How Greece came back from the brink
The country has staged a powerful recovery in the 10 years since it faced near economic collapse
Ben Hall and Eleni Varvitsioti in Athens
The Greek debt crisis in the 2010s led to the country almost exiting the euro, but tough reforms helped to transform its economy and the experience has helped to profoundly reshape the Eurozone © FT montage/Getty ImagesDimitra Piagkou remembers precisely the day in 2011 when she “broke”.
She climbed to the top floor of her building and put her leg over the parapet.
“I was ready to jump,” she says.
Her laundromat business in Athens had gone under and she was hundreds of thousands of euros in debt.
That day the bank was auctioning off her home.
Greece had sunk into the most severe recession of any developed economy during peacetime.
Piagkou had nothing left apart from her dogs.
As she prepared to leap, her beloved German shepherd tugged her from behind and she took a life-saving step back.
Piagkou spent the following months living on a park bench.
Now aged 74, she has no pension because of her tax arrears and ekes out a living selling a street newspaper.
“You learn to survive with nothing,” she says.
Piagkou’s personal tragedy is one of many that unfolded during years of immense economic and social hardship caused by Greece’s devastating sovereign debt crisis.
This month marks a decade since the turning point in the drama, which gripped global financial markets for years and threatened to blow apart the economic and monetary union that is the EU’s singular achievement.
“If Greece [had] exited the euro, that would be the end of the euro,” says Pierre Moscovici, the European commissioner for economic policy from 2014-19.
“Because that proves that our single currency isn’t forever.
It becomes just a fixed-rate zone.”
In July 2015, Greeks voted in a referendum to reject the country’s international bailout at the urging of their far-left populist government.
Prime Minister Alexis Tsipras, who swept to power on a wave of popular revulsion towards the mainstream parties in January 2015, and his divisive finance minister, Yanis Varoufakis, wanted to extract better terms from Greece’s European and IMF creditors.
Their brinkmanship left the country on the verge of exiting the euro, financial meltdown and economic catastrophe.
Yet, within only a few days, Tsipras backtracked and Varoufakis was gone.
Tsipras’s “somersault”, or kolotoumba as the Greeks called it, was a costly gambit that set back the economic recovery and destroyed the government’s credibility with its European partners.
But it also marked the beginning of a new era of Greek compliance with bailout requirements and laid the foundations of recovery.
In the 10 years since, Greece has staged a remarkable rebound, exiting its bailout programme, maintaining fiscal discipline and outgrowing richer economies.
“We essentially lost 25 per cent of our GDP and we came very close to having to manage a complete societal collapse had we been forced to leave the Eurozone,” says Greek Prime Minister Kyriakos Mitsotakis, who took over from Tsipras after his centre-right New Democracy party won elections in 2019.
“But I think it also is testimony to the resilience of the Greek society and the political system that we have managed to recover.”
The difficult reforms Greece finally adopted in the wake of the crisis have transformed its fortunes.
The brush with catastrophe also profoundly reshaped the Eurozone, spurring it to shore up a fragile single currency with new tools and institutions.
But there remains work to do.
A decade after the crisis peaked, Greece’s per capita GDP is still just 70 per cent of the EU average and its productivity problems remain acute.
The EU meanwhile still lacks a proper banking union and a budget big enough to cushion economic shocks.
Former European Central Bank president Mario Draghi has warned that the bloc risks “slow agony” if it cannot muster up to €800bn a year in additional investment in innovation and infrastructure, some of it through common EU borrowing.
“Greece has reformed, but not transformed. Same for the euro area.
We can now deal with the known unknowns, but are still too stuck in our little national boxes,” says Thomas Wieser, a former top European official.
Cut off from markets in 2010 following the global financial crisis, Greece rapidly became the Eurozone’s weakest link.
The country had structural weaknesses and massively under-reported the level of its public deficit, which in 2009 was more than five times the EU’s 3 per cent limit.
“The real origin of the crisis in 2009 and 2010 was the cheating on the numbers,” says Marco Buti, a former top official in the European Commission’s economics directorate.
“This led to the moral hazard paradigm that tainted the whole crisis.”
It meant some parliaments around the EU demanded a “pound of flesh had to be extracted from Greece”, he says.
Students clash with riot police during a 2010 protest against austerity in Athens. Greece’s first bailout programme, which required large cuts, was shaped more by urgency than precision © Angelos Tzortzinis/AFP/Getty ImagesGreece was unable to put its finances in order and needed three international bailouts over eight years to stay afloat, implementing repeated rounds of tough austerity while it was facing political instability and social upheaval.
