A BRIEF HISTORY
It was the idea of trade without boundaries and ease of access to international markets that fueled the dream of uniting all of Europe with a single currency. For most of Europe’s history, the continent has been at war; the WW-I, the WW-II, Nazi invasion of Poland, Slovak-Hungarian War, Irish war of independence etc. The wars not only crippled the economies but also stood in the way of trade pacts. The WW-II was the tipping point. The devastated continent decided that a union was the only way to escape the externalities of nationalism. 1st January 1958 saw the dawn of a new era, the signing of the Treaty of Rome, the formation of the European Economic Committee by the founding member nations – Belgium, France, Italy, Luxembourg, The Netherlands and West Germany. This deemed progress was immediately followed in 1951 by the Treaty of Paris which established the much needed European Coal and Steel Community. The underlying aim was to amalgamate the Franco-German coal and steel production industries which were of much use to the war impoverished continent. During a course of the next four decades a lot of treaties were signed and a lot of tensions arose; in 1973 Denmark, Ireland and the United Kingdom were brought in, Greece, joined in 1981 and so did Spain and Portugal in 1986. Till this point in history, the European Community did face major ups and downs, but now a dare stood in its way. The final unification of Europe through a common currency, signifying a communal monetary policy and thus on the night of 1st November 1993, the treaty of Maastricht was signed, and in 2002 the Euro banknotes replaced individual national currency.
The European Union was formed with the sole purpose of ushering the continent into an era of sustained economic growth and development. Greece was a part of a much bigger dream, the dream that would bring prosperity through increased investments. Brought into the union not only because of the fine opportunity it provided to invest in its developing markets but also because of its chaotic history of civil wars, decades of dictatorship and the perils it posed to the furtherance of the entire continent. It was a strong contender for German, French and Swedish weapons because of its topographical closeness to Turkey. Along with this political agenda in mind, Greece also provided for a market of cheap labor and a sublime market for high end European products.
THE STATE OF THE ECONOMY
Greece was one of the worst hit nations, after the ravaging WW-II. Their unwillingness to partake in the war dismantled the economy. Amongst other reasons, the country was immensely dependent upon the British for food, a naval blockade and transfer of food grains to Germany, tipped them over. In 1941 a brutal famine killed almost 7% of the population. The occurrence of hyperinflation during 1943 (34,864%) and in 1944 (163,910,000,000%) coupled with a Civil War went on for a major part of a decade. Despite this, the GDP grew quickly during the 1970s, at an unprecedented rate of 7%, which was only second to the Japanese economy. In 1970, the Greece economy was ranked 20th in the world based on its per capita income. The recovery from crippling war scenario was quick, but soon faulty expansionary fiscal policies worsened the debt-to-GDP ratio, which escalated from a tolerable figure of 34.5% in 1981 to 115% in 90s. The Iranian revolution and the nationalism of oil refineries in the state, stopped the supply of cheap fuel to the much needed economy.
The country did not meet the criteria to introduce Euro. The inflation estimates were in double digits while average of the member nations were lower than 5%, its deficits almost three times the average of the member nations. It was not ready for a makeover. It is believed that when Greece was inducted into the Union, the government concealed its economic records and fudged the estimates. Both parties knew the facts, and still decided to keep mum. They saw the introduction of the euro as an opportunity to start anew, but the skeletons don’t always stay in the closet.
Greece operates as a majorly socialist economy. In 2001 the government controlled considerable amounts of the economy. The income from public sector amounted for almost half of its GDP. The government made the mistake of borrowing from the public in order to bolster its budget deficits. Governments usually only borrow up to 3% of the GDP but Greek’s public debt stood up to 12% of the GDP. In the 80s and 90s, both left and right wing parties agreed that privatization was the way forward but a drop in investment and the use of economic stabilization programs shot that dream. The euro represented a dawn for the Greeks, and so it was. Following the introduction of the euro and as a member of the ECB, the country now enjoyed cheap available credit at less than 3%, the same as other nations, which was earlier available at 25%. This lead to lending at an unprecedented rate. As foreign capital flooded, the economy was one of the fastest growing in the Eurozone at a rate of 4.2%. Despite that the country witnessed high budget deficits in the following years. The crash of housing bubbles in US and rest of the world finally pulled the skeletons out of the closet. The uncontrolled borrowing and the spending came to a halt as the capital markets froze. Two of the country’s largest economies were shipping and tourism, which were majorly overturned by the global meltdown. Prior to the euro, the government devalued their currency to fund their borrowing, now this was no longer possible.
Poor economic policies and unhindered borrowing were only some of the bad decisions made by the Greeks. Tax is one of the main sources of any State’s income but Greece is known for major tax evasion, corruption and a policy of no fine on delayed tax payments.
The Greek government’s debt, as revealed in 2010, was €269.3 bn (113% of GDP). It was then that they needed savior, and like the perfect partner in marriage, Germany stepped right in, and provided a bailout package. This sweet deal came with an underlying condition, that the government would adopt austerity measures including a freeze in salaries of govt. employees, 10% cuts in bonuses and a freeze of overtime workers, measures that don’t always help the economy. The problem is that in any economy the government is the largest spender, and as it makes cuts, people lose jobs, as they lose jobs, they earn less and then the government receives less and less as revenue through taxation.
The country has received over two bailout packages with over seven austerity deals being passed in the parliament. The government does not seem to be recovering, with its debt-to-GDP ratio worsening. They’ve recently defected on a payment to the IMF and have become the first developed nation to do so. Coupled with this the new Syriza government has rejected a bailout with austerity measures through a nationwide referendum which could mean a very serious Grexit. A couple of years ago, I was watching a documentary and when the presenter asked the Greeks where the future lay ahead, with the Drachma or with the Euro, they decisively choose the Euro. The austerity measures don’t seem to be working. What will happen to Greece? Will it seek help from Russia? Will it return back to the Drachma? We’re yet to find out.