Greece considered
leaving the EU
in the midst of the
government debt crisis.
Today it is among the fastest-growing EU economies.
August 6, 2024
For the busiest:
Greece's public debt rose from 22.7% of GDP in 1980 to 100.5% in 1993.
After Greece joined the euro, investors considered the country to be economically stable, meaning Greece could continue borrowing cheaply.
When the global financial crisis began in 2007-2008, Greece was already vulnerable.
In 2009, a new government revealed that Greece's deficit was far higher than officially reported: 12.5% of GDP rather than 3.7%, far above agreed limits.
As investors became concerned about economic mismanagement, Greece’s costs of borrowing jumped, making its budget deficit unsustainable.
Greece had to agree on a bailout loan from the EU and the International Monetary Fund.
In return, the creditors demanded that Greece implements strict austerity policies – cuts government spending.
These reforms proved too much too soon and triggered a short-term worsening of the crisis but made a critical adjustment to the financial climate.
By 2014, the Greek economy began recovering sustainably.
Post-pandemic, Greece is among top-performing economies in the EU and began reducing its debt burden quickly
However, Greece fell behind its neighbours and is currently 2nd poorest economy in the EU.
BACKGROUND
Greek democracy was restored in 1974, when the rule of a military junta ended after 7 years.
Two major parties were the centre-left Panhellenic Socialist Movement (PASOK) and the centre-right New Democracy (ND).
Although ideologically distant, both parties gained popular support with high social benefit payments.
In 1981 Greece joined the European Communities, what later evolved into the European Union.
Starting in the 1980s, Greece expanded its public sector, meaning that there were many state-run companies in public services like healthcare, transport, and communications, as well as industries like petroleum and energy.
High government spending required running budget deficits, which Greece financed by borrowing.
Greece's public debt rose from 22.7% of GDP in 1980 to 100.5% in 1993.
In 1992, Greece signing the Treaty of Maastricht, which imposed a debt limit of 60% of GDP and a government deficit limit of 3% of GDP.
Greece’s ND-led government reduced government spending and increased some taxes to meet the necessary criteria for adopting the euro as currency. These requirements included reducing the debt to GDP ratio, and the deficit to GDP ratio.
Despite the efforts, Greece was only able to meet the necessary criteria and join the Eurozone by misreporting its deficit and debt levels.
On January 1, 2001, Greece adopted the euro.
To decrease its debt officially, the country borrowed money from investment banks using currency contracts that were not recorded as debt.
In 2001, Greece obtained a $2.8 billion loan from Goldman Sachs hidden as a "cross-currency swap". This arrangement enabled Greece to transform its foreign currency debt into a domestic currency debt, based on an artificial market exchange rate.
In 2004, Greek Finance Minister acknowledged that the deficit-to-GDP ratio in 2000 was 4.1% instead of the reported 2.0%, and the debt-to-GDP ratio was 114% instead of 102%.
After Greece joined the euro, investors considered the country to be economically stable and safe, meaning Greece could borrow money cheaply.
For many years, investors loaned money to Greece at rates close to Germany's. This supported strong short-term economic growth and reduced unemployment, but increased debt further.
Greece's productivity remained lower than that of other EU countries.
The country was increasingly importing more than it exported, creating a trade deficit.
Normally, the currency of a country with a trade deficit would lose value, making imports more expensive and stabilising the difference. However, Greece was now using the euro, which it could not devalue.
When the global financial crisis erupted in 2007-2008, Greece was already vulnerable due to decades of economic mismanagement.
In October 2009, the newly elected government revealed that Greece's deficit was higher than officially reported: 12.5% of GDP rather than 3.7%, far beyond agreed limits.
Greece's debt-to-GDP ratio turned out to be 127.8%, more than twice as much as the Treaty of Maastricht allowed.
As investors became increasingly concerned about economic instability and mismanagement, Greece’s costs of borrowing jumped, making its budget deficit unsustainable.
In 2010, US financial rating agencies downgraded Greek bonds to a "junk" grade.
Greece was unable to pay on its massive debt obligations and had to agree on a bailout loan from the EU and the International Monetary Fund.
In return, the creditors demanded that Greece implements strict austerity policies – cut government spending, such as on social payments and services, and increase taxes, to reduce debt and deficit.
These extreme budget-cutting measures imposed on Greece failed to quickly reduce the government debt but worsened the economic recession and severely worsened the standards of living for hundreds of thousands of Greeks, as unemployment exceeded 25% in 2012.
