Greece was at the other end of the table, having just written off a sizeable debt that Germany was reeling under.
And because one can’t see the seething Angela Merkel repaying that historical favour, the most likely endgame here is Greek removing itself from the EU: which in itself is a problem, because existing legislation has no provision for an exit. The EU did not see this coming in the summer of 1999, and the bitter fruits of that season are being harvested today.