Timeline of Greek Economy 1981 - 2010

The Greek Economy after EU Membership (1981 – 2010)

Teething problems (1981 – 1985)

 1981 - Greece entered the EU

o EU’s stated ideals – liberty, democracy, respect for human rights, fundamental
freedoms and the rule of law
o Most basic objective of the European Project was to avoid new wars between
European countries by integrating the social and economic policies of members,
causing a reduce likelihood of war between members.
 Successful. No wars between EU members
o Prerequisites of EU membership (DURING Greece’s entry)
 Unanimous thumbs-up by European Commission
 Adoption, implementation and enforcement of acquis communautaire
 Entire body of European Union laws
 Treaties, regulations and directives passed by the European
institutions as well as judgments laid down by the Court of Justice.
o However, joining the EU meant that Greece gave up their own currency (drachma),
and gave up on their rights to discretionary monetary policy.
o Reasons why Greece wanted to join the EU8
 Greece considered the EU to be the institutional framework within which
stability could be brought into its democratic political system and
institutions.
 Greece sought to enforce its independence and position within the regional
and international system as well as its "power to negotiate", particularly in
relation to Turkey, which, after the invasion and occupation of Cyprus (July
1974), appeared as a major threat to Greece. (Turkey and Greece have an
old relationship as antagonists) Within this context, Greece also sought to
loosen its strong post-war dependence upon the US.
 Accession into the Community was regarded by Greece as a powerful factor
that would contribute to the development and modernization of the Greek
economy and Greek society.
 The Trade with European Union countries (Germany, Italy, and UK) accounts
for 65% of Greek trade.
 Greece wanted, as a European country, to have "presence" in, and an
impact on, the process towards European integration and the European
model.
o While the European Commission stressed that a "clearly positive response" should
be given to Greece's request for accession, it proposed the institutionalization of a
pre-accession transition period before full institutional integration, in order for the
necessary economic reforms to take place.

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 Timeline of Greek Economy 1981 - 2010

o Internal EU trade currently accounts for 1/3 of overall GDP and total private and
public investment within the Euro area has risen to 22% of GDP.
 Characteristics
o Strong doubts concerning certain serious aspects of European integration.
o Greece attempted to re-determine the country's position within the European
community by means of establishing a "special regime" of relations and regulations.
 March 1982 – Greece submitted a Memorandum
 Requested for additional divergence from implementing certain
community policies
 Requested for further economic support in order to restructure
Greek economy.
 The European Commission acknowledged only the second request
as well-founded.
o During this period Greece was particularly reserved concerning general issues with
regard to European integration and the efforts and plans aimed at further
integration in the departments of institutions, politics and defense.

Gradual Assimilation into the European Union (1985 – 1995)

 Characteristics
o The policies Greece maintained with regards to the EU was characterized by the
gradual adoption of stronger pro-integration positions.
o Particularly from 1988 on, Greece began to support the "federal" integration model
as well as the development of joint policy in new departments (education, health,
and environment), the strengthening of supra-national institutions (European
Commission, Parliament) and the development of a joint foreign and security policy
by the Union.
o On the other hand, however, inconsistencies remained in both the economic sector,
with the country diverging from the average "community" development level, and
the political sector, with the problem of the FYROM name, which was defused when
the intermediate Agreement was signed.
 1992 – Maastricht Treaty
o At the insistence of Germany, a clause was added that forbids countries from
assuming the debts of others.
o States that the “safe” level for government debt is 60% of GDP.
o Adoption of euro
 World's second most important international currency, after the US dollar
and the second most actively traded currency in foreign exchange markets
worldwide
 Prerequisites
 To participate in the currency, Member States are meant to meet
strict criteria, such as a budget deficit of less than three per cent of
their GDP, a debt ratio of less than sixty per cent of GDP, low
inflation, and interest rates close to the EU average

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 Timeline of Greek Economy 1981 - 2010

 This was a leap of faith, with various difficulties, but several potential
advantages that could balance off the disadvantages.
 Controversial, with many economists questioning whether Europe is
anywhere near as suited to a single currency as the US. (but that is another
story altogether)
 Although careful management of the euro could prevent a boom-bust cycle
for the entire European Union, it could not do so for a single member
country.
o I.e. we are all tied down together, for better or worse.

