THE GREE K CR ISIS

K E , LA NC AST ER UNIV ERSITY

MICHAEL R. KRÄT
 GREECE IN EUROPE

GREECE IS A RATHER SMALL COUNTRY

JUST 11 ,19 MILLLION INHABITANTS IN 2009
JUST 11,12 MILLION INHABITANTS IN 2015
GREECE CONTRIBUTED IN 2014 NOT MORE
THAN 1,3% TO THE TOTAL NOMINAL GDP OF THE
EU (AS MUCH ALS IRELAND AND PORTUGAL)
BUT: GREECE REMAINS A VERY IMPORTANT
COUNTRY FOR EUROPE – IN CULTURAL TERMS
THE GREEK ECONOMY
• GREECE BELONGS TO THE GROUP OF THE ADVANCED / DEVELOPED COUNTRIES (81% SERVICES, 16% INDUSTRY,
3,4% AGRICULTURE (2012)

• GREECE IS NOT A POOR COUNTRY, IT IS RANKED AS THE 45TH ECONOMY IN THE WORLD, WITH A NOMINAL GDP
OF $ 238 BILLION PER ANNUM

• AT $ 21, 648 FOR NOMINAL GDP PER CAPITA, GREECE IS RANKED THE 38TH ECONOMY IN THE WORLD
• GREECE IS STILL THE THIRTEENTH LARGEST ECONOMY IN THE EU (ALTHOUGH IT CONTRIBUTES NOT MORE THAN
1,5% TO THE TOTAL NOMINAL GDP OF THE EU)

• GREECE HAS THE LARGEST MERCHANT NAVY IN THE WORLD (C. 15% OF GLOBAL DEADWEIGHT TONNAGE IN 2013)
• GREECE IS A LARGE AGRICULTURAL PRODUCER IN THE EU, ALSO A LARGE ECONOMY IN THE BALKAN REGION AND
A TOP INVESTOR IN THIS REGION
THE EURO - THE EMU – THE EUROZONE
• THE EURO AS THE COMMON CURRENCY OF THE EU MEMBER COUNTRIES (ALTHOUGH NOT ALL EU –
MEMBER COUNTRIES HAVE INTRODUCED IT; TWO (DENMARK AND THE UK) HAVE OPTED OUT)

• THE POLITICAL CHARACTER OF THE EURO-PROJECT: A DEAL WITH GERMANY ABOUT THE GERMAN
UNIFICATION

• EMU (ECONOMIC AND MONETARY UNION) POLICIES: ESTABLISHING A COMMON CURRENCY AND A
COMMON MONETARY POLICY FOR ALL MEMEBER STATES JOINING THE EMU IN THREE PHASES (STARTINT
1. JULY 1990) - WITH STRONG EMPHASIS UPON CONVERGENCE OF THEIR FISCAL AND MONETARY
POLICIES (FURTHER INTEGRATION OF THE EU BY MEANS OF A COMMON CURRENCY)

