Crisis in Greece: Updated Summary

Greece is still in the news. Not surprising, since the European Union (EU) has never had such a huge problem as this with a member country. I’ve written a lot on the subject already and don’t want to belabor the point. But I’ll try to summarize here (data from Eurostat in billions of euros).

Background. Economic boom in Greece (2002-2008).

1. Nominal GDP jumps from €160 billion (2002) to €242 billion. Goes up 80 billion or 50% in 6 years. Nominal growth rate of 7% and real growth of 3.5%. The growth is equally attributable to consumption, government spending and investment; everything grows, but imports grow more and the balance of payments drops, reaching 13% of GDP or €31 billion. This is money you have to borrow from abroad each year, as you buy more from outside than you sell.

2. Unlike other countries, during these years there is no increase in population or employment. Therefore a higher GDP is divided among the same amount of people. A Greek citizen is 50% richer in nominal terms or 23% in real terms. Surprisingly, despite having the same amount of people and doing the same thing, you find yourself 23% wealthier 6 years later, or earn €80 billion more. Meanwhile, the number of unemployed sits at 0.4 million or 10%, even with the tremendous economic boom. But that’s not where problem lies.

3. Public deficit. During these years of thriving, it remains around 7% of GDP. The deficit rises €87 billion in six years… which must be borrowed. The Greek government debt increases €105 billion and by 2008 (beginning of crisis) reaches €265 billion (109% of GDP). The Greek public sector was in a bad position when the crisis began. The deficit is due to the fact that government spending keeps rising at a 9% annual nominal rate, more than the GDP, and thus is growth that you can only sustain with loans. Income grows less than GDP.

4. The economy grows, with no growth in population or employment. It grows with the money you are loaned. And the debt increases.

Tsipras and Juncker. Source: Flickr
Tsipras and Juncker. Source: Flickr

Crisis hits (2008-2014).

5. GDP is reduced by 23% in real terms. It goes from €272 billion in 2008 to €179 billion in 2014. That is a huge drop. Greece again has the same GDP as before the economic boom, in 2003. The number of unemployed increases by one million and the unemployment rate climbs 9% to 27%, a tough consequence.

6. Government spending spikes (2009) and when it starts to decline (2010) it falls much less than GDP; it continues to swell, reaching 58% of GDP in 2013. Income decreases at the same pace as GDP and when fiscal pressure starts to rise, it is not enough, reaching 46% of GDP.

7. The average Greek public deficit (2009-2013) is 11% of GDP . In these five years, the accumulated deficit totals €121 billion, which Europe (or the troika) must loan to the Greek government. It is an enormous sum.

8. The Greek government takes action. Under the new democratic socialist government, with Prime Minister Samaras, the public deficit is lowered by 12% of GDP in 2013 and 4% in 2014. From €22 billion to €6 billion. Finally, a number that is manageable. Government spending decreases (massively) from €107 billion to €88 billion. The balance of payments is now more even, because it has gone from a deficit of €31 billion (which had to be borrowed) to €4 billion.

Myths about austerity

9. “Austerity has not worked”. That is not true. Curiously, despite the massive cuts in government spending and public deficit, the Greek economy grows 0.8% in 2014; it is the first time that has happened since 2007.

10. Austerity sinks countries. It is not true although it may seem so at first glance, right when the cuts are made. Austerity has worked in Ireland, Portugal, Spain and Cyprus. So why not in Greece?

11. In my humble opinion, Greece could start getting out of the hole, carefully, and with the help of the troika .

Myths about the troika, “suffocating the Greeks”

12. Europe has loaned the Greek government €240 billion in two bailouts between 2010 and 2014. That debt has gone to repay previous debt but has also gone to the Greek citizens via government spending. Specifically, from 2011 to 2014, this translates into €73 billion or 34% of GDP in four years. This is a spike of 8.5% of annual GDP growth.

13. In addition, there have been debt relief measures. I don’t have the figures, but it can be calculated. The public debt in 2014 should be that of 2010 plus the public deficit accumulated between 2011 and 2014. According to these calculations, that is a reduction of nearly €86 billion or 24% of the public debt. That’s not bad.

14. Interest and debt are suffocating Greece. Fact: the principal repayment on the debt is made with new loans. There is zero cost to Greek citizens. The interest on the debt, thanks to the favorable conditions of the bailout, are the lowest in Europe, around 2%. It represents 7% of total government spending. Before the bailout, the Greek government had to pay €15 billion in interest. Now it’s €7 billion.

15. In short, many millions have gone to the Greek people thanks to the troika —€73 billion over four years— and a lot of interest has been saved thanks to the troika and the bailout . Incidentally, all that money comes primarily from European taxpayers.

