The Eurozone Crisis and Greece

On what rules was the euro built?

The Maastricht Treaty, concluded in 1992 by the twelve member states of the European Communities, provided for a single currency and set "convergence criteria" as the threshold for joining it. Besides inflation, interest rates and exchange-rate stability, two numbers applied to public finances: the annual budget deficit was not to exceed 3 percent of gross domestic product (GDP), nor government debt 60 percent of GDP. The euro was launched first as an accounting currency on 1 January 1999, and with the issue of notes and coins on 1 January 2002 it replaced the members' old currencies. Greece joined in January 2001. From then on these countries could no longer move their exchange rates separately. 1 2 3

The power to issue money passed to the European Central Bank in Frankfurt. The treaty made price stability its primary objective and gave it more independence from elected officials than even the German Bundesbank had. Critics saw Maastricht as writing into a treaty a "reversed Keynesianism": instead of managing demand for full employment, restrictive control of money and public spending to keep prices and financial markets stable. The treaty also ruled out two things. Article 123 prohibited monetary financing of governments by the central bank, and the "no bail-out" clause of Article 125 kept other member states and the Union from taking on a member's debts. Debt was to remain each country's own responsibility. 1 3 4

The currency became one, but public finance did not. In the United States, when a state falls into recession, every dollar its GDP loses is offset by 28 cents of federal transfers; the eurozone had no such automatic transfers. All that bound national budgets together was the Stability and Growth Pact, proposed by German finance minister Theo Waigel in the mid-1990s. Yet no sanctions were applied to France and Germany, the first countries to break the 3 percent rule, and in 2005 the rules were relaxed under pressure from those two countries. From the start the pact was criticised as unenforceable against the big countries and aimed only at small ones. 5 6

How did core and periphery diverge inside the euro? {germany}

However different conditions were from country to country, the European Central Bank could set only one interest rate. Real interest rates (the nominal rate minus inflation) were high in low-inflation Germany and low in the higher-inflation south. It therefore paid German investors to lend to the south, and southern households and firms to borrow. Markets saw Greece as a lower credit risk as a eurozone member than on its own, assuming that the Union would discipline its finances and support it in trouble. From 2000 to 2007 the Greek economy, as foreign capital flooded in, grew by an average of 4.2 percent a year, one of the fastest in the eurozone. 4 7

Where the money flowed in, wages and prices rose faster than productivity. As labour costs rose more in the periphery than in core countries such as Germany, Greece lost competitiveness and its current account deficit swelled. The current account is the balance of money a country exchanges with the rest of the world through trade in goods and services and income flows; a deficit must be covered by borrowing or investment from abroad. Greece ran current account deficits averaging 9.1 percent of GDP from 2000 to 2011, and both its trade deficit and its budget deficit rose from under 5 percent of GDP in 1999 to around 15 percent in 2008–2009. In 2009 the trade deficits of Italy, Spain, Greece and Portugal ran to tens of billions of dollars each, while Germany ran a surplus of $188.6 billion. 7 4

On the German side wages were held down. Taking up the recommendations of the Hartz Committee in 2002, the Schröder government carried out the "Hartz I–IV" labour-market reforms in stages from 2003 to 2005. The EU employment commissioner László Andor later criticised the German practice of "wage dumping" within the eurozone to gain larger export surpluses. The money earned through the surpluses was lent back out to the periphery: according to the Bank for International Settlements, by December 2009 German banks had amassed claims of $704 billion on Greece, Ireland, Italy, Portugal and Spain, far more than their aggregate capital. In Spain and Ireland the credit that came in this way fed property bubbles. 8 7 4

How did the shock of 2008 become a Greek debt crisis? {greece}

When the 2008 financial crisis spread to Europe, the flow of funds from core to periphery dried up. As banks faltered, governments put public money into rescuing them. On 29 September 2008 the Irish finance minister Brian Lenihan issued a two-year guarantee to the depositors and bondholders of the six main banks. Irish banks lost an estimated €100 billion, much of it on loans to property developers and homeowners, and the Irish budget went from a surplus in 2007 to a deficit of 32 percent of GDP in 2010, the highest in the history of the eurozone. Ireland's crisis came not from government over-spending but from the state taking on the banks' debts. 4 9

