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Anarchy In Athens: The Shocking Story Of Greece's Financial Implosion

by Paul Knott
28 June 2011 12 Comments

Riots, wage cuts, increasing poverty and dramatically rising unemployment have seen Greece become the number one victim of the global financial meltdown...

Perhaps the most pertinent comment about the Greek crisis was actually made decades ago by that little-known economic genius Eric Morecambe, when he famously asked “what’s a Grecian urn?” The updated answer for many Greeks is “not nearly enough to live on” and much closer to the original “about ten bob a week” than should be the case in Europe in 2011.

Some picturesque rioting apart, far too little of the coverage of what is happening to Greece has focused on the people. Decent, hardworking people. Families. Pensioners. Instead we have seen and heard endless pseudo-intelligent economist-speak about debt ratios, default and bailout packages. What this actually means is suffering, unemployment and poverty for huge sections of the Greek population. The unemployment rate, in a country with only a modest social security system, hit 16% in the first quarter of 2011. It is almost certainly already worse and will get worse still. Another 150000 state employees will be sacked as part of this week’s latest package of cuts. Plenty more will follow as part of the desperate privatisations to come and the effects of a plunging economy on the private sector.

Many of those still in work have had their wages slashed twice already and will see further reductions. Over one million Greeks (the total population is 11 million) are now trying to survive on an income of less than €400 a month. That might get you through a few good happy hours in Faliraki but try supporting a family on it when the cost of living is skyrocketing due to the austerity programmes, which, amongst other things, include all manner of sales tax rises.

These austerity programmes are being imposed on the Greek government by the International Monetary Fund (IMF) and the rest of the EU. Of course, they are pouring billions of Euros in, albeit grudgingly, and those stumping up do have the right to set the terms. After all, as most of the media, economists and politicians keep telling us, this is being done in the interests of “saving Greece”. In reality, “saving Greece” might be a secondary consideration but it is far from the main motivation. What is actually taking place is a massive attempt by the funding countries to ensure, once again, that their incompetent banks get the money back from their lousy investments.

As we have already seen in the UK, Ireland and elsewhere, it is the ordinary people who are expected to pay the crushing price when everything collapses.

Apart from the greedy bankers, the people who benefitted most from the bad loans were Greece’s political and business elites, who took advantage of the low interest rates that came with Euro membership to obtain money for projects designed to boost their political power and personal wealth. Few ordinary people could possibly have had access to the information that would have made them aware of what was going on and few received anything like as much of the benefit of these unsustainable schemes as the rich and powerful.  But, as we have already seen in the UK, Ireland and elsewhere, it is the ordinary people who are expected to pay the crushing price when everything collapses.

Worse still, it is not clear that the Greek people’s sacrifice will turn out to be worth it. For all the savings in the national budget, the indications are that the cuts and price rises are only succeeding in shrinking the Greek economy, making it ever more impossible to repay the debt and causing it to rise further. As Samuel Brittan in the Financial Times, amongst others, have pointed out it is inevitable that Greece will, sooner or later, have to renege on some of its debts and lengthen the repayment terms on the rest. This may mean Greece also has to leave the Euro and reinstate its own national currency. As has been known for some time, Greece did not meet the economic criteria and should not have been allowed to join the Euro in the first place. It is probably time to correct this error. Bowing to the inevitable now will give Greece the time and space to reform itself with less counterproductive pressure from outside agencies motivated by other concerns. This will still be painful for the Greek people but not in a way that is more gratuitous than necessary.

Contrary to much of the hysteria around, this is not likely to be too damaging for everyone else either and will not bring the whole Euro currency crashing down. The financial losses would be relatively small in relation to the scale of Europe’s overall economy. Nor would they be much larger, if at all, than continuing to pour money into the lost cause of enabling Greece to pay its debts in full and on time.

The Euro will survive because most of the people who use it want it to survive. European businesses like being able to trade around Europe without incurring losses due to unpredictable exchange rate fluctuations and most people on mainland Europe prefer being able to cross borders without the hassle and cost of constantly exchanging currencies. The departure of one small, peripheral country from the Euro will not change that and in the long-term the currency will be strengthened by being seen to stick to the rules underpinning participation in it.

