A Plain-English Explanation of How Greece Got Into Its Debt Debacle

Jul 13, 2015 | Economic Policy, History, World Affairs

Published: Question of the Day (July 13, 2015)

Greece’s years-long debt crisis has finally come to a head this summer. Though Greece looks like it’ll get its third bailout in five years, the Greeks were very much on the brink for the last few weeks, and very close to being kicked out of the eurozone over the last few days. The Greek debt crisis seems like a never-ending tragedy, a story that never seems to go away. Greece will likely be the central crisis center of the European economy for years to come, and because of this, it’s worth asking how the Greeks got into this whole mess in the first place.The Greek economic crisis can be traced back to three core elements. Firstly, when the Nazis occupied Greece during World War II, the nation was left with crippling debt due to a major loan that had been forcibly extracted by the Third Reich. Next, participating in the eurozone (i.e., European nations that use the same currency system, based on the euro) has worked to the disadvantage of countries that need to adjust their monetary policies — Greece among them — to adapt to adverse economic conditions. Greece could have done by devaluing the drachma during the most recent downturn. Finally, the Greek government got itself into a terrible debt crisis, first borrowing money from European banks that it could not repay, then finally paying them off with loans from European governments … which it also doesn’t have the money to repay.

Lets start at the beginning. The Nazi occupation of Greece was particularly heinous. In addition to forcing Greece’s central bank to pay an $11.2 billion wartime loan (and later strong-arming the weaker nation into only accepting a fraction of that amount as compensation), Germany’s military policies resulted in more than 250,000 deaths in a span of just four years, mostly from starvation. Even after Greece was liberated, the vacuum left by the absence of Axis rule led to a chaotic political culture that continues to exist today. Incidentally, this explains how a radical left-wing party like Syriza was able to come to power. Earlier this year they made international headlines by coupling a reasonable demand — that Germany pay its WWII debt — with an unrealistic one, namely, that they be compensated with the equivalent of $303 billion.

Economists across the ideological spectrum — from the liberal Paul Krugman to the conservative Milton Friedman — agree that the euro has been (to quote Krugman) “an economic straitjacket.” As Matthew Yglesias of Vox writes, “to function smoothly, the eurozone would need to have some of these cross-subsidies [akin to how the American government transfers money from rich states to poor states]. Taxpayers in Germany and the Netherlands would have to commit to subsidizing Greece and Portugal [another country struggling under the eurozone] on a constant, ongoing basis without fussing the Greeks and the Portuguese about it too much.” Because voters in wealthier European countries will never agree to do this (even though this is the only way a currency union can work), the rest of Europe has forced Greece to accept strict austerity measures (i.e., massive cuts in government spending), even though as Krugman put it, “cases of successful austerity, in which countries rein in deficits without bringing on a depression, typically involve large currency devaluations that make their exports more competitive” … which Greece isn’t able to do.

Deep Roots

The current Greek tragedy can be traced back even to World War II, when the Nazis forced Greek to pay heavy war loans. Greece never really recovered. Since then, Greece has been involved in the wider eurozone, a system that has impeded its flexibility to control its own economy.


The European Debt Crisis Visualized

The end result of these austerity measures is that Greece now has the highest debt-to-GDP ratio (177%) and the highest unemployment rate (almost 26 percent) in the European Union. The small nation of 11 million also ranks below average or worse in “education and skills, income and wealth, civic engagement, housing, environmental quality, subjective well-being, social connections, and jobs and earnings,” according to the OECD Better Life Index. Thanks to this deteriorating quality of life, Greece has also become a breeding ground for fascist and racist parties like Golden Dawn, which have maintained a disturbing prominence in Greek political life.There are two broader lessons to be learned from the Greek debacle. First, it demonstrates how historical events that seem distant to some of us can still have a direct impact on people’s lives today — in this case, the Nazi occupation of Greece. In addition, it reveals that no nation can afford to elect irresponsible political leaders, including not only the Greek politicians whose profligacy compiled the nation’s current debt, but the European ones who won’t use common sense economics to relieve a country being victimized by its involvement in the Eurozone.