The path to recovery began with serious mis-steps. Greece’s first bailout programme, hurriedly launched in 2010, was shaped more by urgency than by precision.
Modelled loosely on IMF interventions in Latin America and sub-Saharan Africa, it required funding cuts yet failed to consider the constraints on a country inside a monetary union with no independent exchange rate or monetary policy.
It is now widely acknowledged — by Greek, European and IMF officials — to have been fundamentally flawed in design and execution.
The first bailout especially “imposed a very tough consolidation, with unrealistic fiscal targets and placed the full burden of adjustment on Greece”, says George Chouliarakis, former deputy finance minister and the government’s chief negotiator under Tsipras.
The economy cratered, shrinking 26 per cent between 2008 and 2013.
Unemployment soared to 28 per cent.
“When it struck us it was so brutal,” says Kostas Kalaitzakis, a partner at ISV, an architecture and real estate development firm in Athens.
“We had no work at all.
We came to the office and had nothing to do.
It was tragic.
The world just stopped.”
Babis Ioannou, ISV’s managing partner, had to lay off 30 of the firm’s 80 staff and to dip into his own bank account to keep it running.
“We didn’t know how things would turn out,” he says.
“I was not able to sleep at night. It was a dark period.”
Growth had returned by the time Syriza party leader Tsipras came to power in 2015, promising to rip apart Greece’s agreement with its creditors.
His defiance resonated with tired Greeks who had seen their real income decline for years.
With the clock running down on its second rescue, Athens began a stand-off with its creditors that would last seven months.
Varoufakis and other radicals in Tsipras’s Syriza party believed the danger a Greek exit posed to the rest of the Eurozone gave them leverage to extract fresh money on better terms.
Varoufakis quickly lost the confidence of his Eurozone counterparts.
“He was never in negotiating mode,” says Moscovici, the former EU commissioner.
“He was never in the compromise mode.
He was always delivering lessons with a kind of narcissist approach . . . [He was] a disastrous finance minister.”
Varoufakis and Tsipras declined requests for interviews.
In June 2015, Tsipras called the referendum on Greece’s bailout terms.
He knew he needed a popular mandate, one ally says, in order to settle with creditors on a proposal that was so far off from what he had promised.
“It would have been very difficult to reach a compromise with a good dose of austerity without a referendum,” says Euclid Tsakalotos who took over from Varoufakis as finance minister in 2015.
Tsakalotos says the deal, the third bailout, that he and Tsipras eventually agreed with creditors was “undoubtedly better” because the fiscal targets were less exacting.
Many other Greek and European officials strongly dispute this, saying the Tsipras administration obtained only minor concessions but at enormous cost because their brinkmanship vaporised nascent confidence in the recovery.
Central bank governor Yannis Stournaras has even costed what he describes as “the so-called Varoufakis negotiation” — €85bn in present value terms based on the deterioration of Greece’s forecast debt position by the IMF between late 2014 and mid-2015.
With Greece defying its creditors and running dangerously low on cash, its banks closed and urgently required fresh recapitalisation.
Capital controls were introduced and the economy plunged back into recession.
At the same time, a wave of young, educated and highly skilled Greeks were leaving the country in search of a better future abroad.
Yet in the following four years, Tsipras’s Syriza government faithfully implemented the terms of Greece’s third bailout.
It had to “outperform” to convince investors that gloomy predictions from the IMF were wrong, Chouliarakis says.
The economy stabilised.
Borrowing costs started to fall and Greece returned to the market in 2017.
After the centre-right came back to power in 2019, modest growth accelerated, propelling the country to a striking fiscal turnaround.
Greece is now running a primary surplus of 4.8 per cent, while public debt is declining rapidly — not only due to inflation, but also thanks to early repayments.
“We’re talking about a different economy now than the one we inherited in 2019 in terms of its fiscal health, in terms of its underlying competitiveness.
A lot remains to be done,” says Mitsotakis.
The New Democracy government has successfully cleared out red tape by digitising parts of the public sector, and curbed tax evasion that was once endemic.
It also cleaned up the banking sector and overhauled the Public Power Corporation, a bloated and inefficient state energy company.
Alexis Tsipras, left, then Greek prime minister, talks to European Central Bank chief Mario Draghi in 2015. Tsipras had come to power promising to rip up Greece’s deal with its creditors © John Thys/AFP/Getty ImagesFuelled by the EU’s pandemic recovery fund, Greek GDP growth has recently outstripped that of wealthier European countries.
Exports as a share of GDP have doubled since 2008.
Athens has spawned a rapidly growing although still small tech sector.
Marco Veremis, the founder of Big Pi Ventures and a leading Greek tech investor, says the crisis inflicted pain but also unleashed creative destruction.