Ultimately, quite a lot of us have enjoyed a holiday in Greece and now it is time to give the Greeks a break too.

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Stick 9:47 am, 28-Jun-2011

I agree that ordinary people are not to blame. But tax dodging is endemic in Greece. What did they expect would happen?? You can't just saunter along expecting everybody else to just pay for you.

Robert 11:42 am, 28-Jun-2011

If Greece defaults could that not lead to a worsening of the situation in the rest of the PIIGS? How many countries have to exit the Euro before it becomes unstable? How much cash will German taxpayers stump up before bailouts become politically untenable? Genuine questions, I'm not being rhetorical.

Paul Knott 1:17 pm, 28-Jun-2011

Thanks for your comments, Stick and Robert. All fair points/questions about a situation that is clearly more complicated than could be covered in full in a short, straightforward piece like the one above. The Greeks definitely have to sort out their tax system as part of reforming the country. But this will take more than a few months, be harder to achieve and produce less revenue if so many more people are earning less or nothing at all. Going after the well-off (invariably the biggest tax dodgers in Greece) first, rather than, for example, reducing the basic income tax threshold from Euros12000 to 8000, as planned would be a better first step too, politically and economically. Greece leaving the Euro would put other member states and the currency itself under more pressure (although I think it would survive). More strain of this kind would be undesirable, to say the least, but was starting to look unavoidable anyway a couple of days ago, given the unrealistic demands being piled on Greece -so less bad just to get on with it before more time and money is wasted. Thankfully there are signs of this danger receding, such as today's French initiative to loosen the screws a bit by extending the term of some Greek debt, thus buying them a bit more time.

Santiago Matamoros 3:19 pm, 28-Jun-2011

Socialism bears its bitter fruit yet again. The elites continue to tax the working class in order to finance the exorbitant lifestyles of the ruling class. Government payrolls and entitlements spiral out of control and taxes rob the working people. Politicians are to blame. Unions. Socialism and the fact that most people do not understand the fundamentals of economics... even President Barack Hussein Obama made an incredibly stupid quip about ATMs reducing employment - a vivid demonstration of his cluelessness on all things economic. The press ignores this serious and fundamental shortcoming with regard to the economic literacy of the Commander in Chief - the same press that pounced all over former President Bush over pronunciation - a far more minor peccadillo.

JR 6:50 pm, 28-Jun-2011

@santiago matamoros- this has nothing to do with socialism- its the capitalist elite- politicians, businessmen and bankers, corrupt to the core all of them, that cuased this mess europe wide and the working people are being made to pay for it. its no surprise that the rich have got considerbaly richer over the past 5 years, while the poor have got considerbaly poorer. greece will default on its loans- its inevitable. i support the working people of greece and their resistance!!

JR 6:53 pm, 28-Jun-2011

and it wont just be greece where the people wont stand and take it- these actions will get more and more common over the coming year- watch the working people of ireland and the uk strike and resist their own austerity cuts. the bankers and corporate elite made the mess, they should pay for it. the neo liberal 'experiment' hasnt worked( how could it?!)- its time for something different. fist in the air in the land of hypocrisy- were going to take the power back.

Jayne 9:46 pm, 28-Jun-2011

Well done Mr Knott on this excellent article - I have lived in Greece for 23yrs. There are typically lazy people here and there are the people who like my husband work outside in the heat for 15hrs a day (I myself work 8hrs a day). These ordinary people are the people who are suffering the most. The rich will remain rich and the poor will get poorer. The Greeks need answers and they are long overdue!

Johnny Johnson 5:58 am, 29-Jun-2011

I can so tell that most of you guys are British because 'tax dodging' comes up as a subject matter for 'why a country might fail'. Here's a clue, if your government is as corrupt as ours (I usually diverge from the royal 'we', but still ...), why pay more taxes to empower the idiots? Just saying, you don't have to agree, but the Moon is a Harsh Mistress even if you are free from the tax man. My hope and prayer is that Pound is still a round to outlast the Euro. Less government, solar powered cave living and homebrew - score. May you hoons get back your real guns one day. Chao.

