1. William Duncan
Professor
The Economic Effects of Spain’s Membership in the European Union
April 22nd, 2015
An Investigative Approach to Greece’s Debt Crisis
History is taught in school not as a way to be good at trivia, but so that we as
humans can evaluate our past to learn from past positive and negative experiences.
We learn about what causes wars so that in the future, we have the opportunity to
recognize patterns in history and avoid a bloody repetition of dark events.
Economics works on the same level. It is important to critically observe economic
events to identify and understand patterns that lead to dangerously poor economies
so that we can learn what behaviors to avoid and how to recover from these
situations. This report will note the importance of learning from the past by
critically analyzing the current condition of the Greek government’s deficit and debt
crisis.
In order to gain a full understanding of an event, one must grasp the past and
present context along with what has been done to remedy the situation. As of 2014,
according to Economist.com, Greece is facing a government gross debt close to
175% of its GDP, compared to a little fewer than 100% of GDP of the rest of the Euro
area. The country’s Long-term unemployment as a percentage of total unemployed
has grown from slightly over 40% in 2008 to almost 80% in 2014, compared to 40%
to a little above 50% in the same time span for the rest of the Euro area. Median
income for the Greek population has fallen from €10,000 while in the rest of the
2. Euro area, median income has grown to roughly €17,500. Also, the percentage of the
total population at risk of poverty in Greece has increased as well from sub-30% in
2008 to over 35% in 2014 likened to just a slight increase in the rest of the Euro
area ("The Agony of Greece." The Economist.)1. As far as the structure of the Greek
economy, the largest sectors of production include trade, transport, and
communication (28.3%), Financial services and business accounting (20.7%), and
public services (18.9%), while neither agriculture, manufacturing, nor construction
account for higher than 15.7% ((Page 3, Table 2) Barcellan, Roberto. Greece: The
Twelfth Member of the Euro-zone.).
The next step in a historical-economic investigative process is how Greece
fell into their current situation. Even before January 1st, 2001, when Greece joined
the European Union, “Greece was living beyond its means… After it adopted the
single currency, public spending soared.” Compared to the other members of the
union, “Public sector wages…rose 50% between 1999 and 2007 – far faster than in
most other Eurozone countries” ("Eurozone Crisis Explained." BBC News. BBC
News). Due to an epidemic of tax evasion and irresponsible government
overspending, the Greek government budget deficit grew exponentially; in 2010,
“Greek officials came clean about the true state of their country’s public
finances…the budget deficit was more than 10% of GDP” (Feldstein, Martin. "The
Greek Budget Myth."). On top of that, the country had still not recovered from the
debt incurred from paying for the 2004 Athens Olympics as well as the Greek
government concealing much of its borrowing to meet the maximum 3%-of-GDP
that is required by the European Union. Since the country covered up much of its
3. borrowing, it was unprepared to deal with the “global financial downturn” and
forced into a circumstance where “debt levels reached the point the country was no
longer able to repay its loans, and was forced to ask for help from its European
partners and the IMF in the form of massive loans” ("Eurozone Crisis Explained.").
Since 2010, the European Union and the IMF have worked together with
Greece to solve the country’s financial crisis. “In May, 2010, the European Union and
IMF provided 110bn euros ($140bn: £88bn) of bailout loans to Greece to help the
government pay its creditors.” Yet, the massive bailout loan proved to be
inadequate, as another 130bn-euro bailout was given early 2012. In addition to the
two loans, “the vast majority of Greece’s private-sector creditors agreed to write off
about three-quarters of the debts owed to them by Athens. They also agreed to
replace existing loans with new loans at a lower rate of interest,” which has reduced
an extra 40bn euros from the country’s debt. For lending all this money, the EU and
IMF have requested that Greece enact “a major austerity drive involving drastic
spending cuts, tax rises, and labour market and pension reforms” ("Eurozone Crisis
Explained."). In the most recent election, Greek voters determined they want to stay
in the Euro. On February 20th, 2015, “the finance ministers of the Eurogroup
reached an agreement with Greece’s government to extend the struggling
economy’s bail-out, which was scheduled to expire on February 28th, 2015.” This
deal aided Greece with another €7.2 billion, assuming the country meets specified
conditions ("The Agony of Greece.").
The current Greek financial crisis has been compared to the U.S. recession of
2007 to 2009. Comparatively, the unemployment rates of both economies took a
4. major hit: the United States’ unemployment rate almost doubled from a bit over 4%
in 2007 to around 10% in 2009 (Statistics, U.s. Bureau Of Labor. "The Recession of
2007-2009."), while Greece has seen its unemployment rate skyrocket from 7.8% in
2008 to 26.5% in 2014 ("Eurostat - Tables, Graphs and Maps Interface (TGM) Table.").
Another indicator of economic status is GDP per capita. When the U.S.’s housing market
crashed in 2007, the GDP per capita growth as a percentage was 0.8%. By 2009, the GDP
per capita had reduced to -3.7%. Comparatively, the GDP per capita growth of Greece at
the start of their financial crisis in 2008 was -0.7%, which fell to -8.6% in 2011, but has
improved since the bail-outs of 2012 to -2.8% in 2013 ("GDP per Capita Growth (annual
%).")
