Origin: Hey, remember that huge financial collapse that torpedoed the global economy back in ‘08? Yup, that hit Greece particularly hard.
Okay, it didn’t all start with the financial collapse but thats the origin of the latest debt spiral Greece is experiencing. Greece had a history of economic troubles and debt in the 90s but enjoyed a period of economic growth after joining the EU in 2001, largely due to cheap loans. When the financial collapse hit this backfired as Greece, like a lot of countries faced stagering economic woes (remember a huge part of their economy is tourism which tends to particularly suffer in economic down times). One problem for Greece became they were unable to manipulate their currency to improve the economy (a common practice) because they had switched to the Euro and no longer had control over it.
Greece was forced to take a bailout deal from international and European creditors (the IMF, ECB, and European Commission) to rescue their economy. These creditors handed Greece loans in exchange for austerity measures, consisting of tax hikes and spending cuts.
What has Austerity done for Greece? Believe it or not the Greek economy has actually grown under austerity. Barely. And you wouldn’t know it by looking at the Greek people.
Unemployment is at a startling 25% and that doesn’t include under-employment, part-time employment, and those who have left the country to improve job prospects. The best analogy for Americans would be the Great Depression. Things are bleak and many Greeks don’t see how they can get better.
Austerity has become a bitter word in Greece as most Greeks believe its only held their economy back while creditors feel its the price to be paid for the bailout. On a side-note the austerity vs spending debate is a long held one in economics and has failures and success stories on each side: when an economy fails to you try to jump start it with more money or is more debt just digging yourself deeper?
A New Government: Frustrated with an anemic economy and what has come to be perceived as an unsympathetic and dictatorial Europe, Greeks voted in a far-left socialist party, Syrizia, headed by Prime Minister Tsipras with the promise to get a better deal for Greece in negotiations.
The Syrizia Party’s subsequent negotiations with European creditors have been tumultuous to say the least. Greek Finance Minister Yannis Varoufakis rhetoric became so inflamed he compared creditors to terrorists at one point.
European creditors are frustrated as they see Greece trying to renege on past promises and looking for special treatment (after all several other European countries have a similar deal and are living up to their end of the bargain). Additionally, because other countries are in similar positions the creditors don’t want to set a precedent that would encourage other countries to look to renegotiate and lead to what could be an unsustainable model.
Negotiations and a Referendum: With deadlines to repay loans fast approaching and unable to actually do so, Greece was forced to try to renegotiate with international creditors. Creditors countiued to push for austerity as Greece argued against such measures. As negotiations dragged with both parties frustrated but determined to reach an agreement, Prime Minister Tsipras suprised everyone by announcing a nationwide referendum on the new bailout terms offered by creditors. European creditors immediately pulled the deal and refused to negotiate further until the referendum had passed. Believing it would give his party a mandate and leverage in negotiations, Tsipras urged Greeks to vote no to the new deal. Before the vote could be held, Greece officially missed its deadline becoming the first developed country to default on a loan. This forced banks to close for the past week and Greeks have been only able to withdraw 60 euros a day (or less if the atms ran out of money).
No-Vote: On Sunday Greek voters went to the polls to vote in a referendum on whether or not to approve the latest bailout deal with European creditors. They overwhelmingly voted no sending shock waves through global financial markets. While many Greeks celebrated what they see as a show of independence others in Greece and around the world are asking what now?
A new deal? European creditors have shown mixed reactions to the no vote. Some now seem unwilling to return to the table. Germans in particular, lead by Chancellor Angela Merkel, (who hold particular influence in the EU) have seemed frustrated with Greece. French President Francios Hollande has been more eager to return to the bargaining table. The firing of Greek Finance Minister, Varoufakis, who made many enemies may help bring creditors back to the table.
Despite Tsipras’s insistence that he is now in a better bargaining position it seems unlikely that creditors will reverse months of tough negotiating stances due to this latest show of intransigence.
Its anyone’s guess whether a deal can now be reached.
Leaving the EU? If a deal can’t be reached Greece will most likely be forced to leave the European Union. This will hurt the global economy (though not destroy it) and may hurt the EU in non-economic ways as Greece would be the first country to opt out. Greece’s economy looks to take a much larger hit. Without an influx of currency from the EU Greece won’t have any currency and the economy will likely grind to a halt. Without access to the single-currency Greece will be forced to return to the drachma. This is a big deal because a) it took five years to switch from the drachma to the euro b) Greece relies heavily on imports and the drachma would be worth less than the euro making Greeks savings suddenly worth less than they were a couple months ago further crippling the economy. Greece may be able to recover from such a hit but in the short-term they are looking at economic disaster.