2010-2018 Greek Debt Crisis and Greece’s Past: Myths, Popular Notions and Implications Labros S. Skartsis, Ph.D. September 2018 (Revised Version Published October 14, 2018) Introduction The 2010-2018 Greek Debt Crisis has had a variety of consequences, but one of the least analyzed, is the addition of “insult to injury” to the entire Greek nation. There seems to be a fairly consistent pattern in reports and arguments made in international media, which merits research and analysis, possibly leading to conclusions with wider implications. What we experience in the present is so powerful an impression (while the past can easily be “condensed” into appropriate words), that we could easily be convinced that it “has always been so”. During the Greek Debt Crisis, (mostly) Western news media have relentlessly focused on selected, negative aspects of the Greek society, organizations and economic activity and, very aggressively, sought similar problems that had happened in the country’s past. Such focus has included exaggerations and surprisingly inaccurate arguments, which have been propagated to a degree that practically made them undisputed facts (a collection of such inaccuracies was presented in a previous relevant paper [1]). The result was an implied message that “things are, and have always been, so bad in Greece, that the Greeks are responsible for whatever happens to them”. It is indeed surprising that impressions that could be corrected by a simple review of readily available data, have been so widely shared across the planet. This paper is certainly not a detailed analysis of Greek economic history, or the controversies surrounding the evolution of the Greek Debt Crisis. It simply aims to present basic economic facts, which, for one reason or another, have mostly been absent in coverage by the above news media. Facts that show that what has been effectively presented as an (almost) eternal feature of a nation, was actually the result of only a short period of mismanagement and irresponsible behavior during a global financial crisis, followed by disastrous errors during the bailout programs. 1 Historical Perspective Greece, like other European nations, had faced Debt Crises (four varying cases of default) in the 19th century, as well as a default in 1932 during the Great Depression[3][4]. Most of the 19th century was indeed “traumatic” for Greek history and finances after independence in 1830. Nonetheless, the above should be compared with e.g. six cases of default for Portugal during the 19th century[3][4], and eighteen cases for Spain between 1800 and 1941 [4]. During the 20th century, Greece’s economy improved markedly, as it frequently enjoyed GDP growth rates among the highest on the planet [5]. For a quarter century – early 1950s to mid 1970s, during the “Greek Economic Miracle” – Greece was second in the world in economic growth rates, after Japan [6]. Average Greek Public Debt-to-GDP ratio for the entire century before the crisis (1909-2008) was lower than that for the UK, Canada or France [2] (see Table 1), while for the 30-year period (1952-1981) until entrance into the European Economic Community, the Greek Public Debt-to-GDP ratio averaged only 19.8% [2]. Country Century Average (1909-2008) Public Debt % of GDP United Kingdom 104.7 Belgium 86.0 Italy 76.0 Canada 71.0 France 62.6 Greece 60.2 United States 47.1 Germany 32.1 Table 1 - Public Debt-to-GDP (%) average, century (1909-2008) before the Greek Debt Crisis (selected countries). Data taken from IMF Historical Public Debt Database (in some cases of war periods no data were available) [2] . 2 Increase of Greece’s Public Debt-to-GDP Ratio After 1981 Between 1981 and 1993 the Greek Public Debt-to-GDP ratio steadily rose, surpassing the average of what is today the Eurozone (which also rose significantly during the same period) in the mid-1980s (see Figure 1, which also includes years of the Debt Crisis). This rise after 1981 followed a similar trend with the Italian ratio (see Figure 2). Figure 1 – Public Debt-to-GDP (%) Greece vs. Eurozone, 1977-2016. Graph from Wikipedia [14] (future projections not included). 140 120 100 80 Greece 60 Italy 40 20 0 1975 1980 1985 1990 1995 2000 2005 2010 Figure 2 – Public Debt-to-GDP ratio (%) for Greece and Italy, 1981-2007. Data taken from IMF Historical Public Debt Database [2]. For the next 15 years, from 1993 to 2007 (i.e., before the Global Financial Crisis of 2007–2008), this ratio for Greece remained roughly unchanged (the trend was not affected by the 2004 Athens Olympics, contradicting one more popular argument about factors that had fuelled the crisis), averaging 102% [2][7]. This value was still lower than that for Italy (107%) and Belgium (110%) during the same 15-year period [2],and slightly lower than the current value for the U.S. or the OECD average [8]. 