What is Greece’s problem?

16. It’s not that complicated. You can’t have massive government spending that far exceeds your income. Would the deficit fall if GDP increased? Yes. But if you keep spending wildly, that won’t solve the problem. Much less if you have grown accustomed over the years to live beyond your means (of your salary or GDP) by going into debt.

The negotiating strategy of Syriza

17. In my opinion, the Syriza government has made a fatal mistake in its cosmic positioning: not knowing what place it occupies in the world . From the outset, it has negotiated with the idea that the EU had a lot to lose if Greece abandoned the euro or defaulted. This very idea was reiterated (again) by Tsipras last Sunday, June 28. This was true in 2010 and 2012. For that and other, more humanitarian reasons, there were bailouts. But the situation in 2015 is radically different. If Greece defaults, there will be no risk of bank failure and contagion in the risk premium or anything . I said that in February and that’s what happened. You didn’t have to be a prophet to see that one coming.

18. The Syriza government’s strategy of going back and forth, making threats today then negotiating tomorrow, breaches and contradictions, etc., takes away all of its credibility. What happened from Friday, June 26 to Wednesday, July 1 further reinforces the same conclusion: the Syriza government is not credible or serious. All you have to do is analyze what happened from Friday, June 26:

Friday, June 26:

Greek negotiators unilaterally withdraw from the negotiation, when it seemed that the sides were drawing closer and the troika had made many concessions. It is not the troika throwing them out.

Tsipras calls a referendum. There is nothing to negotiate until the people have their say.

Sunday, June 28.

Varoufakis tweets that the Greek government opposes capital controls. Hours later, the Greek government imposes it, with the bank closure and placing restrictions on the withdrawal and transfer of money.

Monday, June 29.

Tsipras sends a letter saying that he wants to negotiate. But didn’t he tell the Greek people and the troika that it was on hold until Sunday, July 6, that the people must speak?

Tuesday, June 30.

Default. Nonpayment of €1.5 billion to the International Monetary Fund (IMF), the largest in the history of the IMF.

Wednesday, July 1.

Tsipras sends a letter saying that pretty much agrees to everything requested by the troika. The Eurogroup reconvenes… they keep meeting whenever Tsipras sends them a letter.

Wednesday, July 1.

Hours later, Tsipras goes on television calling for a “no” vote on the conditions being sought by the troika. What’s it going to be? Which Tsipras should I listen to: the one from this morning, or the one from this afternoon?

19. It seems to me that the Syriza government has not evaluated the (negative) consequences if its plan doesn’t work . Have they calculated the damage they can cause to the Greek population? Do they have a plan B? As time went on, we saw that they had no plan B, and hadn’t even contemplated one.

20. So what’s the explanation for them being so steadfast in their position? It is unbelievable: 17 countries are telling you something is white, and you stubbornly insist that it’s black. I think the only explanation is that when you have so much ideology, and you’re so convinced that your truth is the only truth, that you don’t even bother paying attention to other possible truths. The Marxist-Leninist background of Tsipras and part of his team makes it difficult for them to see other realities. Their truth is the real truth. Period.

22. End of discussion. Five months without reaching an agreement means they don’t want an agreement. OK, that’s fine. But they ought to stop with the runaround.

Lack of credibility

22. This behavior of the Syriza government, which was predictable, causes a total lack of credibility. Even if next week the Syriza government says yes to everything… Do you think it will keep its promise? Or is it a mere ploy to get more money without anything in return? Its past behavior does not inspire much confidence in this respect.

23. Unfortunately for Greek citizens, their governments in all these years have not been a shining example of credibility. In January 2010, just four months after his election, Prime Minister Papandreou admits that Greece’s numbers were fudged. Many rumors had already circulated to that effect. The credibility of the Greek numbers is put into question.

24. Papandreou promises to reduce the deficit from 12% of GDP in 2009 (it was actually 15%) to 3% in just two years. He in fact leaves power within two years (November 2011), but with a deficit of 10%. In January 2010, Papandreou says Greece doesn’t need the European aid that it has been offered. Three months later it accepts the bailout. Credibility: shot.

25. With regard to this questioning of the data, I personally doubt that Greece’s GDP could have fallen by 23% in real terms. That is outlandish . Plus, the unemployment rate has gone from 9% to 27%. In short, it is hard to believe. I am not saying that the Greek statistics are false—I don’t know. But they already duped us before. However it is possible that the Greek economy has been submerged and that the GDP appears lower than it actually is. If this is the case, it doesn’t make much sense to do calculations based on the percentage of GDP. That’s why I prefer to calculate it in euros, as that’s how it can be clarified. Ultimately, debts are paid in euros—not percentages. Percentages are used to determine whether you can pay, but only if they are well calculated. Something similar happened in Spain: from 2007 to 2009 consumption fell just 2%, but the collection of VAT fell 30%!!!