In Greece the socialist Panhellenic Socialist Movement (PASOK) won the October 2009 election with 43.92 percent of the vote, and George Papandreou became prime minister on 6 October. The new government revised the 2009 budget deficit, which its predecessor had forecast at 6–8 percent, to 12.7 percent of GDP; the final figure, recalculated by Eurostat's method, was 15.4 percent, and government debt rose to 127 percent of GDP. Greek statistics had been losing credibility since Greece applied to join the euro in 1999, and it emerged that derivatives such as cross-currency swaps arranged by Goldman Sachs and other banks had been used to hide the size of the debt. Markets began demanding higher interest on Greek bonds. 10 7 4

When bond yields rise, so does the cost of borrowing anew to repay old debt, so rising rates themselves make default likelier, which in turn pushes rates higher: a self-fulfilling panic. The spread between Greek and German bond yields and the price of credit default swaps insuring against default shot up together. Inside the euro Greece could not, like other countries, let its currency fall to boost exports and lighten its debt. When the rating agencies downgraded Greek bonds to junk at the end of April 2010, private capital markets closed. On 23 April, on the island of Kastellorizo, Papandreou formally asked the European Union to activate its support mechanism. 3 7 10

What did the Troika and the rescue funds demand? {greece} {ireland} {portugal}

On 2 May 2010 the European Commission, the European Central Bank and the International Monetary Fund (IMF) agreed to lend Greece €110 billion over three years. People in Greece and the other debtor countries called the three institutions "the Troika". The money came with conditions: Greece had to sign a memorandum of understanding committing it to austerity (spending cuts and tax increases), structural reforms and the privatisation of state assets, and the loans were released in tranches each time the European troika reviewed compliance. The interest rate was 5.5 percent. Most of the money went to repay maturing bonds, so that Greek debt initially held by banks gradually passed to public creditors. 7 11

To stop the crisis spreading, the 27 EU member states agreed on 9 May to create the European Financial Stability Facility (EFSF), a vehicle that could issue bonds backed by member-state guarantees and lend up to €440 billion; with up to €60 billion backed by the EU budget and up to €250 billion from the IMF it formed a €750 billion safety net. On 10 May the European Central Bank, too, turned to the bond purchases it had shunned, launching a "Securities Market Programme" to buy southern sovereign bonds in secondary markets. Only three days earlier its president, Jean-Claude Trichet, had denied at a press conference that any such purchases would be made. 4 3

Ireland came next. In secret letters to the Irish finance minister in October and November 2010, Trichet informed the government that emergency liquidity assistance might be suspended unless it requested a programme, and the ECB insisted that no losses be imposed on the bondholders of the nationalised banks. On 29 November Ireland agreed a €67.5 billion bailout and pledged to cut its deficit below 3 percent. Portugal requested €78 billion in the first half of 2011. Meanwhile the ECB raised its rate from 1 percent to 1.5 percent in April and July 2011. A Brussels summit on 21 July lengthened Greek, Irish and Portuguese repayment periods and cut their interest rates to 3.5 percent. 3 4 7

Greek debt did not shrink. On 26 October 2011 eurozone leaders agreed a 50 percent write-off of Greek bonds held by private banks and a rise of the bailout funds to about €1 trillion. When Papandreou announced on 31 October that the deal would be put to a referendum, EU leaders at the G20 summit in Cannes insisted that any vote be on Greece's membership of the eurozone, and on 3 November he dropped the plan. He resigned on 10 November, and Lucas Papademos, a former vice-president of the European Central Bank, headed a coalition government. In Italy too, after mounting pressure on bond prices, Silvio Berlusconi resigned on 12 November and was replaced by the technocratic government of the economist Mario Monti. 4 10

In February 2012 a second bailout of €130 billion was agreed, and private creditors accepted a 53.5 percent reduction in the face value of their bonds. The crisis response led on to permanent bodies and stricter rules. In December 2011 the EU countries except Britain agreed a "Fiscal Compact" capping spending and borrowing with penalties for violators, and the European Stability Mechanism (ESM), a permanent €500 billion rescue fund, entered into force on 27 September 2012. Bailouts had been carried out on top of a treaty that forbade them, and it was said that the "no bail-out doctrine" of Article 125 had become a thing of the past. 4 7