The country's GDP declined from $330.9 billion in 2009 to $242 billion in 2012.
The Troika was widely criticised for its handling of the Greek crisis, especially for overestimating the effect of austerity to reduce debt. Austerity measures caused a drop in GDP, which increased debt-to-GDP ratio even without borrowing.
Critics suggest that the IMF and the EU should have pressed the creditors harder to accept forgiving and restructuring debt, rather than force the Greek side into tough economic restrictions.
THE DEBT CRISIS
To save the country's economy, in May 2010, a group of (1) the International Monetary Fund (IMF), (2) the European Commission (EC), and (3) the European Centrals Bank (ECB) – collectively known as the Troika – provided Greece with the First Economic Adjustment Programme.
This loan, also known as the first bailout, totalled $146 billion over three years in exchange for the Greek government implementing austerity measures.
The Second Economic Adjustment Programme was approved in July 2012. It provided an additional loan of $172 billion in exchange for a pledge to reduce the public debt from 160% of GDP to 120.5% by 2020.
In August 2015, Greece approved the Third Economic Adjustment Programme, totalling $95 billion.
Greece concluded the economic adjustment programme in 2018 after receiving all tranches of the loan.
Ultimately, Greece owed $330 billion to the Troika, leading to a public debt of 180% of the GDP.
Greece agreed to implement significant reforms during the economic adjustment programme period as a condition of receiving the bailout loans.
Pensions reforms
From 2000 to 2010, Greece's pension expenditure steadily increased from 11% of GDP (below the Eurozone average of 12%) to about 15% of GDP.
The reforms adopted aimed to
Increase the retirement age
Cut existing pensions
Decrease many benefits
Increase social security contributions
Despite these measures, Greece still holds the top position in the EU for pension expenditure at 16.4% of GDP, according to the latest data available in 2021.
Labour market reforms
Greece's labour market before 2010 was characterised by a high minimum wage and low productivity.
Greek policymakers aimed to enhance labour market competitiveness and
Reduce the minimum wage
Encourage flexible forms of employment that boost labour participation rates
Reduce high employment exit costs
Decrease non-wage labour costs (especially social security contributions)
Overall, the reforms' results have been mixed. Although unemployment decreased, the average wages and job quality have declined.
Privatisation of state-owned companies
In 2011, the Greece government began privatising (selling) state-owned company, aiming to:
Generate immediate revenue from the sales
Improve the efficiency and competitiveness of these enterprises
Attract foreign investment
To align with EU Policies on reducing state intervention
Between 2010 and 2018, Greece got approximately $12 billion from selling state assets in the real estate, energy, and transport sectors.
In July 2016, a Chinese shipping company’s acquisition of Piraeus, Europe’s 9th largest port, drew global attention due to its geopolitical significance. The company modernised the port and it has been performing well since, although security concerns may remain
Financial reforms
After the debt crisis outbreak, Greece implemented banking reforms to stabilise and restore confidence in its financial sector.
This process involved multiple capital injections, with significant contributions from the Hellenic Financial Stability Fund (HFSF) and private investors.
In addition, there were efforts to reduce non-performing loans (NPLs)—that is, bank loans that are unlikely to be repaid by the borrower —which started soaring during the crisis.
The country succeeded in reducing its NPL ratio from 35.7% in 2015 to 6.5% in 2023. This increased financial stability and credit availability, which lowered borrowing costs, contributing to Greek economic growth in the following years.
POLITICS AND SOCIETY
The debt crisis profoundly affected both the left and the right flanks of Greek politics.
The Centre-left PASOK party was in power in 2010 when the First Economic Adjustment Programme was approved. As a result of the crisis, the party experienced a decline in electoral support, with their vote share dropping from 43.9% in the 2009 election to 13.2% in 2012.
Syriza, originally an alliance of left-wing political parties founded in 2004, filled the political void that emerged. It won the 2015 elections with 36.3% of the votes, as its leader, Alexis Tsipras, championed a strong anti-austerity agenda.
Soon after the elections, the new PM, Tsipras, and Economic Minister Yanis Varoufakis began negotiations for the Third Economic Adjustment Programme.
In July of the same year, Tsipras called for a national referendum on the terms of the agreement, including pension reforms, tax increases, privatisation and new spending targets. The result was a clear refusal, "no" received 61.3% of the votes.
Despite the result, Tsipras accepted the Third Economic Adjustment programme a month later due to the dire financial situation, pressure from European creditors, lack of viable alternatives, and the risk of "Grexit" (Greece leaving the EU).
