Unless you’re a hermit, I’m sure you’re aware that Greece is struggling. (Or just trying to set the record for ‘Most Bank Holidays in a calendar year.) However, reports today suggest that an agreement has been met, but the crisis is certainly not over. Here is a quick explainer as to why.
How did Greece find themselves in this situation?
In order to join the Eurozone, there are certain criteria that need to be met. Greece cooked the books, so it originally appeared as if they met those criteria, and the fellow Eurozone countries didn’t look too hard because everything was going well at the time. They wanted Greece to join the party.
Once Greece ditched the drachma and joined the Euro in 2001, they suddenly had access to huge amounts of credit that was not previously available to them. Over time, Greece accumulated debts totalling 150% of their national income. With the country struggling, its lenders turned aggressive, demanding the loans be paid off at an interest rate in excess of 40%.
Crippled by debt in 2010 and again in 2012, Greece turned to their European neighbours and in particular ‘Ze Germans’, for help. Fellow Eurozone nations also agreed to help out, however, the money came with strings attached. Austerity – no more early retirement, reduced pay for public workers (if they managed to keep their jobs), and large scale cuts to welfare programs (healthcare, child support, etc).
The Greek people grew tired of Austerity, and in January this year elected Alexis Tsipras as Prime Minister. Tsipras, the leader of the left-wing anti-austerity party, Syriza, was elected in on the promise of renegotiating Greek’s debt with the EU and the International Monetary Fund (IMF).
However, having failed to reach an agreement, or make a 1.5 billion euro payment to the IMF, Tsipras decided to leave the decision to take the EU and IMF bailout deal to the public, and continue with severe austerity. A referendum was held last Sunday, and 60% of Greeks voted against taking the deal, which in turn edged Greece closer to the EU exit doors – and what’s now commonly known as a ‘Grexit’.
So why is it so important that Greece pay of the debt, and why do we care?
The IMF is the world’s lender of last resort and if the debt isn’t paid, nobody will be willing to lend Greece any more money. On the 2nd of July, Greece failed to make a loan payment to the IMF of around 1.5 billion euros, and by missing this payment Greece have joined a small and embarrassing list alongside Somalia, Zimbabwe and the Sudan.
The idea behind the single currency (the euro) was that other strong European nations could prop up an individual weak nation in a time of need. However, what has happened is that Europe itself has been weakened. If Greece were to default and leave the Euro, this would leave the other European nations (including Germany) in a much weaker position. The Wall Street Journal estimates that the ‘Financial Cost of a Grexit’ to the Germans alone would be approximately 90.6 billion euros.
Elsewhere in Europe, interest rates would rise as a result and Greece could form closer ties with Russia, increasing instability within Europe.
Why are the Greeks so reluctant to take the bailout?
60% of Greeks voted against accepting the EU deal, as the majority feel that they’re being exploited. Especially young people, who feel they are not responsible for any of it, but have a bleak future ahead regardless. Youth Unemployment is over 50%, the Greek economy has shrunk by 25% since 2010 and yet further cuts are being proposed.
What is most frustrating for the Greek people is that the majority of the bailout money isn’t really helping them. In 2010 and 2012 Greece accepted huge bailout deals totalling hundreds of billions of euros, however, the money didn’t go the the Greek people. It went back to the same lenders who gave them the bailout money in the first place. They were effectively lending Greece more money to pay off money it already owed them. It’s easy to see how it can become a never ending cycle.
The conspiracy theorists angle
John Perkins discussed in his book, Confessions of an Economic Hitman (2004), how the IMF in conjunction with other international corporations routinely use debt as a way to gain control of a country and its assets. The process begins by foreign banks agreeing to lend money to a nation, however, the money will not go to the government or the people but to corporations with close ties to the banks.
Eventually, once the nation is in over its head and cannot repay the debt, they will buy those assets and other assets within the country at a fraction of the original price, whilst insisting the debt be paid off. Essentially, controlling the nation, its resources and its people. Here’s John Perkins in a 24 minute documentary…
An agreement may have been reached, but the crisis is far from over. Whilst Greece’s economy is still suffering, any bailout is a short term fix. Look at this way: You’re well into your overdraft and the bank demand their money back, but times are tough. Your current job is only paying minimum wage and to make matters worse they have reduced your hours by 25%. As you need to pay off the debt, you borrow money from another bank to pay back the first debt. Now you are in even more debt, and earning even less money.
It isn’t going to solve the problem is it?