Tyler Michael Howard

November 8, 2013

PSCI 322

Dr. Joseph Ellis

The Rise and Fall 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 bankrupt 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 go with the floundering of Greece, 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 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. 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. 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 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 globe for centuries. Language and political doctrine has been adopted across the Mediterranean through Europe and east 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 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. 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. There is a high risk and reward factor with the unity possessed 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 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.