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How Did Greece Get Here? The Origins of the Crisis

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Crisis has embroiled Greece for more than half a decade. The once prosperous economy has been reduced to shambles and is teetering on the verge of bankruptcy. How did Greece get here? Let’s have a look at Greece’s recent history to understand what drove the nation to economic ruin.

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Greece saw a particularly dark time in its history during and immediately after World War II. The Nazi occupation of Greece by Germany and Italy during the war was marked by brutal war crimes and occupation loans that tore the economy apart. Political strife followed the war. Although the 1970s ushered in a parliamentary democracy, the economy went into an inflationary spiral that lasted well into the 1990s.

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Between 1973 and 1993, the average inflation rate for Greece was as high as 18.1%, as you can see in the above graph. It fell to Euro Area average levels after that.

Economic growth was negligible, and the government resorted to increased spending to stimulate the economy, running up deficits in the process.

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Greece’s borrowing costs were much higher than other nations in the European Union prior to joining, as you can see in the above graph. Greece made concerted efforts to bring down the deficit and inflation to levels prescribed by the Maastricht Treaty signed in the Netherlands on February 7, 1992. The Treaty, which led to the creation of the euro, prescribed debt levels to be 60% of the GDP (gross domestic product) and the annual deficit to be not more than 3% for member nations. Greece (GREK) entered the Eurozone (VGK) and adopted the euro in 2002.

Greece then had access to borrowing costs at par with those available to credit-worthy nations like Germany (EWG) and France. This helped stimulate economic recovery. The GDP growth rate started to tick upward. However, it was more due to the availability of cheap funds than any sustainable growth in productivity. The complex tax system, tax evasion, and early retirement as early as 50 years of age made matters worse. The deficit of the economy was much larger than the prescribed 3%. Greece had dressed up figures to gain access to the Eurozone (EZU) (FEZ).

Everything went downhill as the global financial crisis of 2008 (XLF) (IYF) rocked the world. The weaknesses in Greece’s economy were suddenly exposed. The deficit was revealed to be a massive 12.7% instead of the 6% the government had been reporting. Investors were spooked, and the borrowing rates started shooting up as credit ratings for Greece were downgraded. Greece needed help to avert bankruptcy. The troika (the European Central Bank, the International Monetary Fund, and the European Commission) stepped in to save Greece from its fate. A bailout fund worth 110 billion euros was approved for Greece in return for stringent austerity conditions.

Greece needed a second bailout in 2012, which it received along with a new austerity plan. The total bailout amount now came to 240 billion euros.

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Less than three years later, the country ran out of money again. Greece, which was fed up with austerity, brought the Syriza party to power. Syriza is a leftist anti-austerity party. Negotiations for an extension of the bailout continued for more than five months. The Greek government negotiated for leniency in austerity reforms, while the Eurozone creditors refused to release further bailout funds without a reform agenda.

This brings us to the present. The negotiations reached an impasse on June 26, and Greece abandoned talks. Greek Prime Minster Alexis Tsipras called for a referendum and imposed capital controls on the economy.

In the next part of this series, we’ll see how austerity has ruined Greece’s economy.

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