Greater economic and social convergence (1995 – 2001)

 Characteristics
o Even further support for the idea and process of European integration and
intensifying integration in every department, in line with the federal model.
o An effort towards greater economic and social convergence with the fulfillment of
the "convergence criteria" set by the Maastricht Treaty
o Greeks traditionally prefer a stronger state-building process15
 Thus, they pushed for a centralized state with strong executive and
rationalized administrative structures that prevailed over localities and
subsequently led to more centralized governmental structures.
 1997 – Stability and Growth Pact adopted
o An agreement to facilitate and maintain the stability of the EU Economic and
Monetary Union
o Consists of the fiscal monitoring of member countries by the European Commission
and Council of Members
o After multiple warnings have been given, sanctions will be placed.
o Drastically improved budgetary discipline
o Governments agree to respect commonly agreed rules on public finances
o Requires governments to maintain an annual budget with a deficit of no greater
than 3% of GDP and public debt at 60% of GDP or less18
 January 1, 2001 – Greece adopted Euro.
o Greece already had a public debt which was more than 100% of GDP
o 12th country to do so.
o Dropped the drachma
o To participate in the currency, Member States are meant to meet strict criteria, such
as a budget deficit of less than three per cent of their GDP, a debt ratio of less than
sixty per cent of GDP, low inflation, and interest rates close to the EU average.
o Benefits gained
 Reduced risks of inflation and devaluation
 Gained access to competitive loan rates
 Gained access to the low rates of the Eurobond market
 Low interest rates in the Eurozone
 Funds from the EU

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 Timeline of Greek Economy 1981 - 2010

 Eliminates transaction costs associated with currency exchange

 Became a member of the European Economic and Monetary Union
o These led to a dramatic increase in consumer spending, which gave a significant
boost to economic growth.
o New infrastructure and growing revenues from tourism, shipping, services, light
industry and the telecommunications industry have brought Greeks an
unprecedented standard of living.
o High economic growth, low interest rates (long boom)
o Good
o Economy grew by an average of 4% a year until 2008.
o Public debt ratio fell (good), but only because GDP grew more quickly than debt.
Large budget deficits continued. Greece also relaxed its fiscal grip.
o Inflation rates continued to stay above the Eurozone average, hurting its
competitiveness.
o The Greek economy in this period relied increasingly on foreign borrowing.
o Other problems with the Eurozone in general
 Without true structural economic convergence or a centralized economic
government, some would struggle with a regime of a single interest rate and
a common exchange rate, being deprived of key economic weapons,
including devaluation.
 Between 1997-2007, Greece averaged 4% GDP growth, almost twice the European Union
(EU) average

Road towards fiscal turmoil (2002 – 2008)

 2005 – ratio of net interest costs to GDP fell by 6.5% since 1995
 2008 Greek Riots
o In this period, Greece did little to tackle its persistent deficits. (fiscal indiscipline) and
such positive economic conditions did not last long. The unemployment rate among
the younger generations started to rise, and a countrywide feeling of frustration
started to spread in the younger Greek generations. Greek youths also gained a
perception of general inefficiency and corruption in Greek state institutions. The
severity and immediacy of the situation became apparent when widespread rioting
occurred on the streets of Greece in 2008, after a 15-year old student, Alexandros
Grigoropoulos was killed in Exarcheia, Athens by two policemen. Hundreds of youth
rioters damaged public utilities and property. Riots then spread to other Greek cities
such as Thessaloniki.

