How Did Greece Get Here

Greece is again (still) embroiled in crisis, riots and talk of default. How did it come to this? Greece is a long time in brewing this stew and the EU has let them do it.

Step 1: Greece had a ridiculously generous welfare state for a relatively poor country. For example, Greeks were allowed to retire with generous benefits as early as 55 years old. That’s great for middle aged Greeks. But where is the money going to come from? The country was poor in comparison to the rest of Europe. The Greek per capita GDP is well below the EU average. Greece also has a particularly under staffed and poorly organized tax authority. Even when taxes are – on paper – sufficient to pay for government expenditures, the Greek government has extreme difficulty collecting those taxes. So the answer to the money question was BORROW IT!

Step 2: The Greek government was initially prevented from adopting the Euro currency because their debt and deficit rates did not conform to the convergence criteria for adopting the Euro. Unfortunately, a conservative Greek government simply cooked their books to get in. In doing this they had the active help of Goldman Sachs which helped them by arranging a variety default swaps and other financial gimmicks to conceal the enormous debts that Greece was piling up. The European Central Bank authorities employ enough finance experts to see through these gimmicks or at least see that something fishy was going on. But for political reasons, there emerged a kind of norm of tolerance to failure to meet convergence criteria. Most of the current members of the Euro Zone failed to meet the strict standards for entry. But most of those failures were minor. Only Italy was really in flagrant violence of the criteria but allowed to join anyway. So, Greece hired some Wall Street city slickers to cook their books, the European Central Bank held their nose and let Greece join the Euro.

Step 3: In 2009, the Greek socialist party defeated the conservatives and reveals the true fiscal situation in Greece. With the 2008 recession in full swing, all Hell broke loose in Greece. By 2010, Greece was begging for the EU and the IMF to bail them out by restructuring their debt. A condition for that help was a substantial austerity package that included dramatically reducing the aforementioned generous welfare benefits.

Step 4: Greeks have been rioting periodically in reaction against the austerity measures – often violently.