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Tyler Michael Howard

November 8, 2013

PSCI 322

Dr. Joseph Ellis

The Collapse of Greece

Greece is widely considered to be the founding nation of democratic institution. Greek

philosophies and ideals led to the formation of modern day democracies. Beginning in 2008

however, Greece has been on the brink of financial collapse and political turmoil. A financial

crisis has left the country in a severe economic recession and on the brink of total collapse.

Within this research, there will be a look at the political and economic history of the country to

the present day as well as historical junctures that have made Greece the nation that it has

become today. This sets the table for the problems of the financial crisis that has hit the country.

There are many principles that contribute with the stumbling of the Greek economy, but the most

important would have to be the role of the European Union and Euro zone within Greece. The

inability to take the necessary action in order to curb the massive debt in Greece has put the

economy of Europe as well as the rest of the world in jeopardy. The crisis has “transformed the

unthinkable into reality” (Tsoukalis 2011, 25).

The economic situation of Greece has always been perplexing. Greece made great strides

in the turn of the twentieth century from an economic standpoint. Greece was plagued by

economic underdevelopment and flawed democratic institutions followed by a spell of

authoritarian rule. The economy then transitioned into a full- fledged democracy and was

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benefitted greatly by the increase in regional trade with the Balkans and with the establishing of

the Marshall Plan. Industry and regional trade were rebuilt and put to prominence after the

effects of World War Two. The Marshall Plan was an effort to rebuilt Europe in a democratic

image and protect against the spread of Soviet laden Communism. The upper class of Greece

was deeply entrenched within the arts, sciences, and finances that helped to fuel the economic

growth of Greece. This brought about stability within the economy and brought higher standards

of living to Greek citizens. Greeks received more gracious benefits and retirement age was

rather low in comparison to other Euro zone nations. In 2008, Greece was the 27th largest

economy in the world according to gross domestic product with 32,100 U.S. dollars per capita

(Eurostat, 2010). There was however trouble brewing. In October 2009, a transition from the

New Democracy Party to the Socialist Party (PASOK) lead to a transition in political ideal and

shed new light upon an increasing budget deficit (Arghyrou 2011, 174). The government

increased its borrowing to deal with the effects pressed upon the banks in Greece. Budget

deficits skyrocketed to 15.4% of gross domestic product in 2009 (Arghyrou 2011, 182). This cut

government spending on programs such as welfare, social security, and pensions. There was no

competitiveness within the economy as inflation rates continued to climb. The government

contributed greatly to the ongoing crisis in dragging its feet to put an explanation on the

problems at hand. Greece, like many other countries work on a spoils system of sorts rewards

voters and clients with money.

From a political standpoint, Greece has undergone tremendous transformation since the

nineteenth century to present day. Greece won its independence from the Ottoman Empire in

1830 and attempted to rectify the old democratic ideals of the nation. Regime changes with a

provincial monarchy brought new styles of government in that brought riots and violence to the

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region. During the time of WWI and WWII, Greece was threatened by being conquered by

neighbors such as Italy and Turkey, but joined the Triple Entente on the side of the Allies. The

Germans blitzkrieg Greece and set up concentration camps and a military dictatorship for a

government. After WWII, communist influence may its way into Greece made its way into

Greece and the country was propelled into civil war between communist and anti communist

forces. The establishment of two main political parties in the New Democracy and the PASOK

socialist party would pull the nation into two directions. These two parties continue to trade

places atop the government into present day. The Greek government has been heavily dependent

on loans and foreign intervention within the nation. Since the independence from the Ottoman

Empire, the Greeks were heavily reliant on the assistance of other European nations such as

Britain and France. This is apparent even today as the Euro Zone is giving aid and loans to a

financially crippled Greece.

From a historical perspective, Greece has one of the most luscious historical traditions in

the world. Stated before, Greece is considered to be the cradle of democracy of the western

world. The foundations of democracy lay in Greece where Demos Kratos meaning power of the

people. This influenced great civilizations from the Republic of Rome up into present day

democracy around the world. Famous Greek philosophers such as Aristotle, Plato, and Socrates

laid the foundation for democratic principles. These men are pillars of enlightenment within the

academic and political world. Historical and cultural heritage of the Greeks continues to

“resonate throughout the modern world in the form of art, literature, philosophy, and politics”

(Europa.eu). Greece is the founder of the modern Olympic Games that brings together the best

athletes the world has to offer for the right to be the champion in their respective sport. The

Olympics are a tradition that is still around to this day. Greek culture has been spread across the

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globe for centuries. Language and political doctrine has been adopted across the Mediterranean

through Europe and into Central Asia. Greek language was seen as the language and trade. The

elite of societies around the world learned Greek as the language of academia and trade. The

Greeks are the pioneers of globalization with their arts, architecture and culture spread across the

globe. The Greeks have always been prevalent through history with the legendary warriors of

Sparta, the philosophers of Athens, and the conquests of Alexander the Great. The Greek empire

was one of the largest empires in history and had a major impact on societies around the world to

where Greek culture can be seen on the world stage today.

