It seems that the saga of Greece’s economic demise is still dragging on. The debt crisis plaguing the Greek economy traces back more than five years and multiple bailouts ago. Even after accepting still more emergency lending, the country remains deadlocked with its European creditors over what reforms it will undertake.
How Did We Get Here?
Asking how the whole of Europe got into its current economic mess is a broad question. Europe’s response to the financial crisis in 2008 has a great deal to do with it. Further, the structural imbalance of the European Union (EU) as a whole certainly plays into it, as well. Greece is simply the starkest example of what happens when politics and economics are not in sync.
The European Union began as a utopian vision of a unified Europe. The idea was a noble one, given the unbelievable amount of internal warfare the continent has seen in its history. However, when the euro currency was introduced in 1999 and the EU also became (partly) a monetary union known a the “eurozone,” no steps were taken to unify the new EU’s fiscal policy. This means that the member countries using the euro shared a currency but had no uniform spending policy. As a result, Greece could borrow and spend as much as it pleased while Germany maintained tight fiscal discipline and a balanced budget.
This scenario couldn’t go on indefinitely. Eventually, Greece’s spending and debt accumulation caught up with it—and Germany and its wealthy neighbors were forced to bail out their Greek counterparts.
In its most recent incarnation, the Greek debt crisis became a standoff between the country’s creditors (Germany, the European Central Bank, and the International Monetary Fund) and a newly-elected left-wing government in Greece. Led by the socialist prime minister Alexis Tsipras, Greece refused to play the part of cooperative debtor. The people had elected a socialist government, and Prime Minister Tsipras was determined to fulfill that mandate. This meant not agreeing to the austere terms of another bailout agreement.
However, Tsipras’ administration eventually capitulated after their hardball tactics didn’t secure much better terms than the ECB and IMF were originally offering. Many within his left-wing party (known as Syriza) saw this surrender as an act of treason. There was an active rebellion among the Syriza representatives, but it eventually became clear that accepting another €26 billion bailout was the only way Greece would be able to pay its bills. The country had frozen its banks, moved to privatize several state-owned assets, and was generally running out of options to remain solvent.
While the Greek government begrudgingly accepted the terms of the latest bailout last August, the specifics of what reforms will accompany this debt relief have yet to be hammered out. The European Commission and Greece are still at the negotiating table. Most likely, an overhaul of the country’s generous entitlement system and a regiment of fiscal austerity (less spending) will be demanded by creditors. None of these needed reforms were pursued during the country’s last two bailouts—but perhaps the third time is the charm.
However, this doesn’t mean the political climate in Greece has changed just yet. Much like the back-and-forth we saw during last summer’s bailout gridlock, Tsipras (pictured, right) is again playing the defiant champion of the people against the IMF and the ECB. Although Greece is unlikely to secure even further concessions from their creditors, it helps increase Tsirpas and Syriza’s popularity at home. However, Germany (Greece’s biggest single creditor) does not support the idea of more relief on the debt owed. This impasse may prove to be the biggest contributing factor in Europe’s cultural and economic fragmentation, which could end in the collapse of the eurozone entirely.
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