Greece is in crisis mode. Ever since the global economic crisis of 2009, Greece's economy has been suffering, and the government hasn't been able to pay off its debts. On June 30, 2015, Greece officially missed a huge payment ($1.8 billion) to the International Monetary Fund, and the previous bailout deal that had kept the country afloat expired. Greece was forced to choose: strike a deal, or face economic oblivion. As Greek-American comedian Yannis Pappas tweeted, “Greece hasn’t been in the news so much since before news. #antiquity."
I traveled to Greece this summer on a foreign policy trip thanks to the American Hellenic Institute, which exposed the lucky few of us to the Greek parliament, economists working in Greece, and diplomats. I'm a Greek-American student, and I was given firsthand exposure and a front-row seat to the one of the most striking challenges to the European project to date. For the first time, I took the time to engage with Greece as a modern country as opposed to just a place where my relatives were born.
I found that while Greece is certainly not the only country that has fallen on economic hard times in the last ten years or even in the last five, it is relevant today as the first crisis nation to truly shake the foundations of Western liberalism in the form of the European Union and the eurozone.
So, what exactly is going on over there?
How exactly did this all start?
In 2009, the global market crashed. Why? A number of U.S. banks had participated in a practice called "leveraging," which basically means they were using income on some loans to make more loans, allowing them to run an asset-to-equity ratio of about 10 to 1 (equity, or hard cash in reserves, was about 9.3 percent of total assets, including loans and mortgages). So, when people started defaulting on those loans (because some people had decided it'd be a good idea to lend to basically whoever had a pulse) the entire structure came tumbling down, one domino after the other.
The Greek government had incurred a large amount of debt, and relied on these loans to pay it off. When the loans stopped coming, their debt became unsustainable. In other words, they would not be able to pay it.
But how did Greece get into debt in the first place?
Greeks love socialism (because who doesn’t love free stuff?) and politicians in the '90s and early 2000s knew this. So, to get elected and stay in office, they borrowed vast sums of money to pay for social welfare programs, like increased public wages, huge pensions, and a whole bunch of government employment. This caused the debt-to-GDP ratio to skyrocket, and continued borrowing to postpone repayment meant no one had to take responsibility immediately.
Not all debt was initially public (i.e. owned and owed by the government). Some was private, owned by investors and citizens with a few too many credit cards. When the crisis began, though, the government bought up much of this debt in order to insulate the private market, that way if the whole thing went south, the government would take the hit instead of the private sector of the economy. The problem? The public sector in Greece accounts for about 40 percent of GDP.
How bad is it, really?
In 2003, when Greece entered the eurozone, the maximum percentage of debt-to-GDP allowed was 60 percent. Greece's was 110 percent, which Greece misrepresented in order to gain membership. In 2009, at the start of the crisis, that figure had risen to 130 percent, and by 2014 it hit 177 percent.
The debt itself, though, is not what is hurting the economy — rather, much like a fever, it's the resulting symptoms that hurt. Greece was forced to enact austerity measures (running government expenditure lower than government revenue in order to pay off debt), which caused its economy to contract. Greece has experienced negative GDP growth every year since the crisis began, with the exception of 2014, in which it experienced growth by 0.8 percent.
So does Greece have to pay all that back?
That depends on whom you ask. There are some, like German Chancellor Angela Merkel, who defend debt as sacrosanct. It must be paid no matter what. However, nowhere in the Maastricht Treaty (basically the EU’s constitution) does it say that anybody must pay back their debt. Instead, it states “Member States shall avoid excessive government deficits,” and provides for some penalties and consequences for doing so without demanding that debt be paid.
The IMF suggested on June 25 that some of Greece’s debt should be repudiated, and might have to be, due to the unsustainability of the current debt. Rock star economist Thomas Piketty, author of Capital, criticized Germany for demanding repayment of debt when Germany itself had half its debt written off after World War II. However, in the deal struck on July 13, there was no debt "haircut" provided.
