Greek Financial crisis

Dr. P Pullarao

Greece is perhaps the oldest and greatest civilization of human. The Chinese and Indian civilizations and some South American civilizations have also been very old.  But Greece has been a continuous trend-setter of humanity. Greece is part of the 19 European nations union. They have a common visa and a common currency.  It is no longer a Greek crisis since the deadline has past.  Along with Portugal, France and Italy, Greece forms part of the Mediterranean nations.  They have no oil or major minerals and now all suffer from economic problems.  These countries are unable to avoid a large State benefits programs and a big state-employment sector and pension and socials services.  These 4 nations are now undergoing serious recession and   there is no visible light at the end of the tunnel.

In 2010, Greece fell into severe debt issues.  Greece took huge loans to meet its ever expanding needs. In 2010, Germany and other rich nations held imposed impossible conditions on Greece for repayment.  Greece agreed since it had a pro-Euro government. But the payments became impossible and now Greece is again in a critical economic condition.

While Greece is responsible for its financial mess, other European nations, the IMF and other multi-lateral funding agencies are also largely to blame. They readily gave loans decades ago to Greece thinking that a nation’s guarantees are safe. They did   not calculate that countries can also go bankrupt. Their terms for giving a bailout to Greece in 2010 were very harsh and doomed to fail. And hence such economic policies failed and Greece is back to a crisis.

In January, 2015, a left party the SYRIZA a won the Greek elections, stating that it will fight for change in economic terms imposed by the Euro-Union. The SYRIZA has been very firm.  While its strategy may boomerang eventually or fail, SYRIZA has been able to bring the world’s attention on the mischief done by the debtor-nations too. There is no doubt that there is a debate going on whether   the terms imposed on Greece in 2010 were right or morally correct.

The main problem for Greece is that the term imposed by the creditors makes it impossible for any economic growth. The terms imposed by the creditors seem to indicate that they do not want other debtor-nations in economic difficulties to follow Greece and fail. Greece has    “dare to fail “. If all other countries also took the Greek route and “ dared to fall “, then the entire  monetary system built up by Germany, the IMF and other such cash-surplus nations  will collapse. Therefore, the rich nations of Europe had vested interests in ensuring that Greece was made an example and harsh terms had to be imposed and had to serve as a warning to other debtor-nations, which were watching Greece and were tempted to flirt with failure.

The option to fail looks much easier for democratic countries in Europe than undertaking harsh reforms. Portugal is one nation which is not a large economy like France or Italy. Both France and Italy cannot afford to fail and other countries cannot afford to allow them to fail since they are too big.  Germany and the IMF particularly want to avoid further failures.  Many years ago, the same wealthy nations imposed very harsh terms on a failing small nation Cyprus and ensured that Cyprus implemented them. Now it is Greece’s turn.

Perhaps the world expected that at midnight on Tuesday the June 30, 2015, Greece will explode and disappear. Nothing like that happened. In retrospect, maybe the debtors of Greece like the IMF, Germany and other European countries wanted to frighten Greece to pay up. But their threats did not work.

Greece is one of the oldest countries and civilizations in the world. Alexander the great who conquered the known world 2000 years ago was a Greek. The greatest philosophers and intellectuals were Greeks. Aristotle, Socrates, Heraclitus and numerous others are still remembered for what they said or wrote 2000 years ago.

Ancient history tells s that Greece was about the same size it is today. Yet, it had vast influence and controlled the thinking of the world. Greece gave us the Olympics. Greece gave us the marathon.   Today Greece has only 11 million people and yet has 22 million tourists year. Greece is part of the European Union and its people have free access all over Europe.   Millions of Greeks have left Greece and are now settled across the remaining 18 countries of the European Union.

The Crisis

Like Portugal, Italy and France, Greece allowed high spending and huge budget t deficits.  This high spending by governments was way beyond the tax revenue.  Competitive politics made it necessary   for all political parties to expand populist policies and to promise everything the people wanted and then destroy the currency to meet it. Greece suffers from having a big elderly population, with huge pensions and very little tax contributions.   Greece suffers from the fact that millions of Greeks seek employment outside Greece.  Greece is also allegedly the worst country when it comes to pay taxes by its citizens. Greece has low tax compliance and high expenditures.

Oil-rich countries   can afford such low tax collections and big budgets as oil income takes care of everything. But Greece has no oil and very little mineral riches. This has created a situation whereby Greece kept borrowing all over the world. As on date, Greece as defaulted on an IMF loan. This is viewed as very serious in the financial world.

But there are other options. The Greek government seems agreeable to resigning and not clinging to office. This has made the task of the creditor nations very difficult. They will have to find a workable solution. There is a referendum in Greece on July 5, 2015.  The result of the referendum will also indicate how Greece and the creditor nations must proceed.

On visible outcome is there. You cannot impose harsh conditions on a nation and expect them to be implemented. Greece has perhaps helped all poorer countries   in that it had boldly opposed harsh conditions and “dared to fail “.

Dr P Pulla Rao is a Socio-political and Economic analyst