Why is Greece's economy in such a bad state?
June 15, 2011 5:25 PM Subscribe
Why is Greece's economy in such a bad state? What could, or should, have been done to avoid this? How much is a specifically Greek issue compared to a European issue compared to a global issue?
One contributing factor is apparently rampant tax evasion that's left the government unable to meet its financial obligations, along with a healthy dose of corruption.
posted by Rhaomi at 5:31 PM on June 15, 2011
posted by Rhaomi at 5:31 PM on June 15, 2011
Response by poster: Just to clarify: I'm reasonably savvy on the banking crisis. My interest lies in issues like: why has this affected Greece more than the most of countries, and whether being out of the Euro would have made much, if any, difference.
posted by Hartster at 5:32 PM on June 15, 2011
posted by Hartster at 5:32 PM on June 15, 2011
I do believe it is as simple (or complex) as excessive public and private borrowing after the Euro gave them the facade of fiscal stability and apparent credibility. Contributing factors are excessive government wages/benefits, tax evasion, no concomitant increase in productivity vis a vis increases in wages/benefits. I would also guess, like Ireland, that after conversion to the Euro there was excessive speculation and dependence on construction and loans for economic growth.
posted by rmhsinc at 6:08 PM on June 15, 2011
posted by rmhsinc at 6:08 PM on June 15, 2011
This recent opinion piece in the Irish Times gives some historical perspective. But given its source it could be a case of the kettle calling the pot black, or as pointed out in the comments a European version of "Thank God for Louisiana"
posted by Long Way To Go at 6:10 PM on June 15, 2011 [1 favorite]
posted by Long Way To Go at 6:10 PM on June 15, 2011 [1 favorite]
It is basically the same problem all/most governments are having now. Not enough revenue versus too many spending obligations. It is worse for Greece because they never were all that financially strong to begin with, and when their economy was growing, they borrowed MORE money instead of less. They also have a very high debt to gdp ratio, something like 140%. Which means they are paying a lot more (per GDP) just to service their debt. And there does not seem to be any political will to solve the problem.
Basically, if they were a business, they are in danger of going bankrupt. If they were an individual, they would have a credit score of about 340. (Made up number)
In other words, it isn't so much that their economy is that bad, it is that their finances are a shambles.
Fiscally, since they are a part of the Euro and not in charge of their own money, they can't inflate their way out of the problem.
posted by gjc at 6:11 PM on June 15, 2011
Basically, if they were a business, they are in danger of going bankrupt. If they were an individual, they would have a credit score of about 340. (Made up number)
In other words, it isn't so much that their economy is that bad, it is that their finances are a shambles.
Fiscally, since they are a part of the Euro and not in charge of their own money, they can't inflate their way out of the problem.
posted by gjc at 6:11 PM on June 15, 2011
Best answer: Paul Krugman has written about Greece extensively and (to me) persuasively. You can search the archives of his blog for postings.
The gist, as I understand it is that when Greece joined the Euro it was able to borrow at artificially low rates. It went on a borrowing (and spending) binge, and it didn't manage its internal affairs properly. See previous commenters about tax evasion, government efficiency, etc.
What makes the situation exceptionally bad is that, as part of the Euro, Greece does not have the ability to devalue its currency. If Greece were on its own currency, that currency would now be devalued; it would be worth less, and people who lent the Greeks money in Drachmas (or whatever) would have lost some money. Meanwhile, Greece would have to pay more to get (or borrow) foreign currencies, but it would be able to keep interest rates internal to the country relatively low. Keeping internal rates low is important because it allows people/companies in Greece to borrow (Drachmas), make investments, etc; in other words, it allows the Greek economy to grow. On a global basis, Greeks would be poorer, because their Drachmas wouldn't buy as much foreign goods. But at least the economy would be functioning.
But that's not happening. Because Greece is stuck on the Euro, the differential between the Greek economy and --- say --- the German economy can't be expressed as a currency devaluation (with a corresponding haircut to the banks that foolishly lent the Greeks all that money). Instead the differential is expressed by interest rates: Germany can issue bonds at very low rates, Greece has to pay very high rates. These high rates are exactly the opposite of what you want when your country is suffering through a recession. They make it much much harder to grow your way out of the recession. On top of this, Greece is being asked --- actually forced --- by the IMF and the rest of Europe to make large cuts to its spending. Cutting spending also hurts economic growth.
The theory of the IMF and ECB (European Central Bank) is that if Greece cuts its spending enough, it will have enough money left over to pay its debts. The ECB wants this because it is controlled largely by the Germans and the French, whose banks lent Greece most of that money. Unfortunately, the more Greece cuts its spending, the worse its economy gets, and the higher the higher the interest rates it has to pay to continue borrowing.
Krugman and others who he references think there is no way for Greece to get out of this death spiral without debt restructuring (i.e. the banks that lent to Greece take a loss) or by exiting the Euro (which would have all sorts of cataclysmic effects I don't understand, and is said in general to be "unimaginable"). The rest of Europe is dead set against restructuring, so there's something of a stalemate as things get worse and worse and worse.
I'm not trained as an economist so I undoubtedly got some of the details wrong, but that's my understanding of the Greece situation.
posted by alms at 7:31 PM on June 15, 2011 [7 favorites]
The gist, as I understand it is that when Greece joined the Euro it was able to borrow at artificially low rates. It went on a borrowing (and spending) binge, and it didn't manage its internal affairs properly. See previous commenters about tax evasion, government efficiency, etc.