How did "whatever it takes" calm the crisis? {spain}

On 1 November 2011 Mario Draghi, governor of the Bank of Italy, succeeded Trichet as President of the European Central Bank. From December he opened two rounds of three-year loans to banks at 1 percent (LTROs), providing €489 billion and €529.5 billion. Even so, in June 2012 the yield on Spain's ten-year bonds reached 7 percent. Before the crisis Spain's debt had been only 60 percent of GDP, lower even than Germany's, but when its housing bubble burst it spent heavily on bank bailouts. On 9 June the Eurogroup (the meeting of eurozone finance ministers) granted up to €100 billion to recapitalise Spanish banks. 3 4

At an investment conference in London on 26 July 2012 Draghi declared: "Within our mandate, the ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough." On 6 September the ECB turned the words into a programme, Outright Monetary Transactions (OMT): it could buy eurozone governments' bonds with maturities of one to three years in secondary markets with no ex ante quantitative limit, but only for a country that had entered an EFSF/ESM adjustment programme and respected its "strict and effective conditionality". Bundesbank president Jens Weidmann cast the only vote against it. 12 13 3

OMT was never actually used, but the mere promise that the central bank would keep buying brought Spanish, Italian and French bond yields steadily down, because investors betting on default would now be betting against the central bank. Its protection, though, was offered only on condition of accepting an austerity programme. The ECB went on cutting rates, setting a negative deposit rate in June 2014, and amid fears of deflation began in March 2015 a quantitative easing programme buying €60 billion a month, government bonds included. 3 4

Meanwhile Cyprus collapsed. Cypriot banks had €22 billion of exposure to the 2011 Greek haircut, and on 25 June 2012 the government requested assistance. The first plan put forward in March 2013 by the Troika and the eurozone finance ministers was a one-off levy of 6.7–9.9 percent on all bank deposits, small ones included. After the Cypriot parliament rejected it on 19 March, a €10 billion bailout was agreed on 25 March on condition that the second-largest bank, Laiki, be closed and around 48 percent of uninsured deposits at the Bank of Cyprus, the largest, be seized. It was the first time a "bail-in", putting bank losses on depositors, was applied to a eurozone country. 4 14

What did austerity leave behind in Greek society?

The Troika's prescription was "internal devaluation": since the currency could not be devalued, wages and prices were to be cut directly to regain competitiveness. In 2010–2012 Greece carried out a fiscal adjustment of more than 9 points of GDP, "a record fiscal consolidation by OECD standards". Twelve rounds of tax increases, spending cuts and reforms followed from 2010 to 2016, and Greek wages fell by nearly 20 percent from mid-2010 to 2014. By 2014 the government had a primary surplus, that is, a surplus excluding interest payments. Yet the second programme demanded a further 15 percent cut in private-sector labour costs in 2012–2014. 7

The economy shrank accordingly. Greek GDP fell by 26 percent, from €242 billion in 2008 to €179 billion in 2014, and Greece suffered the longest recession of any advanced capitalist economy to date, overtaking the US Great Depression. The debt itself grew by only 6 percent between 2009 and 2017, from €300 billion to €318 billion, but because the denominator shrank, the debt-to-GDP ratio shot up from 127 to 179 percent. In October 2012 the IMF announced that its forecasts for countries implementing austerity had been consistently overoptimistic: a fiscal consolidation of 1 percent of GDP had reduced GDP not by 0.5 percent but by 0.9 to 1.7 percent. In 2013 it admitted that it had underestimated the effects of the tax rises and spending cuts in Greece. 7 15

The pain reached into people's lives. Greek unemployment rose from 7.5 percent in September 2008 to 23.1 percent in May 2012, and youth unemployment over the same period from 22.0 to 54.9 percent; unemployment reached 27 percent in 2013 and was still 22 percent in 2017. In 2014, 36 percent of Greeks lived below the poverty line, and in February 2012 it was reported that 20,000 Greeks had been made homeless in the preceding year. The number who reported having attempted suicide rose by 36 percent from 2009 to 2011. Hundreds of thousands of well-educated Greeks left the country in search of work. Unemployment in Spain also reached 27 percent, and across the eurozone periphery the crisis raised poverty and income inequality. 7 15 4

