The Greek financial crisis accelerated as the wider world’s financial crises started in September 2008. Greece was severely hit by the resulting capital market instability.
The country was at the top of the rapid investment cycle financed by foreign savings and stimulated with low tax rates.
Having a large public debt-to-GDP ratio, a big government deficit as well as a big deficit on the balance of payments current account, and the falling GDP combined with persistent inflation, Greece was no longer able to service its public debt by issuing government bonds. As a member of the eurozone Greece was unable to turn to the IMF.
Greece needed the institutional framework (the creditor of last resort) that in the eurozone simply did not exist. It had to be reinvented – immediately. 2010 brought the first ad hoc campaign among eurozone Member States to solve Greece’s international liquidity problem. Then gradually the Eurogroup created the European Stability Mechanism (ESM). Greece had received help from eurozone Member States and the IMF in return for the required stabilization policy.
The implementation was controlled by representatives of the European Commission, IMF and ECB (the “Troika”). However, Greece’s problems started elsewhere, in a long lasting investment cycle with extensive economic growth, but these problems continued to grow as a result of the stabilization policy prescribed by the Troika.
By 2010, Greece had been in recession and had external and internal imbalances, large public debt and a fiscal deficit. Greece is a member of the eurozone and this should provide a Member State with an institutional framework for access to credit in its domestic currency while forcing it to (1) eliminate fiscal imbalance, (2) reduce inflation, (3) ensure the conditions for its external balance and (4) the beginning of economic growth. Restrictive fiscal policy (saving), which would eliminate the first two mentioned Greek imbalances, would be necessary to be combined with measures from European comparable development policy (subsidies to existing and newly-emerging businesses to cover a portion of needed R&D to introduce new products and technologies, subsidies for small and medium enterprises to cover a portion of needed investment costs, and the use of structural and cohesion funds to improve competitiveness in areas where Greece has so-called Ricardian comparative advantages related to natural resources and in particular tourism, transport, logistics, etc.) to eliminate the external imbalance (similar to Slovenia after 2008) as well as with adequate infrastructure investments financed by EU cohesion and structural funds so that stable economic growth is assured.
As a set, the last two measures (development policy and infrastructure investment, both financed mainly from EU funds) could be symbolically called “a new Marshall plan for Greece”.
Since the beginning of the Greek stabilization of 2010 to 2014, the share of the general government deficit decreased from 11.1% of GDP to 2.7% of GDP, the general government structural balance (by IMF estimations) had improved from 12.1% of potential GDP deficit to 1.5% of potential GDP surplus.
If Greece were not also undergoing economic depression, its public finance would already be stable.
During the stabilization process (2010–2014) Greek public debt decreased (due in part to write-offs) by 12 billion euros, but its share in GDP increased to 177% of GDP.
In the course of this process government expenditures were reduced by 35 billion euros, or 30%, while government revenues were reduced by 15 billion euros, or 16%.
The former Greek current account deficit had been transformed into a 1% GDP surplus in 2014. Inflation expectedly disappeared. The stabilization policy in Greece of 2010–2014 succeeded in establishing fiscal and external balance but pushed Greece into economic depression. From 2008 to 2014, Greek GDP in nominal terms decreased by 26%.
However, from 2010 to 2014 the Greek economy had lost 854 thousand jobs (19%), and over the period of crisis and the stabilization project together (2008 to 2014) the number of employees in Greece decreased by 1,075 million, or 23% (nearly a quarter).
The unemployment rate in 2014 (26.5%) was 13.8 percentage points higher than at the beginning of the implementation of the stabilization policy in 2010.
Investments had fallen significantly more than GDP. In 2014, total investments represented less than 11% of Greek GDP. Deterioration of development perspectives and worsening of the social situation in Greece caused by the stabilization program 2010–2014 reached such an extent that we can rightly refer to it as a disaster. It obviously happened accidentally.
The implementation of this stabilization policy was not a planned economic attack on Greece, rather in its essence the outcome of the hysterical (irrational) insistence of all-powerful Troika advisers. One could regard the Greek economic depression 2010–2014 as a massacre fit to be called the magdeburgerize, in reference to the German term “Magdeburgisieren” and incident resulting in slaughter of two-thirds of the population of the protestant city of Magdeburg during the Thirty Years War (May 1631).
There is no doubt that the Greek stabilization program should be redesigned and supplemented by an incentive to economic growth partly and largely financed by EU funds.
Having viable economic growth would lead to an end of the fiscal deficit (Greece has a structural fiscal surplus) and public debt would be slightly reduced, followed by a significant decrease of its share in GDP.
Greece has, using the best practices of development policy guided by EU standards, a very solid possibility of “catching up”. In the hypothetical case that its per capita income attained a level comparable to Germany in 2014, its public debt this year would represent only about 81% of Greek GDP.
Such an example is, of course, extreme, but when the first signs of improvement in this direction are realised, this country will again obtain its position as a stable Eurogroup member.
