II Austerity woes: trials and tribulations of debt
The Greek crisis: a critical narrative
Prologue: the biggest sovereign insolvency in history
Although it is difficult to clearly identify a starting point for the Greek crisis, one could say that the crisis, as a major event for the Eurozone and the global economy, really started when Greece announced, at the end of 2009, skyrocketing government and trade balance deficits and government debt. The final figures announced by Eurostat showed: government deficit for 2009 was at 15.4 per cent of GDP up from 9.4 per cent in 2008 and 6.4 per cent in
The crisis probably reached its peak in March 2012, when, ‘after a tortuous process, the majority of private holders of Greek government bonds had agreed by March 9th to trade in their bonds for new, longer-dated ones with less than half the face value of the old ones and a low interest rate. The biggest sovereign-debt restructuring in history allowed Greece to wipe some €100 billion from its debts of around €350 billion.’ A leading London law firm described the event as follows: ‘The bankruptcy of the Hellenic Republic in 2012 was by far the biggest sovereign insolvency in history up until then. The combination of the fact that the bankruptcy involved a developed country and that the second largest currency in the world was threatened meant that those events together were so far the largest episode in financial history’ (Allen & Overy 2012: 5).
The European Commission’s description of the current phase of the Greek Crisis sets the more general framework: ‘Since May 2010, the Euro area Member States and the International Monetary Fund (IMF) have been providing financial support to Greece in the context of a sharp deterioration in its financing conditions. The aim is to support the Greek government’s efforts to restore fiscal sustainability and to implement structural reforms in order to improve the competitiveness of the economy, thereby laying the foundations for sustainable economic growth.’2 In fact, the cure ‘offered’ to Greece in this context was, and still is, very simple: internal devaluation, structural adjustments and management of debt.
Greece was before and during the crisis and is still part of a monetary union, so traditional devaluation is not available as an instrument of economic adjustment. Greeks need to go back to a more sustainable level of wealth through a drastic cut in salaries and pensions, and a significant increase in taxes. Concerning structural adjustments Greece should change the rules of the game internally in order to restart its economy, liberalising sectors of activities that could reshape the Greek economy and society. Finally, the EU/Eurozone and/or under the supervision of the IMF should take over the management, ‘haircut’ of the huge Greek debt.
Greece was, indeed, an extreme case of financial and economic imbalances. However, since the beginning of the global financial crisis, four Eurozone countries (Spain, Portugal, Ireland and Cyprus) and three EU countries (Hungary, Latvia and Romania) have entered into similar adjustment programmes. The European periphery looks like Europe’s/the Eurozone’s subprime. The Greek adjustment programme has been - very probably - a brutal concentrate of the way the EU/Eurozone has chosen to handle the financial crisis as a whole. It looks more and more likely that, with ad hoc adjustments depending on the specific characteristics of each individual country, the Eurozone as a whole will have to restart its economy through relative internal impoverishment, structural adjustments and an aggressive management of the accumulated debt that continues to increase.
A historical summary presentation of the Greek economy in the decades before the crisis could be as follows: ‘During the 1960s and 1970s the (Greek) government was essentially breaking even. The deficit increased dramatically during the 1980s: in each year during that decade, government expenditure exceeded revenue by an average 8.1 per cent of GDP. The deficit remained high during the next two decades. The evolution of the deficit is reflected in that of
the public debt. The high deficits in the 1980s led to a dramatic increase in debt: from 26 per cent of GDP in 1980 to 71 per cent of GDP in 1990. Debt further increased during the next two decades in response to the high deficits, which were high partly because of the interest payments on the accumulated debt’ (Meghir et al. 2010: 5).
This trend became unsustainable, forcing higher borrowing needs, when the net transfers from the EU to Greece fell sharply during the last decade, following the entry of the poorer ex-communist countries to the EU in 2004 and 2007. ‘During 2000-8, Greece’s GDP grew twice as fast as the EU27 average, and its unemployment rate was reduced by twice as much. The high growth translated into high incomes: incomes grew faster in Greece than in most other EU countries. Yet, this growth was unsustainable - as has become painfully evident during the current crisis - because it was not driven by improvements in competitiveness. Indeed, Greece’s competitiveness, which was already among the lowest in the EU at the beginning of the last decade, decreased even further during that decade. For example, in 2002, there were eight EU27 countries less competitive than Greece, and in 2008 there was only one (Bulgaria)’ (Meghir et al. 2010: 22).
Although this historical data is interesting, this kind of presentation fails to address at least two important issues: If all these trends existed for decades, how and why did they become ‘fatal’ only in 2008-2009? If these trends in Greek economic history were unsustainable, how did it happen that they were able to survive for decades, and why did they become ‘fatal’ only within the context of the global financial crisis that started officially when Lehman Brothers Bank filed for bankruptcy on 15 September 2008? If we want to address these kind of questions, we need a different kind of history.