10 years on from the Greek financial tragedy: all's well may end well

October 16, 2018

In 2008, far from the sun kissed streets of Athens, there was a sense of panic and disbelief in a grey New York. Lehman Brothers, the fourth largest bank in America went bust - revealing the extent of a rotten economy decayed by shadow banking and excessive lending.

To be clear, Greece's economic woes didn't start with thousands of people in Florida being given unaffordable mortgage,s but as the maxim goes "When America sneezes Europe catches a cold."

The period running up to 2008 is what the Greek economist Yanis Vakovakis has called "Our summer invasion of Russia period, all seemed to going to plan until the snow started falling". Indeed, there was evidence to suggest that Greece was on the correct economic path. In 2001 Greece join the Euro which was hailed by the European intelligentsia as way of cementing prosperity. (Even Tony Blair flirted with Britain joining the euro despite the Pound Sterling's status as a reserve currency) Furthermore, investors could be reassured by the data on debt being released by the Greek government as an act of transparency.

The facts couldn't lie.

It turns out that Greece had not been honest to the EU and had cheated to meet the entry standards to join the European single currency, formally confessing to this in 2004. So when the Papandreou government also revealed, after the 2008 crash, that the deficit data had been inaccurate it was the last straw for global confidence. Especially as the errors made were not bureaucratic mistakes, but much more profound. Greece's 2009 debt was meant to be €269.3 bn but really it was €299.7 bn, i.e., about 11% higher than previously reported. From here onwards the Greek economy went into a death spiral with downgraded credit ratings and runs on banks.

The remedy for this crisis has been hard for Greece both financial and politically. The country had to be bailed out through loans numerous times by the IMF, EC and the ECB - totalling $346bn. In return Greece had to accept stinging austerity measures euphemistically called a "haircut" to try to cut the nation's debt down.

Every part of Greek Society that relies on public spending had to make do with less, thus the vulnerable have been hit hardest. Old age pensions are due to be cut a further 18% next year and there has been a exodus of young people leaving Greece. To add to the sense of tragedy- like a "Sword of Damocles" hanging over the whole crisis, was Grexit. The prospect of Greece throwing it's hands in the air and turning it's back on the euro, returning to the drachma and leaving the European Union itself. (Good thing we don't have deal with anything like that these days )

Politically proud, the Greeks over the past 10 years have been the butt of jokes and have felt embarrassed for receiving international help which is unsurprising. Britain is still haunted by it's image of being the "sick man of Europe". Notably the recollection of Dennis Healey asking the IMF for money in 1976 with his "begging bowl" is still a source of national shame. Naturally therefore Euroscepticism has increased in Greece, particularly vented in an anti-German sentiment last seen in the war. Even the idea of the EU being a German conspiracy is gaining traction with Greece’s Dimokratia newspaper; publishing a photo of Angela Merkel as Hitler.

In this context Alexis Tsipras came into power in 2015, a fierce critic of austerity, but has largely followed through with austerity in return for bailouts. He has recently declared after finalizing bailout number three; "Greece is once again becoming a normal country." His point is a politically expedient one that ignores the big picture. It's true to say that the nations GDP increased to 1.4% in 2017, but agreeing to defer debt repayments sounds a lot like kicking the can down the road. Moreover his statement falls into the simplistic conclusion about the Greek financial crisis - ‘If only those "lazy Greeks" would diversify their economy away from shipping and tourism and be more like Germany, they wouldn't have had to have gone through such hardship. ‘

Yet in the United States there is not an expectation for every state's economy to be the mirror image of California’s. The real blame lies with the structural problems of the EU. It has a single currency, but no fiscal transfer mechanisms for richer member states to give money to the poor ones. California and Massachusetts give money through a variety of ways to other states, including in welfare programmes.Imagine if this had occurred in Greece? It could have helped alleviate suffering.

States in America don't view this money as a loan, unlike the EU, IMF and ECB because they believe in the idea of one America and one union.

This is just one economic reform Europe needs and it may one day be achieved slowly but surely. Macron is presently trying to get a common EU budget - A good first step.

 

10 years on from the Greek financial tragedy: all's well may end well.

 

Image: Pexels

 

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