In order to properly analyze and improve historical or economical
occurrences, a look into how similar incidences were handled is necessary. We will
continue to compare the Greece crisis to the 2007-09 U.S. housing market recession.
The United States government passed two acts in 2008 and 2009 called the
Emergency Economic Stabilization Act and American Recovery and Reinvestment
Act, respectively. Conditions had worsened so much by 2008 that
“The massive investment services company Lehman Brothers filed for
Chapter 11 bankruptcy protection… A final bill (The Emergency
Economic Stabilization Act) was developed in early October which
created TARP, a program that authorized the United States Treasury
to spend up to $700 billion to purchase trouble assets both
domestically and internationally.” (Statisitcs, U.s. Bureau Of Labor.
"The Recession of 2007-2009.")
5. With the inauguration of President Obama, responses to solving the financial
recession were speedy and comprehensive. Within 30 days of taking office,
President Obama signed the Recovery Act, announced “a framework for a new
financial stability plan within three weeks,” implemented “key steps of that plan
within four months of taking office, including the stress test, new housing measures,
support for businesses and small banks and efforts to restart securities markets that
support consumer lending,” along with supporting the automotive industry that had
to be bailed out. The President’s used the Troubled Asset Relief Program (TARP) to
support the aid to those impacted by the housing crisis. As of 2013, the Federal
Government of the United States “estimates by the Congressional Budget Office
projected the TARP program would cost over $350 billion, Treasury has already
received nearly $422 billion in total cash payments from the government’s
investments in TARP and support for AIG” ("The Financial Crisis: Five Years Later."
Antitrust Law Journal).
While Greece has shown minor improvement in its economic standing,2 the
country still has a long way to go for full economic recovery. As shown in chart #2
below, Greece has made strides increasing its annual percentage of GDP per capita
growth. However, as of 2014, unemployment rates have continued to rise3. In my
opinion, possible courses of action that could benefit the Greek economy would be
to increase exports, focus on small businesses, and reform tax enforcement laws to
make tax evasion more difficult and have more severe punishments for said evasion.
8. Works Cited
"The Agony of Greece." The Economist. The Economist Newspaper, 4 Mar. 2015. Web.
13 Apr. 2015. <http://www.economist.com/blogs/graphicdetail/2015/03/daily-
chart-0>.
Barcellan, Roberto. Greece: The Twelfth Member of the Euro-zone. Rep. Eurostat, n.d.
Web. <http://ec.europa.eu/eurostat/documents/3433488/5416653/KS-NJ-01-
002-EN.PDF/cd2164a1-89ac-4ccd-a470-9ce33c4a8291?version=1.0>.
"Eurostat - Tables, Graphs and Maps Interface (TGM) Table." Eurostat - Tables, Graphs
and Maps Interface (TGM) Table. N.p., n.d. Web. 13 Apr. 2015.
<http://ec.europa.eu/eurostat/tgm/table.do?tab=table&init=1&language=en&pc
ode=tipsun20&plugin=1>.
"Eurozone Crisis Explained." BBC News. BBC News, 27 Nov. 2012. Web. 13 Apr. 2015.
<http://www.bbc.com/news/business-13798000>.
"Eurozone in Crisis Graphics: Deficit." BBC News. Eurostat, n.d. Web. 13 Apr. 2015.
<http://www.bbc.com/news/business-13366011>.
Feldstein, Martin. "The Greek Budget Myth." Project Syndicate. N.p., 27 Nov. 2013.
Web. 13 Apr. 2015. <https://www.project-syndicate.org/commentary/martin-
feldstein-explains-why-reports-of-the-greek-budget-deficit-s-elimination-are-
much-exaggerated>.
"The Financial Crisis: Five Years Later." Antitrust Law Journal (2013): n. pag.
Www.whitehouse.gov. National Economic Council, Sept. 2013. Web.
<https://www.whitehouse.gov/sites/default/files/docs/20130915-financial-
crisis-five-years-later.pdf>.
9. "GDP per Capita Growth (annual %)." Worldbank.org. The World Bank, n.d. Web.
<http%3A%2F%2Fdata.worldbank.org%2Findicator%2FNY.GDP.PCAP.K
D.ZG%3Fpage%3D1>.
O'Brien, Matt. "Greece’s Poor Are Back to Where They Were in 1980." Washington
Post. The Washington Post, 10 Apr. 2015. Web. 13 Apr. 2015.
<http://www.washingtonpost.com/blogs/wonkblog/wp/2015/04/10/greeces-
poor-are-back-to-where-they-were-in-1980/>.
Report by Eurostat on the Revision of the Greece Government Deficit and Debt Figures.
Rep. N.p., 22 Nov. 2004. Web.
<http://ec.europa.eu/eurostat/documents/4187653/5765001/GREECE-
EN.PDF/2da4e4f6-f9f2-4848-b1a9-cb229fcabae3?version=1.0>.
Statisitcs, U.s. Bureau Of Labor. "The Recession of 2007-2009." The Recession of 2007–
2009: BLS Spotlight on Statistics (n.d.): n. pag. US Bureau of Labor Statistics,
Feb. 2012. Web.
<http://www.bls.gov/spotlight/2012/recession/pdf/recession_bls_spotlight.pdf>
.