Approximately forty Syriza members in Parliament, including Varoufakis, refused to back the bailout, forcing the Prime Minister to seek support from the opposition parties, including centre-right New Democracy.
Tsipras resigned and called for an early election the same year, leading to a split within Syriza. He won with 35% of the votes.
In the following years, the Tsipras government implemented many austerity reforms, which contributed to its 2019 electoral defeat and the victory of the centre-right candidate Kyriakos Mitsotakis from the ND party. These reforms included pension cuts, tax increases and reduction of public sector jobs.
While ND’s electoral results remained above 25% on average between June 2012 and July 2019, a significant transformation occurred on the far right.
Golden Dawn, a far-right party active since 1985, achieved its all-time highest electoral result in June 2012 with 6.92%. This was a significant increase from the 0.29% it achieved in 2009.
This can be partly attributed to deep anger over austerity reforms and general disillusionment with the Greek political system.
During the early stages of the Economic Adjustment Programmes (2010-2012), Greece saw mass anti-austerity protests caused by a dramatic drop in living standards. Youth unemployment reached 62.3% in 2013, average annual wages declined from $21,600 in 2009 to $17,000 in 2013, increasing homelessness and poverty rate, which peaked at 8.3% in 2013, up from 1.8% in 2009.
The anti-austerity movement began in May 2010, with thousands of protestors taking to the streets, often resulting in violent clashes with the police. Tensions escalated dramatically when three people died trapped in a bank that was set on fire in Athens.
In 2011, a second wave of protests, larger in scale and scope, began occupying the Greek squares, particularly Syntagma Square, where the Greek Parliament is located.
Syriza benefited from the third wave of protests that started in 2012. The left-wing coalition proposed itself as an anti-establishment force and expanded its voter base. Averaging 4% in the previous elections, Syriza won more than one-third of the votes in 2015.
The period of the Economic Adjustment Programmes was also marked by civil disobedience actions, such as people forcibly opening toll booths on motorways or refusing to pay public transport fares.
AFTER THE BAILOUT: 2018-2024
After 2018, Greece went through challenging times due to the COVID-19 pandemic. The outbreak resulted in a decline in tourism, which contributed $40.8 billion to the country's GDP in 2019 out of $205.2 billion total and led to increased public spending.
Following the Russian invasion of Ukraine in February 2022, Greece also saw an increase in energy prices and inflation reaching 9.3% that year.
Since 2019, the Greek government, led by Kyriakos Mitsotakis, has maintained a pragmatic, austerity-based economic policy. In 2021, Mitsotakis presented the "Greece 2.0" program, a 2,000-page plan designed by Nobel Prize-winning economist Christopher Pissarides to use the EU's post-pandemic recovery fund.
The "Greece 2.0" program aimed to secure $43.2 billion in grants and loans from the EU's Recovery and Resilience Facility. Greece's digitalisation and green transition projects will be the main recipients of the funds. The key measures for the green transition include enhancing the energy efficiency of approximately 110,000 houses, investing in the railway network, and promoting reforestation efforts. In terms of digitalization policy, the Greek government is dedicated to improving public administration's digital capabilities and skills, expanding the fibre optic infrastructure, and integrating new technologies in small and medium enterprises.
In 2023, The Economist named Greece one of the countries of the year due to its successes in GDP and stock market value growth, as well as its implementation of pro-market reforms.
IMPLICATIONS
The EU financial interdependence
In the 1990s, European banks started providing significant loans to Greece to support the country's growing infrastructure needs and economic development.
By 2010, French, German and British banks had loaned around $102.3 billion to the Greek government and banks. As Greece's financial situation worsened, the risk of it defaulting threatened the stability of many European banks.
The bailout loans stabilised the Greek banking sector and shielding other European banks from significant losses.
After thorough financial health checks, the new funds were used to significantly recapitalise Greek banks, strengthening their financial position.
Increasing fiscal surveillance
After the crisis broke out, the EU reformed financial oversight rules and imposed stricter budgetary rules on the member states.
