News this summer was dominated by the near epic tailspin of the Greek economy. But for those of us not fiscally minded, it was perhaps tough to understand exactly what was going on in that Mediterranean seat of civilization, and also to know why we should care. With that in mind, here is a guide. Think of it as the program handed to you by the usher as you settle into your comfortable, plush seat to watch a particularly abysmal and depressing play.
Greece’s economy hasn’t been in mint condition for some time now, for several different reasons, both large and small. Chief among them is the fact that Greece had a major trade deficit on their hands which, simply put, means that the country was consuming far more than it was producing and thus needed to borrow quite heavily from other countries. Simultaneously, it was confronting a massive tax evasion problem, with some politicians dubbing the creative banking it required “a national sport”–up to thirty billion euros a year going uncollected. In fact, Transparency International has ranked Greece the most corrupt country in the European Union, largely due to the ease and pervasiveness of tax dodging.
The second major factor behind this rating is that from 2004 – 2010, the Greek government concealed and misrepresented its financial statistics. When new Prime Minister George Papandreou released the actual statistics, the numbers were shown to be far worse than was originally thought. During the years prior to the collapse of its economy, the government ignored the low levels of available cash and simply increased its borrowing. This is much like moving on to a new credit card when you’ve maxed out your old one instead of wisely reforming your financial lifestyle.
Things didn’t get any better for Greece with Lehman Brothers’ collapse in 2008, which touched off a global financial meltdown now called the Great Recession. Greece’s fiscal mismanagement led to its government’s credit being downgraded to “junk bond” status since banks felt there was a high risk of “sovereign default” (when a country is unable to pay back its loans.) This made it even tougher for Greece to get loans in an already cash–strapped atmosphere. All of this combined to produce a crippling cocktail of high unemployment, a staggering amount of government debt and homelessness for poverty stricken citizens.
Faced with no money and a country still to run, Greece had a big problem. The rest of the Eurozone saw the unpleasant ripple effects of Greece’s financial instability, and knew something needed to be done. Enter the Troika. Meaning “a set of three” in Russian, the Troika consists of the European Commission (the executive arm of the European Union) the European Central Bank (ECB), and the International Monetary Fund (IMF).
The Troika brought good news: a bailout for Greece, in the form of 110 billion euros and aid through July of 2013. In return, Greece was required to implement austerity measures (cutbacks) and privatize some government assets, which means that its ownership would transfer from the government to private holders.
A year later, the Troika authorized a second bailout, this time for one 130 billion. In addition, all countries owed money by Greece agreed to lower the interest rates on the loans – costing them a loss of over half their expected payout.
The 2015 elections showed the mood of the populace: tired of austerity measures, and fed up with tax hikes, the Greek people voted en masse for the Syriza party, with the results showing them just two seats short of an absolute majority in Parliament. The Syriza party’s platform was one of anti-austerity, and with Alex Tsipras at the helm, the Greek public was looking to soften the cutbacks while still keeping the bailout money. Faced with the looming possibility of a sovereign default and the total collapse of the Greek banking system, which could lead to a “Grexit”––or “Greek exit” from the Eurozone–the Troika granted a four month technical extension on the bailout plan, during which time they began negotiations with the Greek government. These were broken off on July 27 when Prime Minister Tsipras announced that a referendum vote would take place on July 5, in which the Greek people would vote whether to accept or reject the terms of the bailout package.
The vast majority of the public voted to reject the terms, causing worldwide financial markets to tumble and increased anxiety about the possibility of a Grexit. On July 13, a tentative agreement was reached between the Greek government and the Eurozone leaders, but more negotiations are necessary to finalize the deal. Additionally, the IMF is not putting any money into the Eurozone’s eighty–six billion euro bailout package, saying that the bailout is not enough to right the economy, and that a haircut–or forgiveness of some of the debt–is going to be necessary. Not surprisingly, other Eurozone countries who have loaned large sums to Greece aren’t thrilled with this idea.
In Aristotle’s critical study of the Greek tragedy, he underscores the importance of the element of catharsis, or cleansing, that takes place by the end of the play. Let’s hope that such a catharsis is possible for the floundering Greek economy. Otherwise, this will be a tragedy indeed.