• SINCE 1999 THE EUROZONE EXISTS – TODAY WITH 19 MEMBER STATES (7 MORE ARE SUPPOSED TO JOIN
LATER, 2 HAVE OPTED OUT)
 EUROZONE – RULES OF THE GAME
• MAASTRICHT TREATY (1992)
• CONVERGENCE CRITERIA (QUANTIFIED) REFERRING TO
PUBLIC DEFICIT, PUBLIC DEBT, INFLATION RATE,
LONGTERM INTEREST RATE
• NO BAILOUT RULE
• THE STABILITY AND GROWTH PACT (SGP) (1998,
1999) CONFIRMING THE MAASTRICHT TREATY
CEILINGS OF 3% FOR BUDGET DEFICITS AND 60% FOR
PUBLIC DEBT
• SINCE 2005 SOME FLEXIBILITY HAS BEEN
INTRODUCED
• INSTITUTIONS
• EUROPEAN CENTRAL BANK (NATIONAL CENTRAL BANKS OF THE
EUROZONE ARE SUBORDINATED TO THE ECB)
• ECB BUILT ACCORDING TO THE BUNDESBANK MODEL
• COMMON MONETARY POLICY (DECIDED BY THE COUNCIL OF
GOVERNORS OF THE ECB)
• COMMON MONEY MARKET (INTER-BANK AND INTER –
CENTRALBANK ) REGIME
• PRIMARY GOAL: MONETARY STABILITY, KEEPING INFLATION
UNDER CONTROL
• BUT NO COMMON FISCAL POLICY , NO TRANSFER-UNION
• NO BANKING UNION, NO COMMON SUPERVISORY BODY FOR
BANKS AND FINANCIAL MARKETS, NO CAPITAL MARKETS UNION
ECONOMIC CONSEQUENCES OF THE INTRODUCTION OF THE EURO: UNIFORM INTEREST RATES FOR VERY
DIFFERENT ECONOMIES
CHANGING COMPETITIVENESS IN THE EUROZONE
CHANGING PATTERNS OF TRADE INSIDE THE EUROZONE –
GERMANY VERSUS THE SOUTHERN EUROPEAN COUNTRIES
GREECE JOINS THE EUROZONE IN 2001
THE STORY ABOUT GREEK GOVERNMENTS (CONSERVATIVE) FORGING THE GOVERNMENT DEBT STATISTICS (WITH ACTIVE HELP BY
GOLDMANN SACHS) IN ORDER TO MEET THE MAASTRICHT TREATY CONVERGENCE CRITERIA, IS WRONG.
 THE GREEK ECONOMY – ITS WEAKNESS
• A SMALL COUNTRY – WITH A WEAK ECONOMY: TOURISM, SHIPPING, FOOD, TEXTILES, FEW INDUSTRIES
• FOR ENERGY, GREECE IS TODAY HEAVILY DEPENDENT UPON IMPORTS (OIL AND GAS)
• APART FROM TOURISM AND SHIPPING SERVICES, GREECE HAS NO IMPORTANT EXPORT INDUSTRY
• HOWEVER: FROM 1960 TO 1973 GREECE EXPERIENCED ITS FIRST „ECONOMIC MIRACLE“, GROWTH RATES OF 7,7%
(SECOND ONLY TO JAPAN), THE HIGHEST IN EUROPE

• A VERY WEAK TAX STATE - TAX COMPLIANCE TRADITIONALLY VERY LOW IN GREECE, TAX EXEMPTIONS ABOUND,
GREEK TAX AUTHORITIES ARE NOT VERY EFFICIENT, MASSIVE TAX EVASION

• RATHER LARGE BLACK ECONOMY ( 24,3 % OF GDP IN 2012)

• THE RULE OF OLIGARCHIES SINCE AGES – A FEW BIG CORPORATIONS RUN BY FAMILIES AND AN EXTREMELY HIGH
PERCENTAGE OF SMALL AND TINY ENTERPRISES (31,9 % ARE OFFICIALLY SELF-EMPLOYED)
 GREECE IN THE EURZONE 2001 – 2008
• A GREEK ECONOMIC ‚MIRACLE‘ WITH GROWTH RATES OF 4,2 % PER ANNUM?
• YES, UNTIL 2008 GREECE HAD 14 CONSECUTIVE YEARS OF ECONOMIC GROWTH
• SINCE 2001 GREEK BANK AND GREEK BORROWERS / DEBTORS PROFITED FROM THE MUCH LARGER CAPITAL
MARKET AND THE MUCH LOWER LONGTERM INTEREST RATES IN THE EUROZONE

• A MASSIVE INFLOW OF FOREIGN CAPITAL , DUE TO A RISING TRADE DEFICIT AND CURRENT ACCOUNT DEFICIT
• HEAVY BORROWING BY THE GREEK GOVERNMENT IN ORDER TO FINANCE AN ALREADY OVERDIMENSIONED
PUBLIC SECTOR, HENCE RISING GOVERNMENT DEFICITS

• GREECE REMAINED THE SECOND LARGEST NATO MEMBER STATE IN TERMS OF DEFENCE EXPENSES
THE BEGINNINGS OF THE
GREEK DEBT CRISIS

OCTOBER 2009 : A NEW (SOCIALIST)

GOVERNMENT LED BY GIORGIOS PANPANDREOU
CAME TO POWER
THE NEW LEFT GOVERNMENT REVEALED THE
FISCAL MISREPORTING OF THE PREVIOUS
GOVERNMENTS
THE OFFICIAL GREEK GOVERNMENT DEFICIT ROSE
QUICKLY FROM 11 TO FINALLY 15,7% (THE
HIGHEST IN THE EU)
 HOW THE FINANCIAL
MARKETS RESPONDED

THE INTEREST RATES FOR 10 YEAR

GOVERNMENT BONDS WENT UP
THE COST OF REFINANCING GREEK
GOVERNMENT DEBT JUMPED UP
 THE EUROZONE UNDER
THE IMPACT OF THE
FINANCIAL CRISIS

