Greece: A battle between greed and envy.

When we talk about Greece, we talk about its beautiful beaches, the mesmerizing coasts, Santorini, the origin of various philosophies, and obviously, the $401 billion in debt and a debt-to-GDP ratio of 172%. What happened in Greece is the epitome of the phrase that not everything that shines is gold. From being one of the countries with the highest gold reserves to being the only developed nation to have defaulted on loan repayments to the IMF, Greece has lost all of its beauty. A lie cannot find a shelter for long. One day it erupts like a volcano, and the next thing you know is that you have lost trust, dignity, and money. Even though Greece practiced a free-market economy, which restricted government intervention to an extent, it was the monetary and fiscal decisions that are responsible for what Greece has become today.

Before joining the Eurozone in 2001, Greece had a respectable debt-to-GDP ratio of 60%. Their finances were in good shape, and their budget deficit was also below 3%. But the situation deteriorated dramatically over the next two decades due to fiscal profligacy, which is defined as wasteful and excessive spending, which caused deficits and debt levels to be exploited. In October 1981, PASOK, a party founded by Andreas Papandreou in 1974, came into power. Over the next three decades, PASOK partnered with the New Democracy Party. In order to keep voters happy, both parties lavished liberal welfare policies on their electorates, creating a bloated and inefficient economy.

As Uncle Scrooge wisely said, "nothing good is ever free." This growth that Greece started experiencing came with a cost. The deficit levels in Greece started plunging. In an economy, when there is more spending than earning, the country faces an economic situation called the fiscal deficit. Usually, expansionary monetary policies like decreasing interest rates are undertaken to uplift a drowning economy. Even though Greece implemented expansionary monetary policy, their intentions were to satisfy voters and not to give a damn about the economy. Being a member of the European Union, every country has a limit on how much liquidity it can create in its economy. Greece was operating way past these limitations.

Prior to joining the European monetary union, Greece was already suffering. Joining the European Economic Union appeared to offer a glimmer of hope. The belief was that the monetary union backed by the European central bank would dampen inflation, help to lower nominal interest rates that were increased in order to control the rising price levels, encourage private investments, and spur economic growth. Further, the single currency system would eliminate many transaction costs, leaving more money for the deficit and debt repayment.

In order to become one of the members of the European Economic Union, Greece had to comply with some of the guidelines set by the Maastricht Treaty in 1992. The treaty limits the government deficit to 3% of the GDP and the public debt-to-GDP ratio to 60%. Greece started taking measures considering these guidelines throughout the 1990's. Even though they tried in every possible way to get into the EMU through legitimate means, it was only through misreporting the size of its deficit that the country was able to get into the EMU. Greece hoped that its membership in the EMU would boost the economy, allowing the country to deal with its fiscal deficits. Expectations and overconfidence are two of the most brutal behavioral biases that are responsible for most of the damage.

Initially, Greece's acceptance into the Eurozone had a symbolic significance, as many banks and investors believed that the single currency reflected the differences among European countries. Suddenly, Greece was perceived as a safe place to invest, which significantly lowered their interest rates (higher quality credit reduces interest rates), which further lowered the amount of interest payment that the Greek government had to face. These lower interest rates allowed Greece to borrow extensively, fueling an increase in spending. It was exactly what Greece and the investors needed. An increase in spending did not come with a rise in income, which left Greece still fighting with its fiscal deficit. Many of Greece's fiscal deficits stemmed from a lack of revenue due to systematic tax evasion. Generally, self-employed and wealthy people used to underreport their income, which led to a decrease in the amount of tax collected.

The adoption of the euro only highlighted the competitiveness gap, as it made German goods and services relatively cheaper than those in Greece. Having given up independent monetary policy, Greece would no longer devalue its currency relative to Germany. This served to worsen Greece's trade balance, increasing its current account deficit (more imports than exports).

While the German economy benefited from increased exports to Greece, banks, including German banks, also benefited from Greek borrowing to finance cheap imported German goods and services. What Greece didn't see coming was the 2008 financial crisis in the United States. The recession caused by the financial crisis weakened Greece's already paltry tax revenue, which caused the deficit to worsen. The deficit expanded to such an extent that a US credit rating agency rated Greece as "junk." As capital began to dry up, Greece started facing a liquidity crisis, forcing the government to seek bailout funding, which it eventually received with staunch conditions.

Bailouts totaling $289 billion from the IMF and other European creditors were conditional on Greek budget reforms, specifically spending cuts and higher tax revenues. These austerity measures created a vicious cycle of recession, with unemployment reaching 25.7% in August 2012. Tax revenues weakened, which made their fiscal position worse. Austerity measures also created a humanitarian crisis: homelessness increased, suicides hit record highs, and public health significantly deteriorated. The nation's unemployment rate reached a record high of 28%. After experiencing a powerful economic recession and social unrest from citizens desperate to avoid additional EU-mandated austerity measures, Greece began to rebound from the Eurozone crisis.

In 2018, the nation exited its last bailout program, lowered taxes, and elected a new Prime Minister who vowed to reward the nation's citizens, investors, and businesses. Far from helping the Greek economy get back on track, the bailouts only served to ensure that Greece's creditors were paid while the government was forced to scrape together paltry tax collections.

Greece's sovereign debt crisis began in the 2010s, and a decade later, the country's economy has still not fully recovered, in part due to more recent disruptions caused by COVID-19. While the last official round of financial bailout support was given to Greece in 2018, it has until the year 2060 to fully pay off those debts. I have nothing left to add except a quote from one of the Greek philosophers himself. It goes like, "Youth ages, immaturity is outgrown, ignorance can be educated, and drunkenness can be sobered, but stupidity lasts forever."