How can a country which accepted billions of dollars in loans think it’s acceptable not to pay it back? Simplistic as it sounds, the Greek conundrum stems from denying the basic principle that you can only spend what you earn.
Greece may have just reached another bailout agreement with Europe, but the defiance of last Sunday remains — 61% of Greeks voted against a plan upon which their government had already agreed. They voted against paying their debt. The agreement this week forces more government cutbacks, and will likely prolong the rage of many Greeks who oppose the necessary reforms brought on by indebtedness.
How We Got Here
Greece has struggled with high debt, high unemployment, and political turmoil since 2009. In the early years of the euro (2001-2008), Greece borrowed heavily to build up infrastructure — think the 2004 Summer Olympic Games — but its economy nearly tripled at the same time. Yet after the financial crisis of 2008-2009, the growth stopped — but the borrowing continued.
In 2010, the government realized it needed to cut back, and introduced the much-maligned austerity-cutting salaries for government workers. Later that year, the European Union (EU), European Central Bank (ECB), and International Monetary Fund (IMF) agreed to a €110 billion bailout over three years. In 2012, a second bailout deal increased the total to €246 billion by 2016 — 135% of Greece’s 2013 gross domestic product (GDP). A third bailout is forthcoming.
After seven large government cutbacks between 2010 and 2013, Greece finally took in more money than it paid out, reaching a budget surplus of 1.5% for the 2013 financial year.
The political strain proved too much, however. Between 2014 and 2015, the far-left Syriza Party gained control in numerous elections. The sporadic revolts and violent opposition to government cutbacks had empowered a political movement which favored the same government largesse and deficits which put Greece in the hole in the first place.
The “Nazi” Angela Merkel
Greece is deeply in debt, and Germany holds the IOUs. German Prime Minister Angela Merkel has insisted that Greece pay back its creditors and keep its promise to enact further government cutbacks. Incensed Greeks responded with, well, graffiti, giving Merkel a Hitler moustache, and comparing their creditors to the Nazi occupation which starved 300,000 Greeks in World War II.
Prominent Keynesian economist Thomas Piketty gives an intellectual veneer to this anti-German backlash. He tells Merkel to remember 1953, when numerous Western powers — Greece included — restructured West Germany’s debt, cutting it by 50%. Germany is hypocritical to demand Greece’s repayment and cutbacks when Greece did not demand such terms in the 1950s, Piketty argues.
As Business Insider’s Mike Bird notes, this argument proves utterly baseless. While Germany’s situation in 1945 was comparable to Greece’s today — Germany’s debt was over 200% of its GDP then, Greece’s is 177% of its GDP now — by 1953 the situation was far different.
In 1948, Germany reformed its currency — wiping out approximately 90% of Germany’s cash holdings and deposits. This austerity makes Greece’s recent reforms look like a cakewalk, but it worked.
Unlike Greece in 2015, the German economy in 1953 was growing. More than that, the country had generated a trade surplus and a government surplus — the country exported more goods than it imported and the government brought in more taxes than it spent. Germany reliably started paying back its debt. Greece, however, needs to import more than it can export, and is struggling to balance its books.
Finally, Germany’s 1950s creditors had larger concerns than debt repayments — they were in the middle of the Cold War. It was in the interest of NATO countries to strengthen an economic power in Germany that could be a strong bulwark of Western freedoms from the encroaching Soviet bloc. Germany’s economy was central to Europe’s prosperity, and bolstering both was a crucial Cold War aim.
Corruption is a Greek Tradition
Beneath Piketty’s superficial argument looms a stronger cultural opposition to efficient government. As the Daily Beast’s Nick Romeo explains: “The Greeks ‘Ate’ Their Way to Ruin.” In short, Greeks — unlike Lannisters — do not always pay their debts.
In Greece, corruption is a national tradition. In his book “The Full Catastrophe: Travels Among the New Greek Ruins,” James Angelos interviews a Greek man who traces tax cheating back to the days of the Ottoman Empire. “The one who didn’t pay taxes to the sultan was smart,” the Greek explained.
In 2014, the European Commission discovered that Greek citizens cheated the government out of €10 billion in uncollected consumption taxes. Another study estimated that self-employed Greeks failed to report €28 billion of taxable income in 2009.
Around the time of the first Greek bailout, the government found almost 17,000 swimming pools in rich neighborhoods that were never declared on tax forms.
In addition to tax evasion, welfare fraud runs rampant in Greece. On the island of Zakynthos, nearly 500 people with perfectly good vision claimed a blindness benefit from the Greek health ministry for years. 8,500 Greeks claimed to be over 100 years old in order to collect on pensions.
Some Greeks hated the austerity reforms because they made the government more efficient, cutting fraud which allowed people to avoid due taxes and collect undue benefits.
Hating on “Austerity”
The term “austerity” has garnered a great deal of hatred recently. President Obama called on Americans to reject the “mindless austerity” of Republicans, and the Huffington Post’s Howard Fineman argued that “Greece is Just the Beginning of the Great Austerity Backlash.”
To some people, the idea of paying back debts just seems … unfair. After all, why should a poor country have to pay rich countries?
As Victor Davis Hanson writes in National Review, “The rich Northern Europeans … could write off the entire Greek debt and not really miss what they lost. In the Greek redistributionist mindset, why should one group of affluent Europeans grow even wealthier off of poorer Europeans?”
“Athens has adopted the equality-of-result mentality that believes factors other than hard work, thrift, honesty, and competency make one nation poor and another rich,” Hanson explains. “Instead, sheer luck, a stacked deck, greed, or a fickle inheritance better explain inequality.”
This ideology of fairness over economic sense emerges throughout left-wing circles. Bloomberg Businessweek’s Michael Schuman actually criticized Germany for balancing its budget. “Rather than taking advantage of German financial strength to increase spending, Merkel balanced the national budget in 2014 for the first time in 45 years,” he chided.
Apparently, Schuman cannot praise a government that only spends what it takes in.
Progressives may hate the balanced budgets and government cutbacks that austerity entails, but that does not make such trimmings harmful or unnecessary. Austerity may have gotten America out of one of its worst depressions in 1920-1921. When the economy tanked, President Warren Harding cut taxes and spending, the market self-corrected, and America entered the “Roaring Twenties.” Franklin Roosevelt’s big government policies ten years later seemed to have the opposite effect, prolonging a possibly less great depression.
As Margaret Thatcher famously said, the problem with socialism is that “you eventually run out of other people’s money.” Then arises the simple question of morality — do you pay your debts, honor your word, keep your commitments? Greece, it seems, has a tradition of doing the opposite.