Greece is just recovering from a severe economic recession, and it will take several years to consolidate economic growth and return to pre-crisis levels. But now that the worse seems over, various opportunities open up for Greece. The degree to which it will be able to manage this combination of challenges and occasion exploit will determine its course in the decades ahead.
The Financial-Economic History of Greece
Greece has a turbulent financial history marked but repeated bankrupts. Since its independence was recognized in 1830, it experienced five defaults, the last of which took place in 1932. Greece contracted its first debt from Great Britain even before becoming independent, as a mean to finance the armed insurrection against the Ottoman Empire. Unable to fully repay the interests for this loan, the Greek state had to declare its first bankruptcy while the War of Independence was still ongoing. Since then, it often contracted debts with foreign powers just to repay previous ones. A recurrent pattern can be identified in these crises. Greece received foreign loans, whose terms were not always advantageous; but it failed to repay debts and ended up declaring bankruptcy. The precondition for debt restructuring or cuts from foreign creditors was to apply austerity measures such as reducing government spending and imposing new taxes, which ultimately resulted in financial stabilization and readmission to international credit markets. Soon, investments and loans started flowing in again as foreign lenders were disposed and even eager to provide funds; but this always resulted in unsustainable levels of debt. Combined with domestic problems such as government overspending and corruption, this led to another debt crisis, thus restarting the cycle. A notable even occurred in 1898, when an International Committee was set up to monitor Greece’s public finances; thus anticipating the role of the EU institution in the most recent recession. The last default in 1932 also presents notable similarities with the recent situation, as that that crisis followed a major global-scale financial crunch; namely the 1929 Wall Street collapse.
After suffering huge human and economic losses during WWII and the Civil War that followed it, Greece managed to settle most of its external debt and experienced an exceptional economic growth; also thanks to US aid received via the Marshall Plan. It built infrastructures and promoted industrialization, the living conditions of its citizens greatly improved and its GDP growth rate was one of the highest in the world, second only to countries like West Germany or Japan. During this period, which goes roughly from the early 50s to the mid-70s and that reached its apex in the eight-year rule of Prime Minster Konstantinos Karamanlis of the New Democracy party between 1958 and 1963, the debt/GDP ratio fell to a record-low of 9.7% in 1959; and continued oscillating around 20-25% until the early 1980s. But since the Socialist Party (PASOK) took power it started rapidly growing, stabilizing at a high level of about 100% in the 90s and early 2000s. The return to power of New Democracy in 2004 did not change this course. This massive surge of public debt was largely due to uncontrolled and unproductive government spending combined with the effect of an economic slowdown plus structural inefficiency and lack of transparency, especially in the public sector. Yet, Greece achieved its objective of joining the Eurozone since its beginning in the 1999-2002 period; even though it did so by dissimulating the real entity of its debt; as otherwise the discrepancy from the financial stability criteria established by the 1992 Maastricht Treaty would have been too high for its admission. At that point, things started getting alarming, and Greece itself warned that the situation of its public finances was worse than it appeared; resulting in the country was put under observation by the EU Commission in 2005.
The 2008 US financial crunch had world-spanning effects; and in the EU it shook the very idea of European integration. The refusal of the US government to bailout Lehman Brothers resulted in the latter’s bankruptcy, which had chain effects on the world’s financial markets. States acted to prevent the collapse of major financial companies, as this would have had detrimental repercussions on national economies. But soon, this raised concerns over the ability of states to repay their own public debt; especially over those Eurozone states having the bigger debt/GDP ratio. Among them Greece stood out with its huge debt of more than 120% of GDP. This was the result of a combination of factors. The introduction of the Euro had caused wages to rise, thus deteriorating Greece’s competiveness. The trade balance went negative and the government deficit also reached 15% of the GDP in 2009. As the crisis struck the EU, loans from other countries begun to decline and their interest rates grew, meaning that Greece could no longer finance its deficit via cheap external debt. Moreover, while joining the Eurozone increased financial credibility and favoured trade thanks to lower transaction costs, it also deprived the country of its monetary sovereignty. Consequently, Greece could not counter the effects of the crisis by depreciating its currency; even though this would have been just a short-term solution.