Politics was turned upside down. The two-party system of New Democracy and PASOK, which had alternated in power since 1977, crumbled in the successive elections of May and June 2012. PASOK, which had won 44 percent in 2009, fell to 13 percent in June 2012, while the Coalition of the Radical Left (Syriza) rose from 4 to 27 percent and became the main opposition. The neo-Nazi Golden Dawn jumped from 0.29 to 7 percent and was the third party in parliament from 2012 to 2019. Across Europe, governments that imposed austerity in this period lost support, and researchers reported that fiscal consolidations raised the vote share of extreme parties and lowered turnout. 7 15

Who resisted austerity in the streets and squares? {greece}

On 5 May 2010, just after the first memorandum was signed, a general strike was held in Greece. In Athens alone 100,000 people marched, by some estimates 500,000, and some tried to storm the parliament building on Syntagma Square. That day a fire set by Molotov cocktails at a Marfin Bank branch killed three employees. The day before, members of the Communist Party of Greece (KKE) had climbed the Acropolis and hung banners reading "People of Europe Rise Up". On 27 June 2011 the unions began a 48-hour general strike, the first such strike since 1974. 16 15

In 2011 the squares were occupied. In Spain the "15-M" movement, the "Indignados", begun on 15 May by online networks such as Real Democracy NOW, set up camps in the squares to protest high unemployment, welfare cuts, the two-party system, the banks and corruption; between 6.5 and 8 million people are estimated to have taken part. Inspired by it, a non-partisan "Indignant Citizens Movement" occupied Syntagma Square in Greece from 25 May and held people's assemblies there; on 5 June well over 200,000 gathered in front of parliament. On 29 June, as parliament passed a new austerity package with 155 of 300 votes, police cleared the square with tear gas, and the last occupations were ended in August. 17 16

There was conflict within the movement too. During the two-day general strike protests of October 2011, KKE members who blocked hard-line protesters (mainly anarchists) trying to invade parliament clashed with them, and one KKE member died. The anger of the streets moved into elections: Syriza became the main opposition in the two elections of 2012. The KKE won 8.5 percent in May 2012, but in the June election a month later its support halved. 16 7 18

What happened under the Syriza government and in the OXI referendum? {greece}

In the election of 25 January 2015 Syriza won 36 percent of the vote and 149 of the 300 seats. It formed a coalition with the right-wing anti-austerity Independent Greeks (ANEL), and Tsipras became the youngest prime minister in Greek history. The economist Yanis Varoufakis became finance minister. He argued that the earlier bailout programmes had wrecked the Greek economy by piling new loans and harsh austerity on top of an unrestructured debt. The Troika answered "pacta sunt servanda" (agreements must be kept), suspended the remaining aid and agreed in February only to a four-month technical extension. By then the negotiating documents called the creditors "the institutions" rather than the Troika. 19 20 21 7 22

For four months the talks stalled. After both of the government's June proposals were rejected, Tsipras announced in the early hours of 27 June that a referendum would be held on 5 July on whether to accept the creditors' proposal of 25 June. The Eurogroup announced that the second bailout would simply expire on 30 June, and the ECB decided not to extend its emergency liquidity assistance to Greek banks any further. Greece closed its banks and imposed capital controls. On 30 June it became the first developed country to fail to make an IMF payment on time. On 5 July, 61 percent voted "No" (OXI), and "No" won in every region. 7 22

The very next day Varoufakis resigned. He wrote that, having been made aware of a preference by some Eurogroup participants for his "absence" from its meetings, which the prime minister judged potentially helpful in reaching an agreement, he was leaving the ministry, adding: "I shall wear the creditors' loathing with pride." The German government put on the table an option of a temporary Grexit, a five-year "time-out" from the eurozone. On 13 July, after seventeen hours of negotiations, Tsipras agreed to a third bailout of €82–86 billion. Its conditions, such as VAT increases, pension reform and automatic spending cuts, were judged harsher than those rejected in the referendum. 23 24 20 22

On 14 August the Greek parliament approved the third bailout agreement with 222 votes, but more than forty Syriza MPs voted against or abstained, and the government had to rely on the pro-European opposition. Varoufakis called the deal "Greece's Terms of Surrender", and German finance minister Wolfgang Schäuble's austerity demands drew a storm of criticism under the hashtag #ThisIsACoup. Syriza MPs who had argued for leaving the euro, such as Lapavitsas, moved to Popular Unity in August. Tsipras resigned on 20 August and won the September election, though on a historically low turnout. His second government carried out the austerity of the third programme, and Greece formally exited the bailout programmes on 20 August 2018. 25 20 22 26 27

How has the crisis been explained?

