The Historical Roots of Greece’s Debt Crisis
Can the roots of today’s debt crisis in Greece be traced as far back as the 1830s?
- Over the past year, we here in Greece have been going through all of the five stages of grief: denial, anger, bargaining, depression and acceptance.
- The question before us is this: How can we use the current crisis to steer Greece in the right direction?
- Greece's economic future depends on nothing revolutionary — just a reliable property rights system, low transaction costs and strong enforcement mechanisms.
- Greece's recovery is not a sprint. It's a marathon and an exercise in building trust between citizen and state.
Over the past year, we here in Greece have been going through all of the five stages of grief: denial, anger, bargaining, depression and acceptance.
We woke up to the crisis in denial, came to terms with it, and became angry. Then we started bargaining for our future until we got so depressed we finally had to accept our “new” reality — a reality of recession, high debt and continuous austerity.
Greece is a very old country. Not just an old country, but an old civilization. It wasn’t until the 1830s that the modern Greek state was established, after rebelling and gaining independence from the Ottoman Empire.
This achievement, however, was followed by a series of wars: The 1912-13 Balkan Wars (during which we actually increased our territory), World War I, another war involving Asia Minor in 1921, World War II in 1940, followed by six years of civil war that started in 1946 — and, finally, a conflict in 1974 between Cyprus and Turkey.
The Greek Civil War was fought between a government backed by British and American support and Greek Communists. It was the bloodiest and most devastating war in the history of Greece considering the number of lives lost. The death toll reached nearly 10% of the Greek population.
While we — and the world — have been focused mostly on the political dimension of Greece’s path in the entire post-1945 era, tragically the economic sphere never received similar attention. While still a poor country, Greek leaders sought to protect, and sooth, the war-stricken population by finding alternative ways to help improve their livelihoods. The stage was set for a statist approach to economic policy.
A welfare state emerged, including an automatic, indexed salary schedule instead of annual pay increases based on market indicators (such as productivity). A worker’s base salary would be further adjusted to include subsidies and transfers of all kinds, based on factors such as marital status and number of children. This also included the infamous 13th and 14th monthly salaries.
The resulting lack of economic opportunity and real growth, however, pushed an unprecedented number of Greeks to emigrate to the United States and Australia after the World War II. With one of the highest rates of emigration in the world, remittances soon became the largest component of Greece’s GDP. Greece even established a parliamentary committee for its diaspora to better address their interests.
Also worth noting is the fact that, despite these measures, the average total monthly salary in Greece was still far below the average European Union monthly salary.
Greece’s modern history is marred by conflicting factors: a rapid evolution of the state, economic growth and governance based on legal institutions that were mainly imported. Despite all these problems, I am convinced that Greece can bounce back. And while the path to prosperity may be slow, it is not unrealistic.
Greece has done it before. Let’s not forget the economic miracle achieved by Greece in the early 1970s (when the country boasted an average annual growth rate of 6%). It was a period of unprecedented growth. Inflation was low. Greece’s GDP was growing annually about 8% — the fastest growth rate in Western Europe. Industrial production also expanded at about 10% annually, and manufacturing exports topped agricultural experts for the first time in Greece’s history.
This time around, we will need to spark growth through institutional reforms. The question before us is this: How can we use the current crisis to steer Greece in the right direction?
In the Parliament, we have pushed through some difficult, but very necessary, reforms. They are aimed at freeing up the very rigid labor market of the past. We have also taken actions aimed at rebuilding trust between citizens and the state. These reforms are opening up the so-called “closed professions,” increasing the retirement age, and consolidating wages and pension funds by 2015. We will also restore some key institutions, focusing on property rights and security of title.
We have to rekindle Greeks’ entrepreneurial spirit at home, rather than out of the country. Why is it that Greeks excel far better abroad in countries like Australia and the United States? It’s because these countries provide a friendlier investment environment. We are continuing on the path of reform to deregulate and simplify bureaucracy. I am confident we will see a remarkably strong emergence of local entrepreneurs.
A solution to all the problems can only be found if the formal economy becomes simple, predictable and, therefore, easy to track. Any rules must, at long last, be applied even-handedly, with appropriate pricing of risk and minimal informational asymmetry, which usually benefits those who have accumulated considerable economic power — and thus stifles innovation, risk-taking and entrepreneurship.
Greece’s economic future depends on nothing revolutionary — just a reliable property rights system, low transaction costs and strong enforcement mechanisms.
For that to happen, however, people first need to understand the underlying risk and the devastating effect of bad rules and processes and inappropriate institutions, and that they not only lead to persistent distortions, but also systematically diminish economic growth.
This is the answer to the country’s problems: Unshackle the chains of the past. Unleash the enterprising spirit. We have just never tried it before — and it’s high time to do so.
Greece’s recovery is not a sprint. It’s a marathon and an exercise in building trust between citizen and state. That makes it all the more worth pursuing and completing.
The 2009 crisis is probably the biggest opportunity in Greece’s modern history to carve out a new path to prosperity.
For that to happen, we need to put through deep institutional reforms. That might, and will, displease the few, but if we don’t do so, we will fail the many — our citizens.