The Euro zone works in direct correlation with the European Union but deals more with

the union of European nations that are formed around one common currency being the euro.

Local currencies were dropped in favor of a centralized currency the Euro. The European

Central Bank is in charge of maintaining the rate of inflation and managing the debt inquired by

each respective country. In the example of Greece, the national currency was the drachma which

was replaced by the euro. The Euro zone strengthens the stability of the euro while lowering the

risk of the exchange rate. Trade is improved due to the common currency. In the global arena

the euro “gives the EU more clout, as it is the second most important international currency after

the US dollar” (Central Intelligence Agency, cia.gov). While the Euro was appropriate for

countries such as Germany and France, it diminished market values and returns within nations

like Greece (Krieg, 2011). The switch to the euro caused the wages of workers to inflate to a

standard that the government was unable to pay. With the implantation of the Euro in 2001,

budget deficits have exceeded 3% (Tsoukalis 2011, 23). The government is being forced to

allocate more money than what they have. The Greek government came to see the European

Union as “all protective umbrella against adversity” (Tsoukalis 2011, 23). The euro was seen to

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be a means of free and easy money for the Greeks. Thanks to the loans that were provided by

the European Central Bank considered being free and cheap money, the standard of living within

Greece began to rise steadily. There were problems of inflation of the currency and budget

deficits that were masked by the government and the European nations within the Euro zone did

nothing to address this issue. There were no penalties that were set in place for countries such as

Greece who violated the debt-to-GDP ratios. Countries such as Germany and France, chief

executive members of the European Union, who in their own right had incurred much debt. The

main concern with the idea of one common currency within the Euro zone is that it sets a

standard of monetary and economic policies that may not be beneficial to countries economic or

political conditions. The European Central Bank was seen as a last resort for Greece who was

able to take out loans at a low to negative interest rates (Tsoukalis 2011, 24). Wage garnishing

among the private sector can be attainable, however to reduce the wages of the public sector of

Greece has only resulted in the riots and violence from wage and benefit cutbacks.

The European Union was established to bring together the countries of Europe into a tight

bond of unity. The major benefit of the European Union is that it is designed to facilitate better

trade within Europe and help to better immerse other European nations within the union. There

are currently 28 nations that are a part of the European Union. The European Union has

supported Greece in the time of its financial crisis. Unity is what the union stresses to its

members. In order to avoid contagion from the other members of the union, European Union is

willing to support Greece. The fear is that if Greece defaults on its debt, then other nations of the

union will follow suit. Such nations as Spain, Portugal, and Ireland are amidst great recessions.

For Greece to default and to leave the European Union could create a domino effect for other

countries to follow Greece’s lead. This could lead to the disintegration of the European Union.

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The union will do everything that is necessary to make sure that this does not happen to the tune

of providing two large financial assistance packages and a mega-swap package to reduce debt

and ease the pains of recession (Kiguel 2012, 2). The problem this has created is that it puts

banks in a financially stressful situation and declines the ability for Greece to grow. Banks are

put at the risk of hyperinflation because the European Central Bank has the ability to provide

unlimited liquidity in severe situations. With the ability to produce an unlimited amount of

currency, this can devalue the euro and cause for mass inflation. When covering the debt

incurred, this puts small banks at risk for collapse. With these assistance packages that have

been proposed by the European Union/Euro zone, this puts a halt on growth that can occur

within the country. An increase in taxes and cuts in benefits are two of the main culprits that

been proposed in the packages to Greece. It is impossible for Greece to be able to sustain growth

and make it out of the recession with “social and political unrest” derailing the progress (Kiguel

2012, 4).

