by Taylor Shields
The collapse of Lehman Brothers, a sprawling global investment bank, in September 2008 almost brought down the world economy. The subsequent “perfect storm” of economic distress turned what was already a nasty downturn into the worst recession in 80 years. Massive monetary and fiscal stimulus prevented a 1930s-esque depression, but the recovery remained feeble compared with previous post-war upturns. This is particularly true in Europe, where the “Financial Crisis of 2008” became the “Euro Crisis of 2009-2013” notably including the “Greek Financial Train Wreck of today”.
The Mismanaged Wealth of Nations
The Euro Crisis has been in some respects a continuation of the Financial Crisis of 2008 by other means; markets have suffered from the weaknesses of European banks loaded with bad debts following property busts. Internal imbalances in Europe have proved significant, much like the imbalances between the US and China during the financial crisis. In the first decade of the euro, Southern European economies racked up huge current-account deficits while countries in northern Europe ran offsetting surpluses. The imbalances were financed by credit flows from the Eurozone core to the overheated housing markets of countries like Spain and Ireland, meaning home prices were rising faster than rental incomes or what it would cost to build new houses in those markets.
Greek Bailout Packages: A Trilogy (& Other Short Stories)
In December of 2008, EU leaders agreed on a 200 billion euro stimulus plan to help boost European growth following the global financial crisis. The EU ordered France, Spain, Ireland, and Greece to reduce their budget deficits. A year after the EU launched its stimulus plan, Greece announced its debt had reached 300 billion euros. This debt, the equivalent of 113 percent of Greece’s GDP and nearly double the Eurozone limit of 60 percent of GDP, was the highest in modern history. As a consequence, ratings agencies began to downgrade Greek bank and government debt, and the EU condemned “severe irregularities” in Greece’s accounting procedures.
Greece unveiled a series of austerity measures to curb the deficit in early 2010, policies intended to curtail government spending and control debt via spending cuts, tax increases, etc. In response, demoralized Greeks began striking and rioting in the streets. Newly elected Socialist president George Papandreou repeatedly insisted that Greece did not need a bailout, which proved to be utterly untrue when the Eurozone and the International Monetary Fund (IMF) agreed to a safety net of 22 billion euros to help Greece. Initially, Eurozone financial advisors were adamant that no loans would be given; however, worsening financial markets and escalating protests changed that, and Eurozone countries agreed to provide up to 30 billion euros in emergency loans shortly thereafter. The loans proved ineffective as Greek borrowing costs reached record highs and the deficit continued to soar. Eurozone members and the IMF agreed to a 110 billion euro bailout package to rescue Greece only five short months after Papandreou had so adamantly rejected its necessity.
The euro continued to fall throughout 2010 garnering further concern about the heavily indebted EU countries. The bailout package for Greece was swiftly followed by an 85 billion euro bailout package for Ireland, followed by a 78 billion euro bailout package for Portugal, a second comprehensive 109 billion euro bailout package for Greece, a 10 billion euro bailout package for Cyprus, a 41 billion euro loan to keep Spain’s banks afloat, and a 500 billion euro permanent bailout fund called the European Stability Mechanism, because bailouts were just so in vogue.
Thankfully, it’s not all bad news. After a period of prolonged austerity, the Spanish and Irish economies are both growing strongly. Beach-going tourists of the Mediterranean, reluctant to drag wads of cash to Greece, spent record amounts in Spain helping it achieve its fastest quarter of growth since 2007. The Irish economy has returned to its pre-crisis size and is growing at six times the pace of the wider Eurozone and, according to some sources, even faster than China. Greece, however, has continued to flounder.
Greece’s debt-to-GDP ratio has shot up from 120 percent when it first received a bailout from the IMF, the European Central Bank (ECB), and the European Commission in 2010 to 175 percent. In July Eurozone leaders fleshed out an agreement that could lead to a third bailout for Greece as a last-ditch effort to keep the state in the single currency bloc. Greece already owes 240 billion euros to Brussels, the ECB, and the IMF, and the new bailout package would tack on another 86 billion euros. The conditions of the bailout are still in negotiation, but without it, the world may witness Greece go from “cradle of Western civilization” to failed state.