A PARADISE FOR FINANCIAL SPECULATORS

RAPIDLY RISING BOND YIELDS EXPLAIN WHY
GREECE HAD NO PROBLEM SELLING ITS BONDS
ALTHOUGH IT HAD BIG PROBLEMS PAYING THE
INTEREST
 GREECE 2010: THE FIRST OF FIVE
•
SOVEREIGN DEBT CRISES IN THE EUROZONE
ALL FOLLOW THE SAME PATTERN:

• ANNOUNCEMENT OF RISING DEFICITS - CONCERNS ABOUT A DEFAULT ON THE SIDE OF THE CREDITORS

• BECAUSE OF THE POSSIBLE REPERCUSSIONS OF A DEFAULT – BANKRUPTCIES OF PRIVATE BANKS IN FRANCE, GERMANY, BELGIUM ETC. –
THE EUROZONE STEPS IN

• A PUBLIC LOAN (FINANCED BY RAISING MONEY VIA THE ECB AND/OR NEW INTERMEDIARIES AND THE IMF, GUARANTEED BY THE
EUROZONE GOVERNMENTS) IS USED TO SUBSTITUTE A REFINANCING OF MATURING GOVERNMENT BONDS OF THE STATE IN CRISIS ON
THE CAPITAL MARKET

• ACTUALLY THE LOANS ARE USED TO REPAY FOREIGN PRIVATE CREDITORS – WITH THE EFFECT THAT THE GOVERNMENT DEBT OF THE
CRISIS STATE IS SHIFTED TO NEW CREDITORS (ECB, EUROZONE, IMF)

• DOMESTIC PRIVATE CREDITORS (BANKS) ARE RESCUED BY RECAPITALIZATION (IF THEY HAVE SOLD THEIR BONDS ON THE SECONDARY
MARKETS)
SO THE NGO‘S ARE RIGHT
THE FIRST BAILOUT – MAY 2010
• WHO : THE EUROPEAN COMMISSION, THE EUROPEAN CENTRAL BANK, THE INTERNATIONAL MONETARY
FUNDS - THE „TROIKA“

• WHAT: AN INTERGOVERNMENTAL / INTERNATIONAL LOAN OF 110 BILLION EURO (THE NO BAIL OUT RULE
HAS ACTUALLY BEEN ABANDONED

• CONDITIONALITY: AUSTERITY MEASURES (CUTS OF GOVERNMENT EXPENDITURE, PENSIONS, WAGES,

CUTS OF PUBLIC INVESTMENT, CUTS IN HEALTHCARE, HOUSING), STRUCTURAL REFORMS (REFERRING TO
ADMINISTRATION, TAXATION) AND PRIVATIZATION OF GOVERNMENT ASSETS
CREDITORS VERSUS DEBTORS : TAKING
SIDES
• THE TROIKA CHOSE THE SIDE OF THE CREDITORS

• THE TROIKA LARGELY IGNORED THE INTERESTS OF

THE DEBTORS

• THE TROIKA WAS REGULARLY CONTROLLING WHAT

THE GREEK GOVERNMENT DID

• IN ORDER TO MAKE THAT CONTROL EFFECTIVE, THE

LOANS WERE PAID IN TRANCHES (EACH
CONSECUTIVE TRANCHE CONDITIONAL UPON
CONFIRMATION BY THE TROIKA)
 THE WEAKNESS OF
THE GREEK TAX STATE

GREECE HAS THE HIGHEST LEVEL OF

OUTSTANDING TAX DEBT
(TAXES DUE, BUT NOT PAID)
IN THE DEVELOPED WORLD
AND IT IS GETTING WORSE
THE EFFECTS OF THE RESCUE POLICIES
 THE GREEK ECONOMY UNDER THE TROIKA
• GREECE LOSES EVERY YEAR A LARGE PART OF ITS PRODUCTIVE CAPACITY – THE GDP AND THE GREEK ECONOMY
KEEPS SHRINKING (UNTIL THE END OF 2015 BY A THIRD > 30%)

• GREECE LOOSES JOBS EVERY YEARS, UNEMPLOYMENT KEEPS RISING

• GREECE LOOSES PEOPLE (MORE THAN 3 % OF THE POPULATION, MOST OF THEM YOUNG PEOPLE, HAVE
EMIGRATED BETWEEN 2010 AND 2014)

• THE BIGGEST AUSTERITY EFFORT EVER (IN RELATIVE TERMS)