JT 4:35 pm, 29-Jun-2011

Greece has had a democratic, socialist government on and off for some time now so the utilitarian suggestions above is not wholly correct. Apart from the tax reforms that were suggested that Greece take up before joining the single currency, blah, blah...but this is not the platform to discuss. In basic form a government has two forms of revenue raising; taxation or borrowing. when the latter overtakes the former in a budgetary sense this equals deficit. Unfortunately, if a society wants roads, schools, hospitals etc provided by public funds it requires either and equal amount of more taxation revenues or government borrowings. If you have a persistent budget deficit and debt to reduce one and service the other you need to cut public spending and raise taxes at the same time. Unfortunately, both will shrink the economy, through increased unemployment, reduction in taxes and higher demand for government support. An unfortunate byproduct of living beyond you means (I can hear my Grandma now). Best scenario is actually Germany leaving the Euro, not Greece. Good work ST and PK for this summary of social and economic debate. Lets just wait until the UK 10yr Gov bonds mature in 2018, hey.

JR 4:49 pm, 29-Jun-2011

Greece has long lived beyond its means and spent much of the last two centuries defaulting on its debts. Joining the euro was meant to put an end to all that. However, it merely seems to have exacerbated its problems. It was no surprise to any economist that the European Union, at first, refused to allow the country to join the euro when the new currency started in 1999. Quite simply, its debts were too high and inflation was out of control. By 2000, the EU finally allowed it to join, though there were suspicions at the time that Greece was operating a "limbo dance" – squeezing its figures to hit the stringent euro criteria, only for them to flip back to dangerous levels once it had entered. Indeed many believe Greece simply lied about its figures to gain entry. At the time its inflation was 4 per cent, much higher than the European average, and was suffering from one in ten people out of work – a higher figure than currently in recession-hit Britain. By joining the euro, however, it suddenly enjoyed substantially lower interest rates, because the it was able to borrow in euros. Whereas during the 1990s, Greece had frequently had to pay out 10 per cent or more (18 per cent in 1994) to borrow money, its rate fell dramatically to 3 per cent or 2 per cent. Ben May, Greek economist at think tank Capital Economics, said: "Their mistake was to go out, borrow money and use it to fund huge wage growth, rather than pay down its already substantial debts." Greece went on a spending spree, allowing public sector workers' wages to nearly double over the last decade, while it continued to fund one of the most generous pension systems in the world. Workers when they come to retire usually receive a pension equating to 92 per cent of their pre-retirement salary. As Greece has one of the fastest ageing populations in Europe, the bill to fund these pensions kept on mounting. Tax evasion, endemic among Greece's wealthy middle classes, meant that the Government's tax revenues were not coming in fast enough to fund its outgoings. Hosting the Olympics in 2004, which cost double the original estimate of €4.5 billion, only made matters worse. By the start of this year Greece's debt had hit €300 billion, more than the entire value of its annual GDP. This is unlikely to fall quickly, as its current budget deficit – how much its borrowing exceeds tax receipts – is running at 13.6 per cent of its gross domestic product, twice the Eurozone average. Things have come to a head because the international rating agencies have cut Greece's credit rating, concerned that it will default on its debts. This has the immediate effect – just as when a credit agency cuts a consumer's rating – of pushing up the cost of its borrowing, setting off a vicious spiral.

Bellend Sebastian 3:54 pm, 2-Jul-2011

Mental to have let them into the EU, never mind the euro. Greeks have absolutely no respect for each other, never mind neighbours. Just spent 2 months there. They're fucked.

Poseur 2:31 pm, 5-Jul-2011

You haven't grasped the long term implications of Greece bailing out now on the worth of its citizens as their debt is converted into Drachmas... http://www.lrb.co.uk/2011/06/30/john-lanchester/once-greece-goes

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