The crisis in Greece can be explained using three policy fundamentals: their manipulation of debt-to-GDP ratio as outlined in the Maastricht Treaty of 1999, European austerity policies, and the pillars of fiscal autonomy that were incorporated from America’s financial system.
Greece has been cooking the books ever since joining the European Union and adopting the currency back in 2001 by separating entitlement transfer payments from their overall deficit figures. They basically reclassified their annual deficits by stating they were transfer payments, hiding them on the reports and lacking transparency; it wasn’t until 2009 that their lack of transparency had been revealed. According to the Maastricht Treaty of 1999, which formally spelled out the specifics of joining the Eurozone, a country must maintain a maximum debt-to-GDP ratio of 60% and an annual deficit of no more than 3% of GDP. A 2010 review of their books by an independent auditor revealed that in 2009 Greece’s actual deficit was 15.6% (a 520% discrepancy), which lead to the public knowledge of their financial hardships and ultimately to two bailouts-one in 2010 for €110 billion and the other in 2012 for €130 billion which was spread through various lenders, including the International Monetary Fund (IMF) and European Central Bank (ECB). Greece was given numerous extensions to pay their IMF debt and officially defaulted on their $1.7 billion (€1.55 billion) payment last week, leading to the vote that occurred over the weekend which offered another bailout by the European Union, but would require a serious economic hardship to the country. Greece voted ‘no’, leaving the fate of Greece’s inclusion in the European Union in question.
Where did all of the money go? Entitlement benefits, mostly. Greece’s island of Zakynthos has the highest population density of citizen’s collecting disability benefits for being legally blind (9%), of which these include a taxi cab driver and a construction worker (Angelos, 2012). They also have numerous individuals (almost 40,000) collecting state retirement pensions posthumously. Additionally, they have noted that several individuals are receiving full retirement benefits that are over the age of 100; the authorities are looking into it. Unemployment in Greece has skyrocketed from 7% in 2008 to 22% in 2012, of which 51% are under the age of 25 (Bureau of Labor Statistics).
A leading cause of the unemployment issue is due to the European Union’s austerity program. The long and short of this expectation is for a balanced budget of each member state. It was imposed by Germany and insists on better economic progress in the long run, but has shown to cause high unemployment and a decrease in GDP in the little time that it has been implemented. Germany insists that the austerity experiment will improve everyone’s economy in time, but Greece looks to be the first serious casualty of the experiment. Austerity increases the debt-to-GDP ratio burden of each country and decreases infrastructure spending, causing less opportunity to pay existing debts and economic growth. Accounting is a zero-sum game; if you bring in $5 you can only spend $5. Economics is a little more flexible with spending and it needs to be in order to stimulate the multiplier effect of currency (when you deposit $100 into the bank it is leant out to businesses who then invest in equipment and people, who then deposit money into the bank, etc…). Increasing taxes and decreasing government expenditures takes more and more money out of circulation and decreases economic growth.
It is argued that Germany knew all along that Greece was ineligible to join the Euro currency but was able to let them in through cronyism and cooking the books. This leads to the attitudes of resentment and hostility that we are seeing in the media. Greek people are mad that they must sacrifice entitlements that were rightly afforded to them because of a handshake agreement from 15 years ago that they were not consulted about. Germany is trying to keep pensions and benefits being paid to the Greek people, but the Greeks don’t want to reform their entitlement system or leave the Euro currency. This, mixed with centuries of war and resentment within the two cultures… something has to give in order to avoid a full-out depression in Greece. In the meantime, Europe has taken a page out of America’s playbook and has been throwing money at the situation hoping it’ll fix itself, perpetuating the cycle of corruption and opaque entitlement spending.
In the United States, if one state isn’t doing well economically, we simply move to another state that has more opportunity. Moving from Anchorage, Alaska to San Antonio, Texas may not be easy but it is more than practical for the sake of finding work, and people do it all the time. If Alaska’s unemployment rate begins to climb, people move elsewhere, removing these people from Alaska’s labor market and effectively regaining a balance in the unemployment rate. During the recession, I moved from Buffalo, New York to Key West, Florida for this exact reason and, short of logistics, it was economically smooth. I could access all of my bank accounts instantaneously, my car registration and driver’s license were recognized in Florida, I could speak the language, and my education credentials were recognized. This is not the case in Europe. Even though Europe has the freedom of mobility within its member states; accessing your banking, speaking the language, and transferring you educational certifications is less than smooth. There are also the social issues of centuries of homogeneous living and xenophobia by the older generations. The United States’ currency union has centralized the banking system so that personal finances are not tied to the state which the bank resides and has been insured by the federal government (FDIC) to encourage people to deposit their money in the bank and let it multiply. In Europe, the member state housing the bank reserves the right to confiscate your personal funds and convert it to a new currency overnight. This rule has caused bank-runs in Greece, where everyone is desperately trying to withdraw their cash from the ATM before it is converted into a currency of less value. Bank-runs were the biggest contributing factor to the Great Depression and the American system of banking has since evolved to avoid them. Europe’s policy of decentralized banking has not given people the incentive to deposit their currency in the banks and this is why, if you have ever visited Europe, you’ll notice that it is a predominantly cash society.
The best American example I can think of is Texas. If Texas were to leave the United States and create its own currency, the state would acquire this currency and all debts held would be converted but citizens’ personal finances would still be held in US dollars. It is at the discretion of the individual to convert the currency based on the economic climate of the transition, but they would have control. In Greece, the citizens could wake up one morning and all of their Euros are now worth a lot less simply because they were in a Greek bank. If I were a Greek, I would put my Euros in my mattress, so to speak.
This is an oversimplification of the Greek crisis, but it is difficult to get a handle on the scope and specifics by reading the never-ending onslaught of information being published. The European Union is relatively new and is still battling the social, political, economic, language, and educational hurtles of combining 27 countries that have historically been adversaries. America had the luxury of starting from scratch and had to experience the Great Depression to learn some valuable lessons. Europe is getting there and unfortunately, when you calculate the human factor into economic behaviors the waters become turbulent. It is easy to tell Europe to do things the way we do things in America, but we have our own problems. I give the Europeans credit for trying something new and something that they can truly call the European System of Economics; but how many lives have to be ruined before they decide if austerity is worth the headache? I personally believe in reducing the debt and eliminating deficits, but much like tax reform, nobody has come up with a reasonable and realistic solution, short of letting the current infrastructure collapse, start something new, and trying all over again. Ultimately we would make the same mistakes and have new problems. So all we can really do is learn from our mistakes and keep moving forward.
I hope this breakdown helped explain the crisis and welcome any and all feedback.
Thank you for your time.
Angelos, James, “’Island of the Blind’ Riles a Greek Public Facing Cutbacks” The Wall Street Journal. April 3, 2012
The Associated Press
Brookings Brief: 06 July, 2015
BBC Podcast: 06 July, 2015
Hubbard & Kane (2013), The Economics of Great Power, Simon and Schuster Paperbacks, pgs 204-212