The Greek Anomaly: Three Bailouts and a Continuing Crisis

THE GREEK ANOMALY: THREE BAILOUTS AND A CONTINUING CRISIS by MARKOS BEYS PAPACHRISTOU Submitted in partial fulfillment of the requirements for the degree of Master of Arts Thesis Adviser: Professor Elliot Posner Department of Political Science CASE WESTERN RESERVE UNIVERSITY January, 2017 CASE WESTERN RESERVE UNIVERSITY SCHOOL OF GRADUATE STUDIES We hereby approve the thesis/dissertation of Markos Beys Papachristou candidate for the degree of Master of Arts * Committee Chair: Elliot Posner Committee Member: Peter Moore Committee Member: Joseph White Date of Defense: December 9, 2016 * We also certify that written approval has been obtained for any proprietary material contained therein. To my Parents Christos and Patricia Papachristou Table of Contents 1. Introduction.......................................................................................................................1 2. Origins and Causes of the Greek Crisis.............................................................................7 2.1 Issues with the Greek Politics and Economics...........................................................7 2.2 Economics of the Greek Debt...................................................................................14 3. EU – ECB – IMF Bailouts of Greece..............................................................................20 3.1 Bailouts and Austerity Measures..............................................................................20 3.2 Cost of Austerity.......................................................................................................28 3.3 Why Austerity Failed................................................................................................33 4. Bailouts of Other EU Countries: Ireland, Portugal, Spain..............................................42 4.1 Ireland and Greece....................................................................................................43 4.2 Portugal and Greece..................................................................................................48 5. Alternative Scenarios.......................................................................................................52 5.1 Growth with Debt Reduction....................................................................................52 5.2 Default and Grexit....................................................................................................57 6. Summary..........................................................................................................................63 References ……………………………………………………………………….…….67 List of Tables Table 1. The Three Greek bailout Packages .......................................................................32 List of Figures Figure 1. Evolution of Greek Debt ....................................................................................15 Figure 2. Growth Rates of Greek GDP..............................................................................16 Figure 3. Greek Trade Deficit ...........................................................................................17 Figure 4. Labor Productivity and Cost ..............................................................................18 Figure 5. Unemployment in Greece and the EU...............................................................29 Figure 6. GNI per capita in Greece and OECD................................................................30 Figure 7. Relative Unit Labor Cost in Eurozone...............................................................36 Figure 8. GDP Growth in Ireland and Greece .................................................................44 Figure 9. Competitive Wages of Ireland and Greece ........................................................45 Figure 10. Export Volumes of Ireland and Greece .............................................................45 Figure 11. Portugal’s Competitiveness in terms of Labor Cost ..........................................48 ACKNOWLEDGMENT The author wishes to express his appreciation to his adviser Professor Elliot Posner for helping him during his research work. Thanks are also due to his thesis committee members and mentors, Professors Peter Moore and Joseph White. The Greek Anomaly: Three Bailouts and a Continuing Crisis Abstract by MARKOS BEYS PAPACHRISTOU This thesis explores the main aspects of the Greek economic and political crisis which was triggered by the increasing size of the Greek debt. By 2010 the debt has reached unsustainable levels impeding the country's access to financial markets. Many causes long preceded the crisis and obstructed modernization of the Greek economy. These included paternalistic, clientelist and rent-seeking politics. Accession to the European Union (EU) and later the Eurozone, despite early successes, accelerated Greece's deficit spending and its debt. The EU responded with a succession of three bailouts under increasingly strict austerity measures. A perfect storm of causes combined to yield disappointing results compared to austerity programs of other Eurozone countries. There has been a major austerity cost in economic, political and human terms, severely affecting the social fabric of the Greek society. In addition, the Euro currency has created trade imbalances between stronger and weaker states with the latter being unable to devalue. According to many experts, only a substantial debt reduction may help Greece's recovery. 1 1. Introduction The Greek economic crisis at the start of 2010 rocked the stability of the European Union (EU). To make matters worse, several more economic crises in Ireland, Portugal, and Spain occurred about the same time. Reluctantly, the EU had to respond by providing financial support to the stricken countries by bailout contracts under strict conditions. In the aftermath of these EU crises, two key questions are raised: first, why three bailouts have not worked in Greece in contrast to singular bailouts given to Ireland, Portugal and Spain, which have seen positive albeit modest economic improvement. Second, how is it possible for a member of the EU that was considered to be a successful, growing economy in Europe for more than a decade prior to 2010, could end up in such a deep economic crisis that has resulted in the loss of at least 25% of it’s GDP from 2010-2015? A number of factors both of internal and external origins have contributed to a “perfect storm” situation in Greece. However, the causes of the crisis are not only fiscal and economic, but have also had deep political and cultural roots.1 The primary reason which is mainly cited for the crisis is the rise of the Greek debt which was accumulated over the years since Greece joined the European Union and then the Eurozone in 2002.2 Traditionally, Greece would borrow money from financial institutions to cover budgetary needs (gaps in the budget) and some funds would then be allocated for projects. This borrowing (this money was easily available between 2000-2009) increased with Greece's entry in the EU and the Eurozone. The EU membership was used by the Greek 2 governments as "collateral" cover to keep obtaining funding at low interest rates from central banks and sustain a financial equilibrium in the country. In fact, during this period Greece actually achieved significant economic growth (at least 5% on average). However, this growth was partially driven by special funds (with some strings attached) which were allocated by the EU to help sectors of the Greek economy. Of course, the Greek debt kept on growing as well during this economic growth period. Nonetheless, it seemed manageable as the country appeared to be a low risk for international investors and financial institutions.3 This was unwisely facilitated by the greed of creditors to lend more money to Greece without consideration and thorough testing (the so-called stress test) of Greece’s long term ability to maintain a reasonable debt to GDP ratio.4 The EU response to the Greek crisis, especially in Germany, was very slow during the early stages; it focused mostly on arguing about legalistic issues and treaties. However, the markets took this inaction as a lack of EU guarantee on the Greek debt which led to a degrading of Greek bonds and a rise on their interest rates. This was the official position of the EU prior to 2010: no bailouts. Then the EU, concerned about contagion effects, moved together with the IMF, to bailout Greece at first in 2010. Subsequent bailouts in 2012 and 2015 were needed and made under increasingly severe austerity measures. However, these bailouts which were conditional on austerity have not been effective. On the contrary they have caused economic collapse in Greece which is evident by numerous indicators such as unemployment rate of over 25% and at least a 25% decline 3 in its’ GDP.5 Moreover, the social, human cost and politics of the austerity have been very high, breaking the mainstream two party system with radical political forces from both the hard left and the far right gaining in power and influence. Alternative economic rescue plans have been proposed ranging from pro growth policies and reforms with heavy debt haircuts, to defaults and exit from the Euro (Grexit). Many of these ideas and plans appeared in widely read articles and were promoted by some international experts in economics, finance and political science. However, none of these plans have been implemented as they were all resisted one way or another by the bureaucracy of the European Commission

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