• THE BIGGEST DEFICIT REDUCTION EVER

• BUT A GIGANTIC SOCIAL CATASTROPHY - AN ESTIMATED 44% OF THE GREEK POPULATION LIVED BELOW THE
POVERTY LINE BY 2014
HOW BAD WAS THE GREEK RECESSION?
BY NOW, SUMMER OF 2015, GREECE HAS
LOST NEARLY 30% OF REAL GDP
GREEK UNEMPLOYMENT
GREEK YOUTH UNEMPLOYMENT
GREEK GOVERNMENT FINANCE – THE FISCAL CRISIS OF THE STATE
THE SECOND BAILOUT

• A NEW SUPPORT PACKAGE DRAFTED IN JULY 2011, FINALLY AGREED IN SEPTEMBER 2012

• VOLUME – ANOTHER 100 BILLION EURO, LONGER REPAYMENT PERIOD - 15 YEARS – AND LOWER INTEREST RATE –
3,5 %

• FINANCED THROUGH A NEWLY CREATED CREDIT AGENCY – THE EUROPEAN FINANCIAL STABILITY FACILITY (WITH A
LEVERAGE OF UP TO 1 TRILLION EURO)

• CONDITIONS: AGREEMENT WITH PRIVATE INVESTORS TO ACCEPT A 50% WRITE – OFF OF SOME OF THE GREEK
DEBT (HAIRCUT), IN ORDER TO SUBSTANTIALLY REDUCE THE GREEK DEBT

• ANOTHER AUSTERITY PROGRAM

• DEMAND FOR A MAJORITY OF GREEK POLITICIANS TO SIGN AGREEMENT THAT THEY WOULD CONTINUE TO
SUPPORT THE AUSTERITY PACKAGE NO MATTER WHAT THE OUTCOME OF THE NEXT GREEK ELECTIONS WOULD BE
SYRIZA COMES TO
POWER

GREEK ELECTIONS OF JANUARY 2015

A LANDSLIDE VICORY FOR SYRIZA
COALITION GOVERNMENT WITH
THE RESULTS OF THE FIRST AND SECOND
BAILOUT
• GREEKS CREDITORS: MORE THAN 70% OF GREEK SOVEREIGN DEBT WERE ORIGINALLY IN THE HANDS OF FOREIGN PRIVATE INVESTORS
(MOSTLY BANKS)

• EU BANKS (WITHOUT GREEK BANKS) HELD 45,8 BILLION EURO OF GREEK BONDS, 9,4 BILLION WERE HELD BY FRENCH BANKS, 7,9 BILLION
EURO BY GERMAN BANKS

• IN EARLY 2015 THIS WAS DOWN TO A MERE 2,8 BILLION EURO

• MORE THAN 80% OF GREEK SOVEREIGN DEBT WERE NOW HELD BY EUROPEAN AND INTERNATIONAL PUBLIC BODIES (GOVERNMENTS,
CENTRAL BANK, IMF)

• BUT: THE BURDEN OF THE GREEK DEBT REMAINS UNSUSTAINABLE

• THE GREEK DEBT RATIO AND THE TOTAL SUM OF THE GREEK DEBT KEPT RISING - BECAUSE: SHRINKING GDP, SHRINKING TAX REVENUES,
RISING DEFICITS
WHERE DID THE BAILOUT MONEY GO?
 SYRIZA‘S BID FOR A
NEW DEAL
SYRIZA‘S CHOICE (AND DILEMMA): DEFAULT
OR RENEGOTIATE THE BAILOUT DEALS
THE COST AND CONSEQUENCES OF A GREXIT
VERSUS
THE COST AND CONSEQUENCES OF ANOTHER
BAILOUT PROGRAM
 GREEK GOVERNMENT
DEBT BECAME
UNSUSTAINABLE
AT 6% (IN 2014) ANNUAL INTEREST
PAYMENTS FOR LONGTERM DEBT REQUIRED
NEARLY 20 BILLION EURO, 23% OF
GOVERNMENT REVENUE
IN EARLY 2015, THE INTEREST RATE ROSE TO
10%, EVEN THE IMF REPORTED IN JULY 2015
THAT THE GREEK DEBT BURDEN HAD BECOME
UNSUSTAINABLE
WHY TSIPRAS CAPITULATED
 TSIPRAS AND VAROUFAKIS – AGAINST
ALL ODDS AND WOLFGANG SCHÄUBLE
SYRIZA WANTED A NEW DEAL:
A BREAK FROM AUSTERITY, TIME FOR RECOVERY FOR THE GREEK
ECONOMY
AND ANOTHER HAIRCUT (DEBT REDUCTION)
SCHÄUBLE (GERMAN MINISTER OF FINANCE) WANTED TO MAKE AN EXAMPLE
OF GREECE AND USE IT AS A WARNING:
THERE IS NO ALTERNATIVE TO AUSTERITY!
A PECULIAR CONCEPT OF MACROECONOMIC POLICY:
THE RULES ARE THE RULES!
THE THIRD BAILOUT
• A DRAMATIC COURSE OF EVENTS IN JUNE / JULY 2015 - NEGOTIATIONS WITH THE EUROGROUP, GREEK REFERENDUM,
GREEK GOVERNMENT LET SECOND BAILOUT PROGRAMME EXPIRE, DEMANDED A NEW PROGRAMME, GREECE DEFAULTED ON
A $ 1,7 BILLION PAYMENT TO THE IMF ON 29 JUNE 2015

