To say the Greek economy has struggled over the past decade would be an understatement. Following the Great Recession of 2007-8, the state of the Greek economy was in calamity and by 2009 their budget deficit had exceeded 15% of GDP. The previous government had deficits that were greater than had initially been stated with the biggest two sectors comprising their GDP: tourism and shipping, at a standstill. What followed was a GDP decline exceeding that of the US Great Depression in the 1930s, with the unemployment rate reaching a peak of 27% in 2012. The causes of this crisis are plain to see: fiscal mismanagement and a lack of control over monetary policy, with the results having catastrophic impacts on Greek civilians.
Starting from the 1990s, the Greek government reported deficits far lower than their actual value. This culminated in the Greek government debt as a percentage of GDP rising from 23% in 1980 to over 100% by 1996. This was a problem when Greece wanted to adopt the Euro as their currency, as this figure had to be below 60%, stipulated by the Maastricht rules on deficits and debt. Luckily for the Greeks, Goldman Sachs stepped in with a currency swap program to resolve this issue.
To raise money in overseas markets, countries frequently issue bonds denominated in other currencies. The Greek government issued debt in Dollars and Yen to access these foreign markets. Governments typically engage in currency swaps to protect themselves from exchange rate volatility. In this case, Greece negotiated a currency swap with Goldman based on the “historical implied foreign exchange rate.” What this meant was that the foreign exchange rate at the time wasn’t used, but instead one with a weaker Euro. This allowed Greece to exchange its Dollars and Yen for a greater amount of Euros, reducing their balance sheets and paving the way for the adoption of the Euro as their currency.
The Greek budget deficit during all of the early 2000s exceeded the Maastricht limit of 3%, reaching 7.9% in 2004. This was due to a combination of massive tax evasion problems that had plagued the nation for decades, alongside excessively generous public sector pay and bonus packages. With this said, the ever-increasing budget deficit wasn’t a major issue for Greece during the early to mid-2000s as the economy was growing at a record pace. GDP grew over 150% between 2000 and 2008. However, all this growth and prosperity came to an abrupt end when the sub-prime mortgage crisis in the US triggered a Global Recession.
The Great Recession
The Great Recession of 2008 negatively impacted Greece worse than most countries. The Athens Stock Exchange plummeted by 65% that year, as tourism and shipping slowed down. In 2009, it was revealed that its budget deficit wasn’t the 6.7% of GDP initially reported that year but instead had reached 15.4%. In this way, the growing budget deficits suddenly came to light, as investors feared whether Greece could repay its debts. This led to borrowing costs skyrocketing, as investors demanded higher interest rates on government bonds. This created a vicious cycle, in which these higher interest rates made Greece’s deficit problem worse, leading investors to demand even higher interest rates. As the Euro’s Monetary Policy was conducted by the ECB, Greece could neither reduce interest rates nor devalue their currency to relieve themselves of this calamity. This eventually culminated in the country’s credit rating being downgraded to Junk, as Greece’s Debt-to-GDP ratio reached 127% in April 2010.
Greece, on the brink of default, was aided by the Troika – comprised of the IMF, European Commission and European Central Bank. They decided to lend Greece €110 billion as part of a bailout package in May 2010. The intention was to compel Greece into enforcing austerity measures, a combination of raising taxes and cutting spending, whilst ensuring that they pay off creditors. These austerity measures were implemented to stimulate economic growth, restoring confidence in the Greek economy as the budget is brought from deficit to surplus. This worked to some extent, insofar as the deficit decreased from €10 billion in 2009 to €3 billion in 2011. However, these austerity measures also triggered a decline in GDP; aggregate demand fell as pensions were cut and taxes rose, culminating in the debt-to-GDP ratio rising to 172%. This created another downward cycle as more businesses failed due to fewer customers, leading to fewer jobs, thus depleting tax revenues.
In this way, austerity was self-defeating and so the Greek economy failed to recover, with the Troika deciding to loan Greece another €130 billion in 2012, to resolve these problems. This had the Greek government committed to further austerity measures, with even steeper spending cuts and tax rises implemented. In 2014, 2 years after these reforms had been implemented, the Greek government reported their first surplus in over a decade, a sign that the economy was finally recovering. GDP growth also went into the positive as it reached 0.7% that year. However, this economic recovery quickly ground to a halt, following the election of the Syriza Party in 2015
In early 2015, an anti-austerity party was elected, promising to renegotiate debt repayment terms with the Troika. This led to creditors, who had started to trust the Greek government to demand higher interest rates. A repeat of the earlier crisis followed, albeit to a lesser extent, leading to Greece failing to miss its €1.5 billion payment due in June 2015. The Greek Central Bank capped how much citizens could withdraw from their bank accounts, thereby increasing tax revenues through greater credit and debit card usage.
In the following month, despite their rhetoric in the election campaign, the newly elected ‘anti-austerity party’ passed further austerity measures. This continued for the next 3 years, with the government implementing more austerity measures to secure. The bailout program finally ended in August 2018 as the state of the Greek economy had stabilised with unemployment falling in each of the preceding 3 years and GDP growth in the positive.
The Greek economic crisis was precipitated as a result of an unnecessarily reckless fiscal agenda pursued by the Greek government in the decades leading up to the Great Recession, alongside the inability to reduce interest rates and pump more liquidity into the economy. It demonstrates the failure of a currency union and the importance of maintaining fiscal responsibility in times of economic stability.