title
macrohistory.com

home | 1945-21st century

GREECE and DEBT

previous | next

Greece and Debt

The government in Greece went into debt providing more for its citizens than it could afford – more, that is, than the government was collecting in taxes. After the overthrow of Greece's military dictatorship in 1974, successive governments ran deficits to finance public sector jobs, pensions, and other social benefits. After 1993, Greece enjoyed good economic growth, as high as 6 percent. Government debt was higher than the nation's annual GDP. The interest on the bonds was low and there was confidence that the debt could be paid back easily enough. (The continued borrowing, by the way, was not Keynsian economics. Keynsian borrowing was supposed to be short and paid back with the economic recovery.)

Greece is a member of the European Union and was hiding the fact that it was running deficits greater than allowed by EU rules.

In 2004 the conservative New Democracy party came to power, replacing a Panhellenic Socialist Movement government led by George Papandreou. The new government created an austerity budget in hope of cutting down the debt. This included tax hikes on alcohol and tobacco and an increase in a Value Added Tax from 18 to 19 percent.

A year after the austerity budget, Greece's economy was growing well again – up 4.1% in the first three months of 2006. But by 2007 the nation's debt was up around 105 percent. The conservatives had refrained from measures that would offend the voters – especially measures regarding the collection of taxes.

Then came the economic crisis of 2008. The country's two largest industries, tourism and shipping, were hard hit, and in 2009 revenues fell 15 percent and the debt rose to 127 percent of GDP.

In parliamentary elections on October 4, 2009, the New Democracy party won only 91 of 300 seats. The rival Panhellenic Socialist Movement won 160 seats (a gain of 58 seats), and its leader, George Papandreou, on October 6 became prime minister. (No couple of months of lame duck rule.)

In December, Greece's credit rating fell to BBB+, and this pushed up the cost of borrowing, an additional burden for the Greeks. A few days later that month Papandreou unveiled his plan, including austerity measures, to cut the deficit. A few days later, thousands of workers, annoyed by cutbacks, hit the streets. They complained that they should not carry the burden created by their country's debt crisis. They wanted that burden shifted to the wealthy. It was an old question that is everywhere: How is wealth to be divided? It's a question between employers and employees and a question among legislators deciding tax burdens.

Greece workers were accused of being lazy and profligate. From Germany came complaints of retirement in Greece that was earlier than in Germany. (Early retirement, by the way, has a benefit beyond leisure. In this age of advanced technology and machines doing work that humans used to do, early retirement improves employment opportunities for younger people.)

However, the amount of money that Greece's government had been spending on people (budget expenditures) as a percentage were average among countries of the European Union – and less than for example that of Sweden, Denmark, France, the Netherlands and Czech Republic. (Search Michael Linden, May 14, 2010.) The big difference with these and other countries was Greece's shortage of revenues. From the standpoint of European standards, Greece did not have a spending problem; it had a taxation problem. Greece had been suffering from a huge tax evasion problem. Washington Post columnist Anne Applebaum wrote of Athens having 16,974 swimming pools, revealed by satellite photographs, but only 364 people having reported to tax authorities that they owned swimming pools.

Avoiding taxes was a part of the culture of Greece. It is estimated that tax evasion was costing the Greek government over $20 billion per year. The Greek government in 2009 collected revenues that were only 36.9 percent of GDP, far below the average of 43.9 percent for members of the European Union. In 2010, Greece's revenues were 35.4 percent of its GDP. That of Switzerland was 57.6% and France at 57%. Denmark's was 79.6 percent, Germany 47.2 percent, and Canada 45.8 percent. (The United States, where a lot of people do not hold to European standards and complain about a debt crisis, expenditures were only 14.2 percent of GDP for the year 2010).

Going into 2011 the issue for Greeks remains that if as a society they want government benefits that are standard with European economies they as a society will have to pay for it. Meanwhile, they are burdened by the cost of paying off their debt at rates of interest that are high while their economy is burdened by austerity – the opposite of stimulus – and low or no growth. Much of the debt (in the form of bonds) is held by French banks, and they are offering the Greeks 30 years to pay off the money owed them, while some believe that the Greeks will have to default one way or another. A common way to default is for a government to print more money in order to pay its debt with cheaper currency, but Greece does not have its own currency. Its currency is the Euro.

Copyright © 2013 by Frank E. Smitha. All rights reserved.