What was the referendum all about?
Alexis Tsipras, the Greek prime minister, was in charge of striking a deal with "the Troika," the trio of institutions (the European Central Bank, the European Commission, and the IMF) responsible for the majority of Greece’s debt. However, as negotiations dragged on and the June 30 deadline for payments approached, he found himself stuck between an ultimatum from the Troika and the wrath of the Greek people. So, he decided to go directly to the people himself, and ask them what they thought of the current deal in the first public referendum in 40 years.
While the explicit question was simply whether or not the public approved of the deal (a Yes vote signifying they did, with No signifying a rejection of the deal), many both within Greece and outside the country cast the referendum as a choice between staying on the euro and leaving it. Proponents of the No vote claimed that the Europeans were bullying them and it was time to stand up for themselves, while proponents of the Yes insisted that people needed to be reasonable and realize that staying on the euro was better for Greece in the long-term.
The referendum resulted in a defiant and deafening "Oxi" ("no" in Greek), with votes coming in at 61 percent to 39 percent.
Could Greece really leave the euro?
There was certainly a chance, given the No vote, in the run up to the July 10 deadline set by the European Council. After the referendum, Tsipras returned to negotiations with the Troika, and was told that if he did not put credible reforms on the table by midnight on July 10, there would be no bailout deal. Without assistance, Greece would have been forced to default on its loans and issue a parallel currency to recapitalize its banks, resulting in a messy and disorderly Grexit.
However, Tsipras managed to get the reforms necessary on the table with just three hours to spare, and the deal was approved by the eurozone countries on July 13. Since then, the chance of a Grexit has decreased dramatically. However, it could still happen if Greece does not follow through and implement the reforms necessary.
Why were people so afraid of a Grexit?
The European Union has, from the beginning, been an economic community before a political one. (Literally, the European Economic Community preceded the European Community, which preceded the European Union.) The eurozone was created to unify Europe under one monetary policy and one currency. The project was seen as a one way street towards membership. Once you were in, you were in for life.
A Grexit would have destroyed that idea, and shaken the foundations of the eurozone, which is realistically what is at the heart of the European Union. Other debt-ridden countries like Ireland, Italy, Spain, and Portugal would quickly have to deal with the public outcry against further austerity. If Greece could stand up to the Europeans, why not them? Although unlikely, a Grexit could have precipitated the eventual destruction of the eurozone as a whole. Beyond that, the United Kingdom has long been a reluctant partner of the European Union, home to many so-called "Euroskeptics." A Grexit would mark the EU as a failed experiment, and given the Brits a reason to leave.
Further, the EU and NATO, of which Greece is a member, are institutions that rely on consensus to take action. In other words, a unanimous vote is necessary to make decisions, and an irate and weakened Greece could quickly become a very difficult partner.
Greece also retains geostrategic significance to Europe. It is the southeast gateway to the Middle East, with proximity to Egypt, Syria, Israel, and the rest of that lovely neighborhood. Greece already experiences issues with illegal immigration, and a destroyed Greek economy would only exacerbate that problem, allowing even more immigrants into Europe, including possible members of the Islamic State. Greece has also been cozying up to Russia's President Vladimir Putin, which detracts from Europe's stance against Putin over his invasion of Ukraine.
All in all, a Grexit would be terrible for pretty much everyone involved. No debt would get repaid, and instead you would get this whole host of problems.
For now, Greece is on the mend as a new bailout deal comes into effect. Greece has paid off the debt to the IMF on which it had previously defaulted, and banks opened again on Monday, July 20. The storm has not quite passed just yet, but there is reason for optimism. As the president of the American Hellenic Institute, Nick Larigakis, told us, "The Acropolis has watched over Athens for thousands of years. It's seen everything, from civil war to occupation. And a financial crisis is going to destroy it? I don't think so. Greece isn't going anywhere."
Images: Getty Images, Orlando Economos