What’s causing all this trouble with the Greek economy?

In the past couple of years, stock markets around the world have plummeted with each bit of news regarding Greece’s economic woes. The economic crisis that Greece faced in late 2009 started about 10 years earlier. The records that Greece presented prior to admission to the Eurozone in 2001 as well as afterward did not show the true picture of its economic condition. The Eurozone requires that countries fulfill certain membership criteria, including a budget deficit that does not exceed 3% of the gross domestic product (GDP) and a public debt limited to 60% of the GDP. Greece met these criteria but did so by leaving out certain expenses. Also, a derivatives deal that Goldman-Sachs first put in place in 2001 masked the true nature of Greece’s deficit.


When Greek Prime Minister Georgios Papandreou was elected in the fall of 2009, he discovered the extent of the deficit and announced it. Several debt-ratings agencies then downgraded Greece’s rating to the lowest level in the Eurozone.


In May 2010, Papandreou dropped another bomb. He reported that the Greek deficit was 13.6% of GDP for 2009, higher than the 12.9% originally reported. The members of the Eurozone became very concerned that Greece’s economic situation would implode, and they would suffer the fallout. Thus, in May 2010, the European Union (EU) countries and the International Monetary Fund (IMF) decided to get things under control by giving Greece a loan of 110 billion euros ($139.1 billion)*, but under the condition that Greece would institute reforms. A few months later another loan package of 130 billion euros ($165.1 billion) was approved, but as of January 2012, it had not been finalized.


People became angry about the reforms instituted by the Papandreou government, which included cutting the wages and benefits of government workers and retirees and raising taxes. Demonstrations and strikes exploded around the country.


Financial experts point out that the worldwide recession, as well as graft and nonpayment of taxes, has contributed to Greece’s deficit. Papandreou ran on the slogan “Change,” which included changing a corrupt political system. Gerry Hadden, of Public Radio International’s “The World,” on a program that was broadcast on May 11, 2010, asked vegetable vendor Fotini Stavrou who she blamed for the crisis. Stavrou grabbed a potato and responded, “See this potato. If I stole it I would end up in jail. Yet our politicians steal millions and nothing happens to them.” She continued, “The two main political parties here robbed us blind, but it’s our fault. We voted for them.”

Thomopoulos' recent title The History of Greece published in December 2011.

Some economists blame part of Greece’s bleak economic picture on the use of bribes and patronage. Fakelakia (little envelopes) are part of doing business in Greece. Money is stuffed in a fakelaki and slipped to officials to help gain access to medical services, to avoid taxes, and for building permits or driver’s licenses.


Widespread tax evasion has also contributed to the deficit. In September 2011, the government used a new tactic in its approach to this problem. The finance minister named 6,000 firms that owed about 30 billion euros ($38.1 billion).


In the face of continuing economic problems, Prime Minister Papandreou stepped down in November 2011. A coalition government with Lucas Papademos as prime minister took over. The Papademos government faces rising unemployment (in September the unemployment rate was 17.5%) and a declining economy (probably more than a 5.5% reduction in the GDP for 2011).


Representatives of the EU, the IMF, and the Central Bank (referred to as the troika) are set to arrive in Greece in mid-January. The troika will determine whether or not Greece will receive the second installment of the loan. On March 20, 2012, 14.4 billion euros ($18.29 billion) are due on bonds. Without the second installment of the loan, Greece will not be able to pay what it owes.


Nicholas Paphitis of Associated Press in a January 4 article entitled “Greek PM Warns of Default without Loan Deal” reported: “Papademos said the troika has called for a re-examination of labor costs, to boost lagging competitiveness and fight high unemployment, and warned that, unless significant action is taken, the country will not receive its next vital installment.”


Paphitis continues: “Key details of the second bailout deal are still being negotiated — above all the provision under which private creditors such as banks and investment firms would take a 50 percent cut in the face value of the Greek bonds they hold.”


Greece is in a quagmire. If the second loan is not forthcoming, default may be the only option. But even if Greece declares bankruptcy, the country has the potential to emerge from the current crisis a stronger and healthier nation. Greece weathered the declaration of bankruptcy in 1932, as well as the devastation of the country during World War II and the subsequent civil war. Her people have stamina and grit. I don’t believe that they will allow their country to falter.


*The exchange rate of dollar to euro is based on the rate for January 11, 2012:1.27.


About the Author
ELAINE THOMOPOULOS, PhD, is an independent scholar who has authored local history books and is editor of Greek-American Pioneer Women of Illinois. She has published articles about Greece and Greek Americans and is curator of the Greek Museum of Berrien County, Michigan.