What makes the situation exceptionally bad is that, as part of the Euro, Greece does not have the ability to devalue its currency. If Greece were on its own currency, that currency would now be devalued; it would be worth less, and people who lent the Greeks money in Drachmas (or whatever) would have lost some money. Meanwhile, Greece would have to pay more to get (or borrow) foreign currencies, but it would be able to keep interest rates internal to the country relatively low. Keeping internal rates low is important because it allows people/companies in Greece to borrow (Drachmas), make investments, etc; in other words, it allows the Greek economy to grow. On a global basis, Greeks would be poorer, because their Drachmas wouldn't buy as much foreign goods. But at least the economy would be functioning.
But that's not happening. Because Greece is stuck on the Euro, the differential between the Greek economy and --- say --- the German economy can't be expressed as a currency devaluation (with a corresponding haircut to the banks that foolishly lent the Greeks all that money). Instead the differential is expressed by interest rates: Germany can issue bonds at very low rates, Greece has to pay very high rates. These high rates are exactly the opposite of what you want when your country is suffering through a recession. They make it much much harder to grow your way out of the recession. On top of this, Greece is being asked --- actually forced --- by the IMF and the rest of Europe to make large cuts to its spending. Cutting spending also hurts economic growth.
The theory of the IMF and ECB (European Central Bank) is that if Greece cuts its spending enough, it will have enough money left over to pay its debts. The ECB wants this because it is controlled largely by the Germans and the French, whose banks lent Greece most of that money. Unfortunately, the more Greece cuts its spending, the worse its economy gets, and the higher the higher the interest rates it has to pay to continue borrowing.
Krugman and others who he references think there is no way for Greece to get out of this death spiral without debt restructuring (i.e. the banks that lent to Greece take a loss) or by exiting the Euro (which would have all sorts of cataclysmic effects I don't understand, and is said in general to be "unimaginable"). The rest of Europe is dead set against restructuring, so there's something of a stalemate as things get worse and worse and worse.
I'm not trained as an economist so I undoubtedly got some of the details wrong, but that's my understanding of the Greece situation.
posted by alms at 7:31 PM on June 15, 2011 [7 favorites]
alms covers a lot of the near-term issues, but there are also long-term ones. Greece entered the EU relatively late for western Europe (1981) and was, with Ireland, one of its poorest members, and a major recipient of structural and regional development funds -- until the expansion of the EU past the old Iron Curtain beginning in 2004, at which point a lot of that money started to be directed eastwards. (Structural funding also provided a foundation for the Irish "Celtic Tiger", which, at least in its early years, was not dependent upon collective idiocy.) A lot of this was designed to create the conditions for Euro entry, and there's a decent argument that it papered over the cracks in the Euro project.
posted by holgate at 8:30 PM on June 15, 2011
posted by holgate at 8:30 PM on June 15, 2011
Significantly, Greece colluded with Goldman Sachs in order to conceal "the true size of the nation’s debt" when they initially joined the Eurozone. Debt and likely default followed on schedule. Goldman shorted the whole operation. Now, of course, Goldman and the rest of the banksters are chomping at the bit to get a piece of Greece. In other words, Greece's population were played by either an ignorant or malevolent government/bankster setup. More. More. Wash and rinse, etc.
Austerity plan/highway robbery plan/debt slavery plan courtesy of the IMF (PDF):
"A comprehensive plan through 2013 will be finalized, taking as a starting point the existing privatization plan for 2011-13 (covering, inter alia, the railroad sector, airports, post office, water companies, ports, and gaming companies); as well as the state enterprise restructuring plans (which will identify entities to be sold, as discussed above). As a key additional building block, we will complete by end-June a first inventory of commercially-viable public real estate, including an estimate in each instance of valuation. By end year we will extend this to other real estate that has commercial potential. The plan will target proceeds of about _15 billion until the end of the program, and we expect the pace of privatization and real estate development to pick up in the following years. It will provide a quarterly and semiannual schedule for transactions scheduled one-year and two years ahead respectively. An initial draft of the plan will be prepared by end-March and a final plan will be adopted by the Council of Ministers by end-July (proposed as a structural benchmark). We will consult with the European Commission, ECB, and IMF staff on any new legislative initiatives regarding privatization."
posted by rumbles at 10:55 PM on June 15, 2011 [2 favorites]
Austerity plan/highway robbery plan/debt slavery plan courtesy of the IMF (PDF):
"A comprehensive plan through 2013 will be finalized, taking as a starting point the existing privatization plan for 2011-13 (covering, inter alia, the railroad sector, airports, post office, water companies, ports, and gaming companies); as well as the state enterprise restructuring plans (which will identify entities to be sold, as discussed above). As a key additional building block, we will complete by end-June a first inventory of commercially-viable public real estate, including an estimate in each instance of valuation. By end year we will extend this to other real estate that has commercial potential. The plan will target proceeds of about _15 billion until the end of the program, and we expect the pace of privatization and real estate development to pick up in the following years. It will provide a quarterly and semiannual schedule for transactions scheduled one-year and two years ahead respectively. An initial draft of the plan will be prepared by end-March and a final plan will be adopted by the Council of Ministers by end-July (proposed as a structural benchmark). We will consult with the European Commission, ECB, and IMF staff on any new legislative initiatives regarding privatization."
posted by rumbles at 10:55 PM on June 15, 2011 [2 favorites]
The mainstream press, of course, will blame the screwed Greek people, equivocating that their "debt" is the result of a character flaw of the Greek people and that they must be punished for their debt/guilt/sin.
posted by rumbles at 10:57 PM on June 15, 2011
posted by rumbles at 10:57 PM on June 15, 2011
The New York Times reports that the French and the ECB continue to focus on taking care of Business:
Germany backed away Friday from a confrontation with the European Central Bank over a new bailout package for Greece, agreeing under pressure from France not to force private investors to shoulder some of the burden.posted by alms at 10:00 AM on June 17, 2011
This thread is closed to new comments.
posted by MadamM at 5:31 PM on June 15, 2011 [2 favorites]