July 8, 2015    3 minute read

Greece: Living Beyond its Means

   July 8, 2015    3 minute read

Greece: Living Beyond its Means

Greece is grabbing headlines all over the world. There was a recent referendum where an overwhelming majority of Greeks voted “No” to conditions for another bailout. Greek banks are running out of money and Greek people are limited to withdrawing a maximum of 60 euros per day. Negotiations have become increasingly hostile as impending deadlines approach. The aim of this article is to discuss the manner by which Greece got itself into this predicament.

Taxation

There was a widespread culture of tax evasion in Greece. It was very easy for some people to understate their taxable earnings. There was also a problem with corruption when it came tax collection. In February 2015, Haris Theoharis, a member of the Greek parliament said that because of tax evasion, every year Greece was missing out on “between €10bn and €20bn in revenue”.

Government Spending

In short, Greek Government spending rose rapidly before the crisis. A good example is Greek wages. The BBC reported that “Public sector wages, for example, rose 50% between 1999 and 2007 – far faster than in most other Eurozone countries.”

Concealed Borrowing

The EU stability and growth pact requires each member state to stay within a certain limit when it comes to government deficit. This limit is 3% of GDP. Greek governments decided the only way to meet this target was to conceal some of its borrowing. However, when the financial crisis hit- there was no longer a place to hide. In 2009 Greece announced it had been understating the amount of government deficit. And after it did this, according to the New York Times it was “shut out from borrowing in the financial markets.”

Taken together, the rising spending, low tax revenue and less borrowing meant that debt levels in Greece were rising. They rose so much that Greece was no longer able to repay these growing debts- and so needed a bailout.

The Role of Creditors

The three institutions responsible for bailing out Greece are described as the Troika. They are: the European Central Bank (ECB), the European Commission and the International Monetary Fund (IMF). These institutions decided they would bail out Greece, but in return they called for reform- namely in the form of major austerity measures. These reforms crippled the Greek economy. GDP fell continuously until 2014 and unemployment rocketed- it is now at around 25%.

The Syriza Government

In January 2015, the radical left wing Syriza party was elected to govern Greece. They were elected as an alternative to austerity and their leader Alexis Tsipras openly opposed the austerity measures Greece had been forced to take. He took a hard line with the creditors and ruffled a few feathers across Europe. Despite this, both sides seemed to be inching towards a deal. All this changed when Tsipras called the referendum. After the “No” vote, where an overwhelming majority of Greek people voted against bailout conditions proposed by “the troika”- the situation seems more uncertain than ever. Greece is a country known for its shipping industry.  Mr Tspiras’s brinkmanship is taking it into uncharted waters.

And although most people’s sights are fixed firmly on what happens to Greece in the future, it is worth stepping back into the past to see that numerous mistakes were made. Hopefully, in light of these events lessons will be learned, by both the parties involved and those looking back at these events in the future. However, as we see more and more reports about the suffering of ordinary people, we realise that these lessons have been learned the hard way.

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