On July 5, 2015, Greek voters rejected a bailout proposal in a referendum that made headlines around the world. Nine years later, Panagiotis E. Petrakis It reflects the legacy of the crisis in both Greece and Europe.
The 2008 financial crisis initially started with subprime mortgages in the United States, but later engulfed countries such as Ireland, Latvia, Romania, Italy, Estonia, Greece, Portugal, and Spain. The crisis spread throughout the banking system, exacerbating liquidity constraints and ultimately challenging the sustainability of public sector lending.
Subsequently, concerns were raised about the net international investment and debt sustainability of the affected economies, with Greece being singled out as the epicenter of the crisis because of its reliance on public sector lending. The European Commission estimated that debt-to-GDP ratios would be dire in the absence of intervention in several countries, including Greece, Ireland, Portugal and Spain.
The Eurozone’s operating framework, characterized by suboptimal fragmentation of markets, equity imbalances and flow mismatches, created an environment with limited potential for crisis response. The European Central Bank (ECB) was unable to engage in open market operations, and the absence of a common liquidity crisis fund led to the formation of numerous bond equities.
The Minsky moment turned a financial crisis into a recession, and it was only after Mario Draghi took command in 2012 with the slogan “whatever it takes” that the crisis was ended by instructing the ECB to address the liquidity problem, effectively reversing the way the eurozone had been run up until then.
These developments also open the way for a possible change in the medium- to long-term operating model. It should be noted that recent changes in fiscal rules and practices, such as the European Stability Mechanism (ESM) loan to Greece and the Recovery and Recovery Fund (RRF), point in this direction. Of course, intense geopolitical pressures are also contributing to this change.
Ineffective solution
The above is necessary to understand that the Greek crisis of 2010 was part of a broader international and European crisis. The specific methods of dealing with it were chosen internationally (and applied exceptionally strongly in Greece because of the size of the Greek program). These methods had a valid causal basis, but were not very effective in solving the problems they were intended to address in terms of timeliness or effectiveness. This may have been due to flaws in their design or problems in their domestic implementation.
The need to rapidly adjust the net international investment position through structural reforms depended on several factors: the stock of private and public debt, the current account balance, which was characterized by capital movements and sudden interruptions, the balance of trade in tradable and non-tradable goods, and ultimately the capacity to substitute non-tradable goods for tradable goods.
The implementation of these programs provided a window of opportunity for the Greek economy to recover without a functioning banking system for 10 years, along with the extension of Greece’s loan maturities beyond 2032. The economy is now on the road to recovery.
Creditor countries, including Finland, the Netherlands, Germany and Belgium, had a significant responsibility to support debtor countries. Unfortunately, there was no experience in managing a similar crisis in a non-optimal currency area without the central bank’s obligation to provide price stability and employment protection. As a result, the decisions taken to resolve the crisis mainly involved fiscal consolidation, the implementation of supply-side policies to reduce debt, and, in the case of Greece, domestic devaluations that led to significant reductions in domestic wealth and income.
The root of the crisis
The Greek crisis was marked by deep-rooted problems, mainly related to the persistence of political attitudes that promoted social values and macroeconomic imbalances, including dependence on loan capital.
In addition, weak institutional frameworks, including corruption, loose property rights, tax evasion, and lack of institutional trust, contributed to the crisis. These problems were exacerbated by declining competitiveness and productivity, partly masked by the abundant international financing provided by the “cheap euro.”
The lack of adequate banking supervision, both domestically and internationally, particularly in the European and Greek banking sector, exposed major European banks to significant risks during the crisis. As a result, the Greek bailout affected the stability of the European banking system and overall financial stability. The lack of effective monitoring of financial figures, due to the Greek side’s expediency or the absence of relevant institutional rules, further undermined the effectiveness of the administration.
These inadequacies extended beyond the European level to the global level, as evidenced by the intervention of the International Monetary Fund (IMF). In addition, there were substantial and systematic flaws in the calculation of the expected consequences of the policies implemented, which had a negative impact on the credibility of the support measures implemented.
Anti-establishment politics and the 2015 referendum
Confidence in institutional relief programs has declined significantly, and the significant income losses resulting from these measures (25-30 percent for individuals and countries) have led to a markedly anti-establishment political climate.
There were three instances in 2015 when strong social majorities formed, notably the Greek elections in January and September 2015 and the 2015 bailout referendum. These majorities demanded political revenge against those they considered responsible for the management of the situation and for the solutions to the problems that had arisen. As a result, opinions such as those in favor of bankruptcy or a return to the drachma were widely reported in the national news, especially during the discussions on the potential consequences of the Second Memorandum in early 2015.
The pro-Grexit stance within Greece ran into the geopolitical and social inexperience of certain partners in Central and Northern Europe, who sometimes referred to Grexit as a negotiating strategy or a viable solution. Instead of explicitly rejecting the Grexit concept and demanding a reevaluation of the bailout terms, the Greek side engaged in discussions on the topic, thereby undermining its own position in the developing prisoner’s dilemma scenario.
The Greek side tried to strengthen its position by referring to the Grexit crisis in the negotiations following the 2015 referendum. The fact that all parties to the negotiations were considered jointly responsible for the situation, as Donald Tusk said at the Euro Summit on July 7, 2015, after 17 hours of negotiations, was seen as a success for Greece in future negotiations.
Sustainable Legacy
The Greek economy stabilized between 2017 and 2023. It has performed significantly better than other Central European countries, especially in recent years. However, the economic and social impact of the Memorandum period has led to a renewed emphasis on “survival values” in Greek society. Greece is the only society in Europe to have shown this trend.
Moreover, the Greek financial crisis has revealed that “the establishment of politically legitimate mechanisms for resolving international coordination problems is the unsolved problem of the twentieth century.” The severity of the Greek financial crisis and the current state of upheaval underscore the need to restructure essential international institutions that were already under threat by the Greek crisis.
Note: This article presents the views of the author and does not necessarily reflect the position of EUROPP (European Politics and Policy) or the London School of Economics. Featured image source: conejota / Shutterstock.com