Greek debt crisis (2008 – May 10, 2010)

 The Greek fiscal crisis is the outcome of a combination of high debts and fiscal deficits.15
 The national budget spending versus income produced proves a major imbalance. The debt
that accumulated now reflects that the country owes far more than it is earning.15
 Greek crisis was triggered, but not originated “by the recent global financial crisis
 Several countries have been affected by the latest financial downturn:

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 Timeline of Greek Economy 1981 - 2010

o PIIGS (P=Portugal, I=Italy, I=Ireland, G=Greece, S=Spain)

 Greece is considered the worst out of all the PIIGS
o SWINE (S=Scotland, W=Wales, IN= Northern Ireland, E=England) (Several economists
have argued…)
o If the UK was to really cut spending, it would refuse to pay the billions that the EU
demands, cut foreign aid, and leave France and Spain to pick up the slack in NATO as
it pulls back its military. Of course, none of this would go down with many EU
members, let alone the leaches abroad. Also, UK's economy is far more flexible, it
can call in debts owed by others, and it has plenty of middle management that it can
get rid of to save cash.
o It is no wonder that SWINE is used to a lower extent than PIIGS
 As with other European countries, the financial crisis and resulting slowdown of the real
economy have taken their toll on Greece’s rate of growth
 2008 – Economic growth slowed to 2.0%
 2008 – The current-account deficit widened to 14.6% of GDP.
 2009 - Economy went into recession and contracted by 2.0%
o A result of the world financial crisis and its impact on access to credit, world trade,
and domestic consumption--the engine of growth in Greece.
 Since the launch of Europe’s single currency, there have been theoretical worries about
profligacy. The main fear was that free-spending countries such as Italy might borrow
excessively and pass either higher interest costs or the bill for a bail-out on to other, more
frugal countries such as Germany.
 High economic growth and low interest rates have masked horrible fiscal governance….
 Greece’s cost of borrowing started to rise
 2009 - Greece, already burdened by a heavy debt load, ran a budget deficit of around 13.6%
of its GDP - far over the euro-zone's 3% limit
 2009 - Greece’s debt stood at 115.1% of GDP and public spending stood at 51.3% of GDP
 2009 – Athens failed to report accurate public finance figures
o EU is angry, threatens to proceed with legal action
 2010 - Intended to cut budget deficit to 8.7% of GDP
 2010 – Estimate for public debt is 120% of GDP
 February 15, 2010 – EU discovered that Greece hid some of her debts
o An inquiry by the country’s finance ministry uncovered a series of agreements with
banks that it may have used to conceal mounting debt
o Using complex financial deals
o Greece had paid Goldman Sachs in 2002 to swap its debt for loans that could be kept
off the books in derivatives.
 Greece turned to Goldman Sachs Group Incorporated to get $1 billion in
funding through a swap on $10 billion of debt, Christoforos Sardelis, head of
Greece’s Public Debt Management Agency at the time, said in an interview
last week. Eurostat, the EU’s statistics office, was aware of the plan, he said.
Spokesman Johan Wullt said by email yesterday that, “Eurostat was not until
recently aware of this alleged currency swap transaction made by Greece.”

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 Timeline of Greek Economy 1981 - 2010

o “I think the banks themselves should also ask, not least after the financial crisis, if
this has been in line with the code of ethics,” Olli Rehn, the recently appointed
European Commissioner for Economic and Monetary Affairs, said. “It is clear that a
profound investigation must be done on this matter,”
o EU very angry
 Threatens to put in place extra measures such as a rise in value-added tax
and further spending cuts
 The EU can take Greece to the European Court of Justice, under threat of
daily fines.
 Brings up a lot of questions
 Did Greece meet the EU entry requirements in the first place?
o Fraud in the inducement of a contractual agreement
o Could Greece get expelled from the EU?
 Is the essence of this transaction with Goldman Sachs to deceive
Brussels?
o Greek Response
 George Papaconstantinou, the Greek Finance Minister, insisted that such
swaps were legal when Greece used them and that it was not doing so now,
claiming it was not alone among EU nations in using such deals.
 Christophoros Sardelis, chief of Greece’s Public Debt Management Agency
when the swaps were conducted with Goldman Sachs, said that the
transactions were too small to have much impact on the country’s long-term
fiscal outlook.
 “The payment stream, the interest, corresponds to about 0.15 per cent
impact in terms of the deficit, based on the current GDP of about €240
billion,” Mr Sardelis said. “The impact from the cost of the swaps is trivial for
a deficit that has reached almost 13% of GDP. The impact of the loan on
public debt is around 1.1 to 1.2%.”
 February 16, 2010 - Finance Ministry workers, state accountants, tax collectors and even
capital market regulators embarked on their own walkout today, incensed by the
Government’s plan to slash dozens of fringe benefits accumulated by civil servants over
many decades, including a bonus for carrying files from one floor to another. Many fear that
the “fourteenth salary” — an annual bonus split between the Easter and summer holidays,
enjoyed also by pensioners — might soon be a thing of the past.
 February 24, 2010 – Nationwide general strike
 April 27, 2010 – The Greek debt rating was decreased to BB+ (a “junk” status) by Standard
and Poor’s. The stock markets worldwide and the Euro responded by declining further.