Those included:
a) The Sixpack (2011): regulations to strengthen the enforcement of fiscal rules and improve the monitoring of budgetary policies, it included sanctions for countries that do not comply with these rules.
b) Fiscal compact (2012): a treaty between EU states that limits the GDP to deficit ration and sets out frameworks to pay off excess debt.
c) The European Stability Mechanism (ESM) (2012): an intergovernmental organisation offering financial assistance to eurozone countries experiencing difficulties borrowing on the market. In return for this assistance, it requires implementation of specific economic policy conditions. Portugal, for instance, sought ESM’s assistance in 2011 and returned to economic growth by 2014. However, during this period, Portugal's unemployment rate increased from 12.6% in 2011 to 16.2% in 2013.
d) The Banking Union (2014): This key component of the monetary union had two major goals: to make European banks more robust and to standardise financial sector rules. The most important implementation was the 'single rulebook,' a set of laws that apply to all financial institutions in the EU.
Rise of Euroscepticism
The Greece debt crisis contributed to the continent's political transformation, leading to the rise of Eurosceptic parties such as Syriza in Greece, Vox in Spain, and Law and Justice in Poland, among others.
Left-wing Eurosceptic parties were mainly focused on economic issues, particularly the debt crisis and the following austerity measures, while right-wing Eurosceptic parties mainly criticised mass immigration and the loss of national sovereignty.
These parties are divided between hardliners who advocate for exiting the EU or Eurozone, and moderates who oppose further EU integration or criticise specific policies.
According to opinion polls, the trend of Euroscepticisc among the general public began to slow down after Brexit in 2016. However, in parliaments across the EU, the share of votes for Eurosceptic parties continued to climb and reached all-time highs in the early 2020s.
SOME LESSONS
Fiscal discipline – Greek debt crisis was caused by long-term economic mismanagement: unsustainable borrowing and data manipulations.. This made the country especially vulnerable to shocks like the global financial crisis of 2007-2008.
Economic diversification – Greece depends on exporting services, such as tourism and shipping, for around 40% of the GDP. Greece also relies on importing manufactured goods and energy sources.. This situation makes Greece vulnerable to deglobalisation shocks (such as the COVID-19 pandemic) and energy crises.
Risk of austerity – radical spending cuts negatively affected the living conditions in Greece, leading to record-high unemployment, troubled public services, and cuts to pensions and public sector salaries. However, Greece has paved the way for long-term sustainable development with improved financial health, transparency, and investor confidence.
Trust in international organisations – European institutions and the IMF played a crucial role in providing financial assistance and designing policies for Greece. However, they were widely criticised for their mishandling of austerity policies. According to a 2015 Pew Research Center poll, 86% of Greeks felt the EU was interfering in their country's affairs, and 67% viewed the EU as inefficient. This led to widespread protests, limited legitimacy for unpopular economic decisions, and domestic political polarisation,
GREECE'S ECONOMIC FORECASTS
By 2014, Greek economy began to stabilise, and the economic outlook improved following the implementation of pro-market reforms.
The Greek government expects to generate $6.1 billion this year from the sale of state assets, including a share in the Athens airport and concessions for two toll roads.
Investments are projected to increase by 15.1% in 2024, supported by Next Generation EU and the EU structural funds for $70.5 billion by 2028.
In April 2024, S&P rating agency revised Greek economic outlook to “positive”.
Greece's economy is expected to keep steady non-inflationary growth in 2024 and 2025, continuing to reduce its debt
GDP growth: 2.2% in 2024 and 2.3% in 2025.
Inflation: 2.8% in 2024 and 2.1% in 2025.
Unemployment: 10.3% in 2024 and 9.7% in 2025.
Debt-to-GDP: 153.9% in 2024 and 149.3% in 2025.
Overall, Greece still has the lowest living standards in the eurozone despite its strong post-pandemic recovery.
Greece is now the second poorest economy in the EU, down from the middle of the pack pre-crisi. Real wages in Greece declined by about 30% compared to 2007.
However, in 2007 the Greek economy was at the peak of an unsustainable growth spurt, driven by cheap borrowing and some overvalued sectors of the economy like construction and real estate.
Following the crisis, the economy is still larger than pre-eurozone levels.
Greece is experiencing a steady decline in birth rates, dropping from 10.1 births per 1,000 people in 2008 to 6.8 in 2024. This, combined with an ageing population, will increase pensions and health expenditures in the following years.
Most Foreign Direct Investment in Greece comes from Northern European countries, such as France and Germany. The current economic slowdown in these countries raises questions about the long-term sustainability of this trend.
In conclusion, Greece has undergone a massive transformation over the last decade. While it has achieved significant results in stabilising the macroeconomic outlook, it has not improved much society's living conditions nor yet solved structural issues such as high indebtedness and over-reliance on a few economic sectors.
Author Elia Preto Martini
Editor Anton Kutuzov