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Long Term Causes Of The Greek Economic Crisis

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Greece banking crisis

By John D. Theodore
Faculty Member, Economics at American Public University

The Greek economic crisis is making headlines today, but the country’s economic problem started several decades ago and has a number of precipitants.

Lack of Industrialization

The first precipitant has to do with the lack of industrialization in the country. Industrialization in Greece came in the early 1960s and was followed by a rapid shift to small manufacturing in the late 1980s. This change was followed by additional de-industrialization that caused the value of manufacturing to the gross domestic product (GDP) to decline substantially.

Greek output moved away from industrial production in favor of services. This shift resulted in a low GDP per capita, the deep and long economic recession, and the unfavorable influence of manufacturing trade.

Kleptocrats in Charge

The second precipitant had to do with the kleptocratic (the verb kleptein in Greek means to steal) practice of government officials, not necessary the prime ministers themselves. These corruptive practices reached their zenith in the financing of the 2004 Olympic Games and the purchase of armaments, especially from Germany, for which German producers received substantial bribes.

Worst of all, funds allocated to Greece from the European Union were pocketed by government officials on a systematic basis. The funds received by the Greek kleptocrats found their way into banks outside the country, such as in Swiss and Cypriot banks.

The previous administration apprehended a small number of corrupt ex-government officials but most of them are still enjoying their freedom. This is reflected in the Greek proverb that states that small thieves go to jail and big ones go on vacation.

Taxation Issues

The third precipitant was the absence of correct and advanced taxation practices. Private residences never paid property taxes; small business operations rarely paid taxes; and many large businesses systematically avoided taxation. Employees and retired individuals paid income taxes. In addition, unemployment reached double-digit percentages during the last five years.

From 2009 to Today’s Crisis

The slow downfall of the Greek economy did not go unnoticed. In 2009, the European Union advised Athens to reduce its budget deficits. In the same year the debts of the country were 300 billion euros, 113 percent of its GDP, at the time Eurozone has established a 60 percent limit. In the following year the European Union detected that Greece’s government accounting system had a incorrect data; during the same year Greece received a euro bailout of 110 billion euros and was informed to begin austerity measures.

In 2012, Athens had talks with its private creditors that continued for several weeks. To this, new talks were added with the European Commission, the European Central Bank, and the International Monetary Fund (IMF) charismatically known as the “troika.” During the same year, the Greek parliament under the coalition government of the New Democracy Party and the Socialist Party (PASOK) passed strong austerity measures at the expense of salaried persons in private and government enterprises and retirees.

Between the passage of the austerity measures and the end of the 2014 calendar year, systematic visits by the troika took place in Athens and signs that the Greek government met most of its promises were visible. However, the coalition government was against additional austerity measures at the expense of salaried employees and retirees. The troika exhibited understanding of this issue and was ready to negotiate more. The negotiation process was slow but moving relatively well; both sides respected each other.

For the last several years the SYRIZA Party, a leftist political entity, headed by a young engineer—Alexis Tsipras–was promising deliverance to the Greeks from the austerity programs imposed by the European Union. In January 2015, Tsipras won the election and created a coalition government with an extreme right-wing party, the Independent Greeks or ANEL.

Many of the politicians Tsipras brought with him had limited political and diplomatic experience. The most impressive of all these newly arrived politicians was the Minister of Economics; he misrepresented the documents provide by the prime-ministers in all European meetings he attended. He was asked to resign and he is now subject to litigation by a number of parliament representatives.

The Tsipras administration managed to change the positive image Greece had in the European Union to a super-negative one. Many European Union officials overtly state that they detest interacting with the Tsipras government and negations became much more difficult. In other words, the European Union did not know what to expect from the Tsipras administration and the Greek crisis was getting deeper and deeper until the middle part of July 2015. The crisis lost its ominous force when the majority of the Greek political parties offered their support to Tsipras to honorably negotiate with the Europeans, a situation which is taking place smoothly. The banks opened on July 13, 2015,and the Athens Stock Exchange is resuming operations on July 27, 2015. The Europeans are now prepared to offer better terms provided that the Tsipras administration implements its promises. It appears that the implementation will take place due to the pressure the administration has from the rest of the political parties, with reputable members, that are closely watching what Mr. Tsipras is doing. However, it should not be assumed that the crisis is over yet.

About the Author
John D. Theodore is a full-time professor with American Public University. His third doctorate is in international business economics. He specializes in the areas of South Europe and Latin America.

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