The financial crisis that has crippled the Greek economy serves as a cautionary tale against irresponsible spending.
First, it may be helpful to students to explain that government finances are not much more difficult to calculate than the numbers in one’s personal bank account. A country earns X and spends Y; Y should not exceed X. Just as responsible borrowing and credit are an important part of personal money-management skills, countries should borrow only what they need to get by, under strict rules of payback.
Greece not only eschewed the rules of responsible spending, the country also completely ignored the rules of responsible borrowing. The result was catastrophic debt that the country is unable to repay, potentially leading to financial crises in the countries that loaned money to Greece.
The Greek financial trouble started decades ago when government after government increased the size of the country’s payroll. A “you scratch my back…” system rewarded supporters of the two biggest political parties with government jobs. This practice eventually led to a Greece where one in five citizens of working age held a government job.
At one point politicians stopped offering so many government jobs and instead began handing out raises to those already working for the government. This, coupled with notoriously poor tax collection enforcement, had Greece scrambling to keep the money flowing.
The country turned to its neighbors and began to borrow. The lenders offered money with little question, because as a member of the European Union, Greece was required to adhere to strict financial restrictions including not allowing its national budget deficit to exceed 3 percent of its economic output. Greece’s debt soared, but no one was concerned because the Greek government continued to report a national deficit of 3.4 percent.
The final blow was struck with the election of a new government that discovered the country’s financial books had been “cooked” for years. The 3.4 percent deficit was a lie, and Greece was really operating on a national deficit of just over 15 percent. This revelation, coupled with the demise of Lehman Brothers Holdings—a New York City-based investment bank—in 2008 and the worldwide economic crisis that followed, led Greece’s lenders to enact stricter borrowing rules. The country’s borrowing costs skyrocketed, and in an instant, it became impossible for Greece to repay its debt without taking further loans.
European Union countries and the International Monetary Fund stepped up in 2010 with a 110-billion-euro bailout (a euro equals about 1.33 U.S. dollars). The money was given with the condition that Greece implement severe “austerity” measures including deep government spending cuts and wage lowering. These measures led to a dangerously sluggish Greek economy. A second bailout of 130 billion euros has been agreed to, with 30 billion going to the country’s private debtors and 40 billion going to the Greek banks, which are expected to report massive losses.
Despite all of the austerity measures and bailouts, experts estimate that Greece may not reach financial stability until the year 2020 or later.
Class Discussion Points