The Greek Economic Crisis
(Stratfor, 2011)
Greece, a land fraught with conflict over her long and storied life. Greek geography has been both a blessing and a curse throughout history that stretches back to the 6th century BC. Greece has given the world many gifts, the first Olympic Games in 776 BC and classical Greek culture, especially philosophy, which had a powerful influence on the early Roman Empire. (Friedman, 2011.) Classical Greece is generally considered to be the cradle which provided the foundation of modern Western culture and civilization.
Greece is known for holding Europe’s oldest currency. Approximately 2,600 years ago Greece coined the first tradeable currency on the European continent, the drachma. Throughout Greece’s history many currencies that belonged to occupying nations supplanted this original form of payment until the 1820’s when the drachma returned to stay, the drachma was finally replaced with the Euro in 2002 (McGinnis, 2004.) How could a country that founded European currency with roots in ancient and biblical times become the focal point in the eventual near failure of the European banking system? What led to the crisis that still threatens to dissolve the EU as a common currency entity? Is a “Grexit” (A Greek exit from the EU) or a “Grecovery” (A Greek economic recovery) the end game for the country also known as the “Hellenic Republic?”
According to George Britos, Greece achieved five distinct phases of its economic cycle starting with growth from post WWII over a period of time stretching from 1945 until 2010 during which time achieving a meteoric economic growth progress followed by a long slow decline and abruptly crashing post Eurozone entry. The economic growth and social progress achieved by Greece in the post WWII years slowed drastically after 1974 because many institutions sustaining the efficient and free-market operation of democracy were cast away with the introduction of a new socialist constitution with strict provisions. (Bitros, 2013.) These policies reduced competiveness strangled growth and the economy of Greece shrank drastically from which it has yet to recover.
The first phase as shown in figure 1 below occurred in the years prior to 1974. The actual growth rate was approximately 6.9% which post WWII and an economy in shambles is an achievement unto itself this also means that in those years the economy nearly doubled three times. The second phase which lasted from 1974 until 1981, the growth rate dropped by nearly half to around 3.5% which is still a very respectable growth rate. The third phase between the years of 1981-1994 displayed a growth rate that barely exceeded a recession rate with less than 1% growth more than a 50% decline from the previous period and nearly an 87% decline from the year’s pre-1974. The forth phase, which lasted from 1994-2008 saw a slight uptick in economic activity until 2008 and lastly, the economy quite recently entered a fifth phase with negative growth rates which are averaging −3.2% during the periods 2009–2011. Overall the growth rates of the period 1954–2010 have followed a negative trend sinking from a high of 6.9% to a low of -3.2% and decrease in over 10%. In Fig. 1, this is indicated by the downward slope of the dotted line, which corresponds to the following equation:
%ΔGDP = 0.126T − 0.0006T2
(3.63) (−3.57)
¯R^2 = 0.23 D.W = 2.0 RHO = 0.185
(Bitros, 2013)
Fig. 1. The historical record of economic growth.
“Where the variables % ΔGDP and T respectively represent the percentage change of GDP and the year; ¯R2 is the adjusted coefficient of determination; D.W stands for the Durbin-Watson statistic; RHO is the autocorrelation coefficient, and the figures underneath the parameter estimates give the values of the t-statistic” (Bitros, 2013 pg 3.)
The time period of economic growth mirrors the changes in human and physical capital. Figure 2 shows the time patterns that compare the productivity for physical and human capital against total factors of productivity since the 1960’s. Capital peaked around 1974, the high growth rates came directly from increases in human and physical capital while capital tapered off bottoming out in 1995. In the period 1974–1981, the rate of increase in the productivity of these two productive factors declined, with the consequence that the pace of economic growth slowed down to half the average rate of the previous period.
(Bitros, 2013)
Fig. 2. The sources of economic growth (Bitros, 2013 pg 4.)
The span 1981–1994 saw economic growth collapse, the decline in the productivity of physical capital was not counterbalanced by the changes in productivity from all other sources. From 1994 to 2008 the growth of labor productivity accelerated significantly, but alternatively physical capital increased only moderately, raising economic growth to the average 1974–1981 rate. The decline in all productivity since 2008 explains the decline into the territory of negative growth rates.
This shows that Greece lacks the natural ability to generate capital, there are little to no natural resources, save the Aegean Sea, a lack of arable farmland and due to Greece’s geography is far away from Europe’s capital generating centers. Greek port’s that could be used for trade are surrounded by mountains and cliffs making commerce difficult. This affords Greece little room for population growth, and contributes to its inability to produce much domestic capital. This, combined with the regionalized approach to political authority encouraged by mountainous geography, has made Greece a country that has been inefficiently distributing what little capital it has had for millennia. Additionally Greece lacks a strong middle class to buy goods that would encourage trade (Friedman, 2011.)
Lacking a strong middle class, and dealing with a poorly dealt hand of geography, trade and economics by the mid 1970’s Greece had reached a fork in the road. It was run but a military Junta that allowed for open elections, the party that took over the government from 1975-1981 used excellent economic sense to again grow total production of the economy and the contribution of labor, even with a reduction in outside capital. It appeared that Greece would shake off the periods of negative growth and continue grow. 1981 elections saw a return to the family of Papandreou to the leadership of the country. This same year Greece was allowed entry into the EC the then “European Community” a precursor to the modern day European Union (Kulukundis, 2014.)
The membership into the EC allowed Greece to take advantage of numerous subsidies which the government then used to buy votes and sway public opinion to retain rule. In the competition between the two dominant political parties during that period and the decades that followed, the Greek civil service sector became the number one employer of the country as the number of people working for the government swelled to the point where it reached the highest percentage of public employees of any work force in Europe, a full 25% of the population worked on the governments payroll. Pension plans, benefits, all to keep the government in power, many of the workers had no actual responsibilities. Whole families were raised on the proceeds and came to depend on the income for over a generation. It was here that the seeds of unreality were sown, the Greek peoples had finally learned to live beyond their means and revel in excess. It was now that smashing plates in restaurants, a gesture celebrating waste for its own sake, reached its peak.