Possible scenarios

Considering what we have seen, anything can happen. Here are some possibilities:

26. If the ‘yes’ wins in the referendum: 

  • Tsipras resigns and general elections are held. Starting over with negotiations that, in theory, would produce an agreement.
  • Government of national concentration, return to negotiations and an agreement.
  • Tsipras continues (rather shamelessly on his part), goes back to negotiation and accepts the agreement.

In any case, good news for the Greeks and for Europe. Hopefully that is true and we can put an end to all the turmoil the Syriza government has caused us.

27. If the “no” vote wins in the referendum: Tsipras is reinvigorated, goes back to negotiate, but the EU does not yield. Things get messy—bad news for the Greeks.

What happens if there is no agreement?

28. Little by little, banks lose their liquidity, with nothing coming in from the ECB. If it does not act immediately, businesses and families stop consuming and paying due to a lack of money and the economy collapses in 72 hours.

29. To avoid this, the central bank of Greece issues currency (drachmas) and gives liquidity to banks and the economy:

  • The exchange rate will have a significant reduction on the euro.
  • Citizens and Greek companies lose a great deal of purchasing power. Overnight they are poorer because they have, let’s say, 20,000 drachmas instead of 10,000 euros.
  • You can’t really buy things abroad (Greece imports everything from oil to cars).
  • And you can’t borrow either, because nobody will give you a loan.
  • Inflation could rise, as foreign goods are more expensive if the drachma does not generate confidence and is devalued.
  • In the end, you adjust spending drastically, and the population is suddenly impoverished. A nightmare. Has Varoufakis not considered this?

Shouldn’t the EU be more flexible?

30. It is not a matter of money. Overall, you have loaned €240 billion, so what’s another €7 billion, which is what is now being reported.

31. It’s a matter of principles: freedom and responsibility, or rights and obligations. You are freely in the eurozone, but you must comply. If not, no problem, you can leave—no one is kicking you out.

32. It’s a matter of justice. Why help Greece even more, and not help other, poorer EU countries that have not received any aid (Baltic countries, Czech Republic, etc.)?

32. It’s a matter of political prudence. What kind of message would that be sending to other governments in the euro area? That you must protest, loudly, and they will pay attention to you. What kind of message would that be sending to other countries with radical, anti-reform, spend-happy parties?

33. In short, I don’t think the EU has any reason to yield to the Syriza government any further than it has already .

34. Let them vote “yes” to the euro, do their reforms and gradually recover, as they had started to do.

What the EU can do

36. They have intelligent people who have contemplated it (I hope). What I would do is give the Greek government only the money it would need to pay its debt and deficit, assuming it makes reforms.

  • It needs €1.5 billion to pay the IMF. I’d say: Here you go! I have nothing to lose by doing that (I give and receive).
  • I would ask them to have a deficit of 2% of GDP or €3 billion. So I loan them €3 billion. They need more because they spend more? I wouldn’t give it to them. And if they don’t have enough to pay their officials? So sorry! A government needs to be held accountable by its people for the decisions it makes.

38. By doing this, I am using the bank to prevent them from spending more than budgeted, so they won’t have any money to spend.

About Eduardo Martínez Abascal

Eduardo Martínez Abascal is Professor of Financial Management at IESE. He holds a Doctorate in Economics and Business from the University of Barcelona, and an MBA from IESE, University of Navarra. He has also been a visiting scholar at the Sloan School of Management of the Massachussets Institute of Technology (MIT). Professor Martínez Abascal is the autor of the blog Economía para todos (in Spanish).

3 thoughts on “Crisis in Greece: Updated Summary

  1. Fantastic summary. It is a difficult balance to do what is best for Greek citizens whilst being fair to the rest of the european taxpayers.

    “Austerity” would seem to mean “only spending money that I have” rather than “Anti-austerity” which would mean “spending money that I don’t have”. The euphemism sounds much better…

  2. A round of applause for your blog post.
    But… I think that the crisis on Greece is something more about economic. All the people must think about itself.

    “To avoid this, the central bank of Greece issues currency (drachmas) and gives liquidity to banks and the economy”. Agreed.


  3. I agree with you: it is no a economic issue. It more about how the EU overcomes his first great crisis. The good news is that Greece is a small country and the impact of the grexit would be also small.

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