A new beginning (May 10, 2010 – Present)

 May 10, 2010 - the EU approved a €750 billion rescue program [stabilization package] to
support the PIIGS
o €110 billion for Greece - £80 billion from the EU and £30 from the IMF16
o Only after Greece promised to take “drastic austerity measures”

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 Timeline of Greek Economy 1981 - 2010

o Although the package has bought the troubled currency area and the Greek
economy time and substantial relief, it does not resolve the underlying structural
difficulties facing many of its members, particularly the five so-called PIIGS: Portugal,
Ireland, Italy, Greece and Spain.
o 20 billion worth of Greece’s debts are due in April and May. This 110 billion helped
to pay for that and more.
o It took so long as Berlin was worried that a rescue would only encourage further
profligacy and wanted harsh penalties for Greece
 Did not agree on the rescue package early enough, deepening the debt crisis.
 “lack of timely action underscored early European reactions…while
the euro area partners showed little willingness in the beginning, to
come forward with help”
 Greece plans to cut the budget deficit to 3% of GDP by 2012
 What can be done in the near future
o Greece is the most east-western EU member other than Cyprus, and is much closer
to China and the budding economies of Asia than all the EU giants – France,
Germany and the UK. Greece has a chance to become the trade and financial hub
between Europe, Russia, China and the Middle East.
o €130-160 billion will be required for debt repayment.15

References
1. Parker, R. (2010). Will Greece spark global meltdown 2.0?.
2. Sun, M. H. (2010, May 09). Greek debt crisis convulses Europe. Retrieved from
http://www.fifthinternational.org/content/greek-debt-crisis-convulses-europe
3. http://edition.cnn.com/2010/BUSINESS/02/10/greek.debt.qanda/index.html
4. http://www.wsws.org/articles/2010/may2010/pers-m29.shtml
5. Sloman, J., & Wride, A. (2009). Economics. London: FT Prentice Hall Financial Times.
6. http://business.timesonline.co.uk/tol/business/industry_sectors/banking_and_finance/articl
e7029668.ece
7. http://seekingalpha.com/article/188715-did-goldman-help-greece-trick-its-way-into-the-eu
8. http://www.mfa.gr/www.mfa.gr/en-US/European+Policy/Greece+in+the+EU/
9. http://www.eurunion.org/News/EUBrochure.pdf
10. http://ec.europa.eu/economy_finance/publications/publication9869_en.pdf
11. http://ec.europa.eu/publications/booklets/eu_glance/68/en.pdf
12. http://www.ecb.int/press/pr/date/2001/html/pr010102.en.html
13. http://news.bbc.co.uk/2/hi/in_depth/europe/euro-glossary/1216329.stm
14. Krugman, P. (2009). The return of depression economics and the crisis of 2008. New York: W.
W, Norton and Company.
15. http://www.rcpar.org/mediaupload/events/2010RegionalForum/20100707_Papadakis_pres
entation.pdf
16. http://www.myfoxny.com/dpps/news/euro-leaders-seal-greece-rescue-package-dpgonc-
20100507-mh_7431081

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17. Black, Y. (2010, June 13). Half of Greeks do not trust government. Kathimerini, Retrieved
from http://news.kathimerini.gr/4dcgi/_w_articles_politics_1_13/06/2010_404433
18. Delegation of the European Commission to the United States, (2009). Eu insight. Washington,
DC

8 ©Timothy Tan Xin Zhong, RKTBJ