The most widespread account is the story of fiscal profligacy: the Greek government spent beyond its means, falsified its statistics and failed to collect taxes. The Greek finance ministry itself stated that from 2004 to 2009 nominal output rose by 40 percent while central government primary expenditure rose by 87 percent and tax revenue by only 31 percent, and in 2012 the Greek shadow economy was estimated at 24.3 percent of GDP. The Troika's austerity prescription rested on this diagnosis. But it struggles to explain Spain, whose debt was low before the crisis, or Ireland, which had run a surplus. A Bloomberg editorial, commenting on the picture of prudent Germany and profligate Greece, noted that "irresponsible borrowers can't exist without irresponsible lenders". 7 4

A second account sees a balance-of-payments crisis: the root lay less in public debt than in current account deficits, which Wikipedia's summary describes as close to a consensus. With the euro, capital flooded south and inflated southern prices and wages; when the flow suddenly stopped after 2008 (a "sudden stop"), countries that could not devalue were forced into a painful adjustment through falling incomes. Paul Krugman wrote that "this has never been a fiscal crisis at its root; it has always been a balance of payments crisis". On this view the burden of adjustment should have been shared by surplus Germany, not only by the deficit countries; in 2012 the European Commission and the IMF, too, urged Germany to raise domestic demand and wages. 4 7

A third is optimum currency area theory. Formulated by Robert Mundell in 1961, it holds that a region sharing one currency can withstand shocks that hit only one part of it (asymmetric shocks) only if labour moves freely, wages and prices are flexible, and fiscal transfers carry money to the regions in trouble. In the United States more than 40 percent of residents live outside the state they were born in and the federal budget makes transfers, whereas in the eurozone only 14 percent lived outside their country of birth and there were no transfers. Many economists held that the eurozone had never been an optimum currency area. Mundell himself, called the "father" of the euro, made an argument favourable to a single currency in 1973. 5 28

The Marxist economist Costas Lapavitsas located the cause not in Greek laziness or extravagance but in German domestic policy: by keeping its workers' wages down, Germany held inflation below the ECB's target, gained competitiveness and ran huge surpluses, with the result that Greece lost competitiveness and ran up an enormous balance-of-payments deficit. For him the EU had produced not convergence but a structure of "core and periphery", with Mediterranean and eastern peripheries arranged around a German industrial complex. Alongside debt cancellation and the nationalisation of banks, he therefore argued for leaving the euro and returning to a national currency. He also called reading Europe's crisis through the tendency of the rate of profit to fall alone "bad Marxism". 29 27 30 31

Lapavitsas's case for exit provoked debate on the left as well. Sotiris Martalis, also of Popular Unity, criticised the plan drawn up by Heiner Flassbeck and Lapavitsas for relying on an over-optimistic forecast that devaluation to a weak currency would bring rapid recovery, and argued that unless wages rose with it, workers would pay for the recovery. Varoufakis took another road: in A Modest Proposal (2010), written with Stuart Holland, he set out policies for overcoming the crisis within the euro, and after the referendum he still called for an agreement involving debt restructuring, less austerity and redistribution in favour of the needy. In 2016 he co-founded the Democracy in Europe Movement (DiEM25). The sociologist Wolfgang Streeck read the crisis as a clash between two "sovereigns", citizens below and international creditors ("the markets") above, and saw the replacement of elected governments in Greece and Italy by technocrats such as Monti and Papademos as a victory for the markets. 30 21 23 32 33

The Communist Party of Greece (KKE) opposed both the Troika and the Syriza government. In a statement before the 2015 referendum it called Syriza an "in essence social-democratic" party and urged rejection of both proposals, saying that the government's own proposal was 90 percent identical to the creditors' and contained harsh anti-worker measures. When the parliament on 27 June rejected its proposal to put to the people "No to the proposals for agreement of the EU-ECB-IMF and the Greek government" and "Disengagement from the EU, abolition of the memoranda and all the application laws", the KKE called on voters not to choose between the two but to cast the KKE's proposal as their vote into the ballot box. The way out it named was rupture and disengagement from the EU, unilateral cancellation of the debt, socialisation of the monopolies, and workers' and people's power. 34 18