“If it hadn’t been for the crisis there wouldn’t be a tech sector,” he says.
Wealthy Greeks, who normally invest abroad, have put money in his fund.
“That would have been unthinkable five years ago,” he says.
After years in survival mode, Ioannou’s ISV is back operating at pre-crisis levels.
But although investment as a share of GDP has increased to 15 per cent, it is still well short of the EU average of about 20 per cent.
Spyros Theodoropoulos, chair of the Hellenic Federation of Enterprises, notes that Greece has a net investment shortfall of more than €100bn — a legacy of years of under-investment and capital depreciation.
“We lost a decade of productive investment,” he says.
A big project by Microsoft to build data centres in Athens — vaunted by Mitsotakis at its launch in 2020 as a symbol of Greece’s transformation into an “investment destination” — has still not been completed.
“There was real momentum after the crisis, but expectations sometimes outpaced reality,” says Theodosis Michalopoulos, former head of Microsoft Greece, Cyprus and Malta.
“Projects of this scale naturally require time.”
This government had to solve the perennial problems the country had economically, politically, institutionally, all the things discussed for decades
Average hourly productivity is less than half the EU average, a figure that underpins broader concerns about competitiveness and wage stagnation.
The country continues to rely heavily on sectors such as tourism and real estate — a comparative advantage for sun-kissed Greece, but not necessarily conducive to long-term value creation.
Nikos Vettas, head of the Foundation for Economic and Industrial Research, a think-tank, says “we need more high-value production — goods and services based on innovation, uniqueness, and export potential — not just commodities”.
Reforms to education, the justice system and public administration have only been “baby steps”.
“We missed a golden opportunity,” Vettas says.
“Even with a pro-reform PM and political stability since 2019, we didn’t pursue ambitious structural reforms with enough intensity.”
But some point out the challenges of reforming a country whose structural flaws, mindsets and bad habits long predate the crisis — issues such as slow justice and bureaucratic paralysis.
“This government had to solve the perennial problems that the country had economically, politically, institutionally, all the things discussed for decades,” says Greece’s finance minister Kyriakos Pierrakakis.
“And on the other hand the government gets elected and has to handle all the emerging challenges and crises of the last six years.”
For Chouliarakis, the former deputy finance minister, the return to pre-crisis prosperity is still a distant goal, despite the growth figures Greece is posting today.
The country may be outperforming its peers, but the damage done during the crisis years was so profound that convergence will require a generation of sustained outperformance.
“We would need to grow by 1 per cent higher than the rest of the EU for another 15 years to be where we were in 2007,” he says.
Greece’s crisis left behind a different country, but it also transformed the EU, albeit after a faltering start.
As the contagion spread to Ireland, Portugal, Spain and Cyprus and threatened the rest of the Eurozone, the bloc eventually agreed to set up its own permanent rescue fund, what became the European Stability Mechanism.
It put in place a new system for winding up failed banks.
And the ECB became a lender of last resort with president Draghi’s landmark pledge to “do whatever it takes” to save the euro.
Banks have become more political and much more national than they were.
We need a real banking union to cut this sovereign doom loop
“Because of Greece, Europe changed,” says Stournaras of the central bank.
“Greece was the midwife of history.”
When the pandemic struck in 2020, the legacy of Greece’s bailouts underscored the need for EU solidarity and an €800bn recovery fund.
A senior EU official says the pandemic recovery fund’s model of investment in return for reforms proposed by national capitals was shaped by lessons from Greece.
But the Eurozone still has no sizeable budget or permanent fund to offset shocks.
Moves to create a banking union, including a pan-European deposit insurance scheme to reduce the risk of stricken banks bringing down highly indebted governments and vice versa, are stuck.
“Banks have become more political and much more national than they were,” says Luis Garicano, co-author of Crisis Cycle: Challenges, Evolution, and Future of the Euro.
“We need a real banking union to cut this sovereign doom loop.”
Buti, the former European Commission official, says the pattern of European decision-making that characterised the Greece crisis — denial, panic, courageous decisions, complacency — still prevails in the EU.
“As soon as you take bold decisions, and the situation improves, the urge to complete the job goes down.”
The consequences of that pattern still scar Greece.
Nearly a third of Greeks are at risk of poverty or social exclusion, according to 2024 official data.
Piagkou, the newspaper seller, still carries an enormous debt.
Yet through the kindness of strangers, she was lent a modest apartment she now calls home.
“The IMF and EU have learnt from this. Greece forced the Eurozone to evolve,” says Stournaras.
“But we paid the price — painfully and publicly.”
0 comments:
Publicar un comentario