• TSIPRAS HAD TO AGREE TO MUCH WORSE TERMS THAN HE – AND A 62% OF THE GREEK VOTERS – HAD REJECTED BEFORE

• IN AUGUST 2015 THE THIRD BAILOUT PACKAGE WAS AGREED:

• ANOTHER 86 BILLION EURO FOR GREECE OVER THE NEXT THREE YEARS (COMING FROM THE EUROPEAN STABILITY
MECHANISM (ESM) AND THE ECB – THE IMF IS NOT YET INVOLVED

• CONDITION: ANOTHER HEAVY AND VERY HARD AUSTERITY PROGRAMME PLUS STRUCTURAL REFORMS

• BUT: SOME FURTHER RELIEF OF THE DEBT BURDEN FOR GREECE

 WHAT WAS WRONG WITH THE EURO (IF ANYTHING) ?

• THE COMMON CURRENCY LACKED THE NECESSARY INSTITUTIONS - BECAUSE THE EU IS NOT A FEDERAL STATE

• EUROPEAN CENTRAL BANK – WHICH WAS NOT SUPPOSED TO ACT AS LENDER OF LAST RESORT

• COMMON CURRENCY WITHOUT A BANKING UNION (INCLUDING A COMMON DEPOSIT GUARANTEE SYSTEM)

• COMMON CURRENCY WITHOUT A FISCAL UNION ( INCLUDING A TRANSFER UNION – FINANCIAL EQUALIZATION
SYSTEM)

• COMMON CURRENCY WITHOUT A COMMON AND COMPREHENSIVE FINANCIAL SUPERVISION SYSTEM)

• A COMMON MONETARY POLICY WITHOUT A COMMON ECONOMIC AND FINANCIAL POLICY

• JUST A SET OF MINIMAL (AND VERY CRUDE) „RULES“, BUT NO REAL CONVERGENCE POLICY

• A FAR TOO SMALL BUDGET / BUDGETARY POWER OF THE EU ITSELF

WHAT HAS THE GREEK CRISIS REVEALED ABOUT THE
EURO?
• NOTHING THAT WE DID NOT KNOW BEFORE
• THE EUROZONE LACKS THE NECESSARY INSTITUTIONAL FRAMEWORK FOR A COMMON CURRENCY
• THE EUROZONE LACKS A COMMON FISCAL POLICY, INCLUDING A FISCAL TRANSFER / FISCAL EQUALISATION SYSTEM (A TRANSFER UNION)
• DURING THE CRISIS (THE GREEK ONE AND THE OTHER FOUR SOVEREIGN DEFAULT CRISES) THE ECB HAS ACTUALLY CHANGED – AND HAS
BECOME A LENDER OF LAST RESORT FOR THE EUROZONE - FOR THE EUROZONE BANKS AND FOR THE GOVERNMENTS AS WELL

• THANKS TO THE CRISIS, THE EUROZONE HAS ALREADY INTRODUCED A KIND OF EUROBONDS (THE BONDS ISSUED BY THE ESM ARE DE
FACTO EUROBONDS, GUARANTEED BY ALL EUROZONE-STATES)

• UNDER THE PRESSURE OF THE CRISIS THE EUROZONE HAS ACTUALLY STARTED REFORMING ITSELF
• THE PRESENT DEBATE: WHETHER THE RULES (MAASTRICHT AND SGP) ARE THE RULES WE NEED, WHETHER THERE IS AN ALTERNATIVE TO
AUSTERITY OR NOT

• THE PRESENT DEBATE: WHETHER THE EU NEEDS A LARGER BUDGET TO HAVE AN IMPACT, WHETHER THE EU NEEDS MORE AND NOT LESS
COMPETENCES
 YOU SHALL BE DAMNED, IF YOU DON‘T
SAVE GREECE (HELMUT SCHMIDT)