There is a lot of political and social tension in the streets of Athens, Greece. When I studied there this past summer, there were several instances, during my afternoon walks or my morning commute to class, where I would stumble upon a political rally — impassioned people protesting all sorts of issues from low wages to corrupt politicians. No matter where I went, though, when I would ask locals what the cause of all this socioeconomic turmoil is, they always told me something along the lines of “It’s this damn economic austerity.” As someone who used to study ancient Greece, it was hard for me to believe that this once all-powerful society could be debased to such a miserable financial state, especially considering that, three decades ago, Greece’s economy was thriving. After looking into the causes of the crisis, though, I have learned some fascinating things – the most important of which is that Greece doomed itself to economic collapse through its irresponsible borrowing habits, and that countries like the United States need to learn from Greece and rework some of their social and economic policy.
So how did the crisis occur? Well, first, I need to provide some context on the ballooning Greek debt of the early 2000s. After the military dictatorship was overthrown in 1974, two political figures (with drastically opposing political views) vied for power. The first one was named Constantine Karamanlis, who lead the New Democracy (ND) party; his main goal was to gradually develop and modernize the Greek economy until it was strong enough to join the European Union. Karamanlis’s opposition was named Andreas Papandreou, leader of the Panhellenic Socialist Movement (PASOK), who opposed European assimilation and preferred patronage politics and rapid economic growth supplemented by the government. Karamanlis originally won, and during the 1970s, his policies brought about a steady stream of economic development. Then, in 1981, PASOK won control of the government.
What followed was an incredible expansion of the Greek government’s public sector and its interventions into private businesses. Universal healthcare, social security, and generous pensions were all established. The wages of both public and private sector workers were artificially raised. A competitive two-party system was established, where each party sought voter support by promising more jobs and higher benefits to their patrons. Because of the drastic wage increases, consumerism flourished in the Greek middle class, but investing and entrepreneurship waned. Overall, the government of Greece had never been larger, but there was a problem -- they didn’t have enough money to fund all the projects they had begun. Rather than cut back on spending, Papandreou and his lackeys decided to abandon all financial restriction and borrowed all the money that they needed.
This habit of unrestricted borrowing continued for 30 years and ended around 2007. That year, the United States mortgage industry, housing industry, and stock industry simultaneously crashed when several major mortgage companies filed bankruptcy after investing in high risk “subprime mortgages”. For many Americans, the Great Recession, as it is called nowadays, caused their stock portfolios and house values to drop significantly. West of the Atlantic Ocean, this period of economic downturn would last until June of 2009. Over in Europe, however, the housing crash had a catastrophic effect on the Greek economy.
When the recession hit Greece, Greek politicians were forced to reveal how high the national debt had risen. Because they had borrowed so much over the past 30 years and their credit was so poor, they had to ask the European Union to send them $330 billion worth of “bailouts” (emergency loans) in order to save their economy. With the loans, however, the EU required that Greece undergo severe austerity measures to prevent them from further increasing the national debt. These austerity measures included cutbacks in public spending, increased taxes, and the banning of unionization. Many of these austerity measures are still in place today, causing serious dissent and dissatisfaction of the people of Greece with their government.
According to an article by the National Bureau of Economic Research, Greece’s stunningly large debt was the biggest reason that Greece’s economy crashed harder than every other countries’ economy. Following their models, any modern government with such poor fiscal balance, put under the strain that the Great Recession brought about in the world, would collapse in the exact same way that Greece did.
Now, it’s important that I make a distinction here. Spending government money on the public sector and increasing welfare, healthcare, and other social benefits is not necessarily a bad thing. This is not a political tirade. What I am saying, though, is that if you are going to increase government spending, you need to do so smartly, carefully, and in a very meticulous manner. Money doesn’t grow on trees, and in the same way you wouldn’t advise an individual to go crazily into debt, governments need to consider the potential consequences that massive amounts of debt could cause for them and their citizens in the case of economic collapse.
In Greece, corrupt politicians, more in favor of rubbing elbows with their patrons and spending money they didn’t have, are the ones to blame for the ballooning debt of the 2000s and the current suffering of the Greek people. Even today, their unstable political infrastructure can still be felt; Dr. Kondolis, a public health researcher, once told us in one of our lectures, “For most public sector jobs, if you want to get hired, you need to know someone and be affiliated with the party that is in charge.”
The Greek people are not totally innocent when it comes to the debt crisis, either. Instead of voting for Karamanlis’s plan of responsible financial choices, steady economic growth, and slow European assimilation, the people voted for rapid, artificial economic expansion; they allowed and even encouraged politicians to increase social benefits at the expense of a stable, well-fortified economy. For three decades, the politicians of Greece, and even its people, opted for quick, temporary stimulants to their economy, and never gave the time nor sacrifice necessary to establish a more permanent and stable economic backbone. This is a perfectly clear example of people remedying symptoms and refusing to even acknowledge that there is a greater problem until it is too late.
For me, though, this is a cautionary tale towards the American government. Greece’s government debt, at the beginning of the crisis in 2007, stood at 103.1% of its GDP. Currently, in January of 2020, America’s national debt clocks in at 106.72% of its GDP, with no sign of slowing down anytime soon. If another economic crisis were to occur, I am not sure if America would be able to survive.
History repeats itself, first as a tragedy, second as a farce.
(Karl Marx, The Eighteenth Brumaire of Louis Napoleon)
BBC Editors. (2018, August 20th). Greek bailout crisis in 300 words.
BBC Editors. (2011, October 19th). Greek government austerity measures.
Gourinchas, P., Philippon, T., & Vayanos, D. (2016). The Analytics of the Greek Crisis. NBER Annual Macroeconomics Annual 2016, Volume 31.
History.com Editors. (2017, December 4th). Great Recession.
Pappas, T. (2010, November 29th). The causes of the Greek crisis are in Greek politics.
Treasury Direct Editors. [Debt to the Penny and Who Holds It] (www.treasurydirect.gov/NP/debt/current). Treasury Direct, U.S. Department of the Treasury, Bureau of the Fiscal Service.