At the height of the crisis, Greece found itself in a serious standoff with foreign investors over the terms of debt restructuring and cancellation. The so-called Troika, formed by the European Commission, the European Central Bank and the International Monetary Fund, demanded Greece to adopt harsh austerity measures to reorganize its finances as a precondition for a bailout; similarly to what had happened in previous cases. In this, Germany played a major role, because its banks owned the largest share of the Greek public debt. As such, Angela Merkel’s government acted primarily to protect the interests of Germany and its financial actors, who would have suffered significant losses in case of a Greek default with negative consequences for the German economy. Yet, given the relative small size of the Greek economy, a default would not have been fatal for the Eurozone; but Germany’s very decision made the situation worse. Berlin has always been very unwilling to implement expansionary economic policies to boost growth in the EU and assist countries facing economic troubles like Greece. For this reason, initially it insisted for a bail-in, which would have meant making private creditors withstand the costs of restructuring the Greek debt. However, Germany’s stance greatly undermined the market’s trust by creating fears among investors, thus further worsening the situation for Greece and the EU.
In the end, Greece had no choice but to implement the austerity measures demanded by the Troika; and in exchange it obtained three bailout programmes which included a cancellation of 100 billion euros of debts in 2011. Nevertheless, Greece plunged in a deep economic recession. Its GDP shrunk, and so did salaries. Unemployment grew to reach about 27% of the workforce in 2013, and it still remains above 20%. Living conditions worsened for large swathes of the population. Today, the government budget has returned in surplus, but due to the contraction of the economy the debt/GDP ratio has actually increased to a current level almost 189%.
But even more importantly, the crisis caused tremendous social harm, disrupting the lives of millions and sparking violent protests alimented by anti-EU and anti-German sentiments. This also arose the controversy over German reparations for WWII. Like other states, Greece was plundered by the Germans during their occupation, and it received some material compensation after the conflict in the form of equipment and commodities. But since the US wanted Germany to rapidly recover in an anti-Soviet logic, Greece and other countries were convinced to soon renounce to the remaining reparations. In addition, a 400 million marks loan that the Germans forced Greece to concede during the occupation was not included in the reparations; but today Berlin refuses to discuss the issue. Converting this amount to today’s dollars is very complex, but considering that in 1941 one dollar was worth 2.5 Reichsmark and accounting the changes in purchasing power of the USD, a rough estimate suggests that in 2017 the loan would have been worth 16.6 billion dollars. This is a huge sum, but still small compared to Greece’s 388 billion USD of debt.
What Prospects for Greece?
The acute phase of the crisis is over; yet, Greece will have to deal with its consequences for many years ahead. Its recovery is still shaky, unemployment is a problem and its debt/GDP ratio remains very high. In this context, the result of the 2019 elections and in general the future political orientation of the country is uncertain; as new economic turmoil may have negative effects on political stability and vice versa.
Still, there are also opportunities that Greece can exploit. Lower wages translate into a competitive advantage, and in the post-crisis scene there is plenty of opportunities for investment. More importantly, Greece’s large merchant fleet combined with its location give it the potential to become a Mediterranean trade hub. Being close to the Suez Canal, Greece can be seen as a gateway to Europe for Asian countries. China, in particular, has shown great interest in Greece as part of its “One Belt, One Road” initiative; and COSCO, its state-owned shipping company, acquired the majority of shares in the Piraeus Port Authority. Since then, both the container volume and revenues have greatly increased. Russia has also interests in Greece, because it is a pipeline crossroad: its Trans-Anatolian Pipeline (TANAP) is scheduled to connect on Greek soil with the Trans-Adriatic Pipeline (TAP) to reach Western Europe. Exploration for hydrocarbons in the Eastern Mediterranean is also opening opportunities for Greece, but is also accompanied by greater tensions with Turkey. Finally, as Washington’s relations with Ankara deteriorate, the former is building closer ties with Athens, who can take benefit from this.
Greece remain in complicated situation, but with a careful management it can fully recover. It must pay attention to its public finances, favour domestic saving, avoid contracting external debt, diversify its partners and attract foreign direct investments capable of sparking a positive economic spill-over. To what extend Greece will succeed in doing so will determine its future well-being and its role in international affairs.