The fears of the European Union and Euro zone were the defaulting of fiscal debt by

Greece and its exit from the European Union and Euro zone. Greece can be compared to that of

Argentina who defaulted on their loans and underwent a massive economic recession. The main

difference between Argentina and Greece is that Greece is part of the European Union is trying

to rescue the economy of Greece. The purpose of trying to rescue Greece is to maintain stability

within Europe. The fear of default by Greece could potentially create a domino effect which

could cause nations such as Ireland and Portugal in severe economic debt to default on current

loans and leave the European Union. Effects of this could be catastrophic to the stability of

European economies. Banks would be at risk of hyperinflation and bankruptcy would ravage

many smaller European banks. There is a high risk and reward factor with the unity possessed

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between the nations of Europe and a unified currency in the euro. The nations of Europe are

bound together through the euro which means that with any individual nation having economic

turmoil can spell trouble for every other nation involved. The devaluation of the euro is proving

to be problematic in Greece because it has lead to inflation and the inability to balance the

country’s debt decisively. In Greece, it has been suggested to use a dual currency system in

order to “deal with an overvalued currency while achieving depreciation and improving long

term competitiveness” (Kiguel 2012, 5). The problem with both of these unions is there is a

masking of the problem that is going on in nations such as Greece. The government is able to

gain unlimited liquidity through it the European Central Bank while the European Union

continues to rollover debt and buy Greek bonds at fifty cent on every dollar. According to

economists “there is not an obvious trigger for a currency or debt crisis” (Kiguel 2012, 6).

The combination of weak state and international pressures from the B.C. Smith book

Understanding Third World Politics correlates well with the current economic situation in

Greece. The weak state is indicated by the conflict between the New Democracy and the

PASOK Socialist Party. The international pressures come from the nations of the European

Union. As B.C. Smith stated “stability is a highly normative concept” (Smith 2009, 198). This

quote implies directly to the policies laid out by the European Union and Euro zone. By making

a unified currency, this benefitted some nations while it weakened others. In Greece, it devalued

competition and overvalued the euro to the point of inflation within the public sector. While the

euro is beneficial for maintaining stability within European trade and markets as well as limiting

the exchange rate, it runs the risk of becoming highly overvalued and leading to massive

economic recession in some countries such as Greece. These conditions have set up a public

sector that is unable to deal with the effects of the crisis. With new financial packages being

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offered by the European Central Bank, public spending and benefits have to be cut. This causes

riots, protest and violence within the public sector. As Rachel Donadio says her New York

Times article “the Greeks won’t accept the pain without anger” (Donadio 2012, 1). Finally we

see elite political movements in the transition from the New Democracy to PASOK, rising

concern within the private sector of Greece, and foreign intervention within Greek policy. All

these issues within Greece have laid the foundation for social revolution within the country.

With the Greek economy being pressed into the Euro zone by the euro and the European

Union forcing debt-packages onto the government, Greece is unable to establish any positive

growth. Both unions have pushed the issue of debt and inflation under the table for quite some

time. While there are many problem that persist within Greece today, the lack of guidance from

the European Union and Euro zone have helped to place Greece into potential economic

meltdown. The fate of the European Union and potentially the world economy could rest on

whether Greece chooses to default on their current debt. This could have been avoided if

precautions had been taken earlier along in the process. The situation in Greece is not only

important on a regional scale, but default by the Greeks will show the flaws of the European

Union and monopolizing the currency will force overvaluing of the euro causing hyperinflation

throughout Europe. With Europe being a key player among the global market, the default of

Greece could trigger a widespread global recession in which all markets experience

hyperinflation.

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Bibliography

Donadio, Rachel. "The Failing State of Greece." New York Times [New York] 25 Feb

2012, 1-4. Web. 13 Nov. 2013.

Kiguel, Miguel. "Argentina and Greece: More Similarities Than Differences in the Initial

Conditions." VOX. (2011): 1-6. Web. 13 Nov. 2013. <http://www.voxeu.org>.

Economou, Marina, Michael Madianos, Lily Peppou, Athanasios Patelakis, and Costas

Stefanis. "Major Depression in the Era of Economic Crisis: A Replication of a Cross-

sectional Study Across Greece." Elsevier. (2013): 308-314. Web. 13 Nov. 2013.

Tsoukalis, Loukas. "Greece in the Euro Area: Odd Man Out, or Precursor of Things to

Come?" Peterson Institute for International Economics. (2012): 1-35. Web. 13 Nov.

2013.

Arghyrou, Michael, and John Tsoukalas. "The Greek Debt Crisis: Likely Causes,

Mechanics, and Outcomes." The World Economy. (2011): 173-191. Web. 13 Nov. 2013.

Samuelson, Robert. "In Ireland's Debt Crisis, on Ominous Reckoning for Europe.”. N.P.,

29 Nov 2010. Web. 8 Nov 2013.

Smith, B.C. Understanding Third World Politics. 1st. Bloomington: Indiana University

Press, 2009. 196-225. Print.

http://europa.eu/about-eu/countries/member-countries/greece/index_en.htm

https://www.cia.gov/library/publications/the-world-factbook/geos/gr.html

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