3 The “Critical Period” Before the Crisis: Years 2000 to 2007 Greece entered the Eurozone in 2001, having met all criteria for acceptance, including this for the budget deficit - which had fallen below 3% of GDP in 1999, the reference year for acceptance, according to the Eurostat accounting rules (ESA79) in force at the time [9]. However, the budget deficit again exceeded 3% of GDP during the following years, reaching 6.7% in 2007 [10]. This certainly made Greece more vulnerable to global crises, as it was combined with a high relative public debt level. Nonetheless, the effect of the budget deficit on the Public Debt-to GDP ratio was counterbalanced by high GDP growth rates [36]. From 2000 to 2007 Greece appears to have managed to control this ratio and keep it close to 100%, in a manner similar to that of Italy (Figure 3). For comparison purposes, in Fig.3 the ratios for two more countries (during different 8-year periods) are included: the U.S. for 2010 to 2017, following the Global Financial Crisis, and Belgium for 1990 to 1997, when it was able to control its ballooning debt. 160 140 120 100 Belgium 1990-1997 80 Greece 2000-2007 Italy 2000-2007 60 U.S. 2010-2017 40 20 0 0 2 4 6 8 Figure 3 - Public Debt-to-GDP ratio (%) for Greece, Italy, Belgium and the U.S. for years “0” to “7” of the indicated periods. Data taken from IMF Public Debt Database [15]. 4 Notes on the Correction of Greek Debt and Deficit Values The Greek Public Debt-to GDP values for 2006 and 2007 (close to 105%) included in the above diagrams and data, were established after audits[11] resulted in corrections of up to 10 percentage points for the particular years (as well as similar corrections for the years 2008 and 2009).These corrections, although altering the debt level by a maximum of about 10% [11], resulted in a popular notion that "Greece was previously hiding its debt". These audits, which also raised the corresponding budget deficit values, have lead to accusations regarding Greek data credibility. At the same time, they lead to a certain controversy (regarding, among other issues, the way deficits of a large number of legal entities from the non-financial corporations in the General Government sector, were retroactively added to the budget deficit figures) involving the then head of the Greek statistical authority who was accused of “inflating the budget deficit”[12][13]. This issue, its handling by international media and its implications to the Debt Crisis itself, obviously merit extensive research; however, this is beyond the scope of this paper, which simply accepts the final corrected data. Clearly, nonetheless, a popular notion that Greece’s economic activity was “built on debt, which the country was hiding from the world” ignores the actual data, levels of corrections, and relevant comparisons. The systematic use of such terms by international media, appears to be consistent with the pattern described in the Introduction. Even more emphasis is given by media to the notion that Greece has “always been cheating”, combining the above corrections with the usage of derivatives’ deals with U.S. Banks by Greece in 2001, involving 2.8 billion Euros [9] (which, indeed, effectively masked parts of its deficit, being an “accounting trick” that was not illegal at the time, also employed by other Eurozone countries[9A]), and the argument that Greece entered the Eurozone only thanks to false budget deficit data (which is a totally inaccurate statement [9]). 5 Too High Budget Deficit; the Beginnings of a Debt Crisis: Years 2008 and 2009 It is clear that during the Global Financial Crisis of 2007-2008, Greek governments acted irresponsibly as they allowed the budget deficit to rise to prohibitive levels. After corrections/recalculations (see above), the budget deficit value for 2008 was raised to 10.2% of GDP, while the value for 2009 was finally raised to 15.1% [10]. . The comparison of the latter with the official government forecast (until September 2009) of “6-8%” (depending on the application of a special tax) has been cited as one of the reasons that lead to the Debt Crisis. Of course, several Western countries recorded budget deficits near or over 10% of GDP in 2009, after the Global Financial Crisis, including the UK and the US [1][10]; in addition, revisions of forecasts were not limited to Greece (for example, both the UK and US revised their forecasts for the level of their 2009 budget deficits, more than tripling it [1]). However, Greece could not afford such levels of budget deficits, due to its high relative public debt, while its revision of its 2009 budget deficit forecast came very late, in October 2009. As we have stated earlier, an analysis of the details that lead to the crisis, the controversies surrounding it, or the events during the three bailouts Greece received until August 2018, are beyond the scope of this paper. However, the results of the above bailout programs, when the country suffered serious damage to both its economic output and international image, cannot be oversimplified or ignored. 6 Effects of Bailout Programs on the Debt Crisis Itself It is interesting that media emphatically use the terms Greece’s “enormous debt”, or ”mountains of debt”. Such terms imply a solely Greek fault in an apparently obvious and self-explanatory manner. This, of course, is totally misleading, as Greek public debt is only high as a percentage of GDP (it is not even too high on a per capita basis[19]).It is logical to consider that if the latter was stressed, natural questions would arise as to what happened to the Greek GDP during the crisis, and why. Indeed, there was a 25% drop of Greece’s GDP connected with the bailout programs[16][17]. And, although plenty of attention has been given to the humanitarian aspect of such a drop, not enough emphasis appears to have been given to its disastrous effect on the Debt Crisis itself. Actually, its effect was critical: the Public Debt-to-GDP ratio, the key factor defining the severity of the crisis, mathematically jumps from its 2009 level of 127% [18], to about 170%, solely due to such a reduction of the denominator (i.e., the