How the Greek depression and the euro crisis started with Greek citizens just wanting to buy a decent car.
In this episode you’ll learn:
- What is the root cause the Greek economic crisis.
- How Greece workers work longer hours than any other European nation.
- Why tax compliance and out of control government spending is not the cause of the economic crisis.
- Why Greek households and businesses significantly ramped up their debt levels that led to the economic crisis.
- Why the Greek economic depression is unlikely to end without a debt write down and why European countries refuse to restructure the debt.
Sources for Greek economic statistics included:
The Greek Economic Death Spiral
Debt crisis. Bailout. Austerity. Tax evasion. European Troika.
These are terms that dominate the news coverage on the seemingly never-ending Greek economic disaster.
This crisis has proceeded for so long with such vitriol and finger pointing it is easy to lose track of what actually caused it.
Is this the case of a lavish and corrupt government bestowing bounteous benefits and other perks on its lazy citizens who retire in their 50s if they work at all while collecting multiple state pensions?
Is it true that most Greek corporations and citizens refuse to pay taxes so the Greek government is forced to borrow from the International Monetary Fund and its European neighbors to fund state handouts, and now Greece doesn’t have the money to pay back its creditors?
These are caricatures containing partial truths.
Greece does (or at least did) have an earlier retirement age than other European nations.
And Greek households and businesses indeed are less tax compliant than other European countries. The Greek underground economy of unreported revenue where no taxes are paid is estimated to be about 25% of the nation’s overall economic output as measured by GDP.
The Hardworking Greeks
Yet, Greek citizens work more hours per year than any other country in Europe and more than the average worker in the U.S.
According to the OECD, in 2014 the average worker in Greece worked 2,042 hours versus an average of 1,770 hours for all OECD countries, including 1,789 for the U.S. and 1,371 for Germany.
Of course, a nation’s wealth is not just a function of working long hours. The key is how much output in terms of goods and services is produced per hour worked.
By that measure, Greece is less productive than other nations in Europe. In 2014, Greece produced 22.5 euros of output per hour worked versus 37.6 for all of Europe.
Greece Before the Crisis
Still, Greece from 2000 to 2008 in the years before the economic crisis grew its output per hour worked by 52% versus 28% for all of Europe.
Greece’s productivity not only grew faster than Europe as a whole but its economy also grew faster.
Real GDP in Greece rose at a 4.2% annual rate from 2000 to 2007 compared to a 1.9% growth rate for the euro zone as a whole.
The nation’s unemployment rate also dropped during that period falling to 7.3% in 2008.
Clearly, it wasn’t laziness by Greek workers that led to the economic crisis in Greece.
Nor was it caused by out-of-control expenditures by the Greek government.
In 2008, the year the economic crisis began, Greece government expenditures comprised 20.3% of GDP compared to 20.2% for all of Europe. That compares to 18.5% of GDP for Greece in 2003 versus 20.2% for Europe overall.
The economic crisis is also not due to Greek citizens and corporations failing to pay their taxes, although that certainly has made things worse.
The Root Cause
Rather, the root of the economic crisis is debt. Not government debt, but the private debt incurred by Greek households and corporations.
Prior to the introduction of the euro in 1999, Greece suffered from high inflation and high interest rates. For the twenty years prior to the euro’s adoptions, average borrowing costs exceeded 20%.
After the euro, interest rates on loans in Greece fell dramatically. They were 6.8% by 2003.
Not only were loan rates relatively inexpensive, but banks were willing to lend given the booming economy.
And with Greece adopting the common currency, the cost of luxury goods, such as high-end German sports cars, were now significantly more affordable.
From 1999 to 2008, private sector debt as a percent of GDP more than doubled from 59% to 126%.
Government debt to GDP hovered around 100% over the same period.
The debt binge was led by households and businesses, not the government.
Huge Trade Deficit
All those debt financed imports led to a significant deterioration in Greece’s trade situation.
In 1995, Greece ran an even trade balance but beginning in 1999 the current account deficit (which is primarily imports of goods and services over exports) as a percent of GDP ballooned from 4% to close to 15% by 2008.
When a nation imports more than its exports, the only way to cover the shortfall is to reduce savings or borrow money. Borrowing is what households and businesses did, thinking the good times would last.
But debt only accelerates future spending into the present. At some point the debt needs to be repaid and when the global economy entered into a deep recession in 2008, Greek households and businesses had difficulty servicing their debts.
Non-performing bank loans as a percent of total loans soared from 4.7% in 2008 to 34% in 2014.
Meanwhile, as the Greek private sector struggled to pay its debts, households and businesses reduced their spending on domestic goods and services.
Large Budget Deficits
That meant businesses were selling less so they laid off workers. Greece’s unemployment rate climbed from 7.3% in 2008 to over 25% today.
Higher unemployment means more government expenditures on social services and less tax revenue since household and business income drops.
The result is a ballooning government budget deficit. Greece’s government budget deficit to GDP went from 5.7% in 2007 to 16% in 2009.
Much of Greece’s borrowing from its European neighbors and the International Monetary Fund went to cover these budget deficits and to recapitalize its banks, which were essentially bankrupt do to all the loan defaults.
How will the crisis end?
Given the high unemployment rate, significant debt burden and the ongoing economic depression, it is unlikely to end unless Greece’s lenders write down the value of the debt they are owed.
Otherwise, the economic death spiral will continue.