The Greek tragedy through the Ages
A society that puts equality before freedom will get neither. A society that puts freedom before equality will get a high degree of both. - Milton Friedman
The results of the referendum in Greece and are now out and have clearly shown balance shifting on the side of Government of Greece over the 'troika' of International Monetary Fund (IMF),
The wordings of the referendum have been confusing to many people. It has asked people 'Should the plan of agreement, which was submitted by the European Commission, the European Central Bank and the International Monetary Fund in the
It is also interesting to see how Greece with a population of barely 11 million and a
It is thus instructive to look at how Greece got here and what should be expected in the future. A look at historical antecedents of Greece and the European project as a whole reveals that Greece has not had a very good record of public debt management.
Looking at ancient times an essay by Professor
A significant part of previous millennium the Greeks were under the Ottoman Empire largely immune to the influence of the Europe and the industrial revolution. Their independence in 1829 meant that they could catch up with the rest of Europe, but that was not to be. According to research by professors Kenneth Rogoff and Carmen Reinhart Greeks have had the most dismal record of all the European countries for the much of 19th century with respect to their debt. They have defaulted thrice on their debt in the 19th century (post their independence from the Ottomans) and also skipped repayments 50 percent of the time. The twentieth century saw a number of coup d'état with the Greeks fighting valiantly before the Nazi occupation. Post that a civil war ensued after which Greece saw some military governments that did not care about much about industrialization.
In 1957, came the idea of European integration and Greece was a little late to see merit in it. In 1981, Greece officially became the 10th country to be a member of the European Economic Community (EEC). The economy of Greece was uncompetitive at that time with inflation at about 25 percent averaging 18 percent from the two decades from 1973-93. The period also saw public debt to GDP rising fast. It rose from about 25 percent in 1981 to about 75 percent in 1992. Due to the deficit spending and rising debt what ensued was skyrocketing borrowing costs. The nominal interest rates in Greece were 24 percent in 1992 compared to 13 percent in Italy and 12 percent in Spain.
All this persisted till 2008 with rising GDP growth and a rise in deficits (which was partially hidden) when the global financial crisis struck. The low growth caught investors attention and yield on the Greek government bonds started to rise. They rose to astronomical levels in 2009 when the new government revealed that the deficit figures were not 6 percent as declared previously but a much higher 12.6%. All this resulted in a recession in Greece with GDP falling dramatically.
At present debt, sustainability is nowhere to be seen, and the debt to GDP ratio has risen to the level of 177 percent due to the fall in GDP over the years. A kind of slow bank run is also seen in recent months as PM Alexis Tsipras has not been able to strike a deal with Greece's creditors. It has resulted in deposits plummeting in Greek banks to less that 150 billion euros. As the referendum was announced credit lines have dried and as a result Greece has put up capital controls. Capital markets and banks have been shut, and people can only withdraw 60 euros in a day.
To sum up focus on unsustainable pension system coupled with the euro system and manipulation of key economic and financial data has wreaked havoc on the economy. It is because within a monetary union a country does not have the power/ control to devalue its currency and make its exports competitive. In a political union like India or the US, the central government has authority to collect taxes and disburse it, according to the requirements of individual states. No such mechanism exists in the Eurozone. Added to these flaws was the Ill-conceived 'rescue packages' and austerity that have accentuated the crisis.
A question that immediately comes to mind is where does one go from here. Will one see Greece hold on to the European ideal or will it sing its own 'Hymn to Liberty'? There has been speculation in the previous month of a Greek exit from the Euro -the 'Grexit', while others have called for more structural reforms. Either way the Greek economy remains uncompetitive and in a state of deep turmoil. Economically speaking structural reforms, with a focus on enhancing productivity and international competitiveness will have to be carried out either way if Greece is to get out of its present yet deeply embedded historical predicament.
(The article is co-authored with Sankalp Sharma, Senior Researcher at the Institute for Competitiveness, India. Amit Kapoor is Chair, Institute for Competitiveness & Editor of Thinkers. The views expressed are personal. He can be reached at email@example.com and tweets @kautiliya)
(image credits: sbs)