GDP). Such a level is considered probably unsustainable. Between 2009 and 2017 the Greek public debt rose from €300 bn to €318 bn (a per capita debt value still below the OECD average, [19]) , i.e., by only 6%, thanks, in part, to the 2012 debt restructuring [20][21]. However, during the same period, the critical Public Debt-to-GDP ratio shot up from 127% to 179% [20] mostly due to the severe GDP drop. This value trapped Greece into a vicious cycle of austerity hindering economic growth. Thus, it compromised the most effective way of exiting the crisis and reduction of this ratio. In a 2013 report, the IMF admitted that it had underestimated the effects of so extensive tax hikes and budget cuts on the country’s GDP and issued an informal apology* [22] [23] [24] [17]. Indeed, the Greek programs imposed a very rapid improvement in structural primary balance, at least two times faster than in Ireland, Portugal and Cyprus [25] ("a record fiscal consolidation by OECD standards[31]"). The results of these policies which worsened the debt crisis, have been cited [26] [27], although this view is not very “popular”, while the above key difference from other bailed-out countries is rarely mentioned when arguments are made about the countries’ relative performance. Greece’s President, Prokopis Pavlopoulos, has been one of the few official voices that have so strongly stressed the bailout progams' share in responsibility for the depth of the crisis [28] [29]. Greek Prime Minister, Alexis Tsipras (who has been widely criticized for his handling of the crisis), speaking on Bloomberg, spoke about errors in the design of the first two programs which, by imposing too much front-loaded austerity, lead to a loss of 25% of the Greek GDP [16]. [*Note: The IMF did formally apologize to Greece on a different issue, in 2012, after comments by Christine Lagarde indicated lack of respect for the sacrifices made by [30] Greeks ]. 7 Media Reports: A Case of (Almost) “Virtual Reality” It is understandable that, in cases of complex issues like the Greek Debt Crisis, news media tend to use simplified presentations of reality, including “self-evident arguments”. Surprisingly naïve implied explanations, like “Greeks are lazy and unorganized, that’s why they are in debt”, have apparently found a wide audience (a fact rarely mentioned, is that high Public Debt-to-GDP ratios are often a feature of advanced economies, while low ratios are very often connected with some of the least developed economies[2]). This approach could indeed, simply be naïve. However, the frequency and pattern of reports, which, on top of relentless emphasis on selected negative features, has included outright inaccurate claims, has lead to accusations about manipulation [1] (possibly connected with several issues, including resulting benefits to “safe haven economies”, or a calculated approach to divert focus from the serious errors during the bailout programs, as described in Chapter 6). To somebody following the above reports, it may look “surprising” that Greeks, even before the crisis, worked the hardest in the EU, took fewer vacation days and, on average, retired at about the same age as the Germans[1][32][33], Greece’s private and households Debt-to-GDP ratio was one of the lowest in the EU, while its Government expenditure as a percentage of GDP was at the EU average [1]. Even tax evasion, when quantified, was not as far from this in other European nations as one would probably anticipate (Greece’s “shadow economy” was estimated at 24.3% of GDP in 2012, compared with 28.6% for Estonia, 26.5% for Latvia, 21.6% for Italy, 17.1% for Belgium, 14.7% for Sweden, 13.7% for Finland, and 13.5% for Germany[34], and is certainly related to the fact that the percentage of Greeks that are self-employed is more than double the EU average [2013 est.][35]). As shown in previous Chapters, despite weaknesses and even failures in Greece’s economic and other structures, the country’s previous economic performance has been far better than what has been implied in the aforementioned reports, including the period on the eve of the Global Financial Crisis of 2007-2008. The trend to maintain a negative image has, apparently, also resulted in little focus on the country’s positive performance during the bailout period, when it achieved a record fiscal consolidation[31] and “topped the global list with regard to structural reforms” (2013 data) [37]. Unfortunately, many of the accomplishments during the bailout period were a necessary result of errors in the design of the bailout programs themselves. The notorious housing complex on Alexandras Avenue was built between 1933 and 1935, and, for decades, its dilapidated buildings are completely out of place, being in limbo between decisions for demolition or preservation as a historic area (and, in the latter case, decisions for allocation of funds for restoration). For years they have been largely vacant, used by immigrants or refugees, or occupied by activists’ groups (during the 2004 Athens Olympics they were hidden from view by a temporary structure). In an action typical of Western news channels’ pursuit of powerful impressions, they have been used as “fitting background” during reports about the Greek Debt Crisis. [Photo:Matrix24.gr] Epilogue Future historians will have to present a careful mix, when stating or implying responsibilities for the evolution of the Greek Debt Crisis of 2010-2018. 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