Here’s a nice summary of the crisis:
Q. How did we get here?
A. Long story. Greece’s economy was never strong enough to share a currency with Germany’s, but both sides pretended it was, as it satisfied Greek pride and Germany’s ambitions (suffused with war guilt) of building an ‘Ever Closer Union’ in a new, democratic Europe. Reckless lending by French and German banks allowed the Greeks to finance widening budget and current account deficits for six years, but private capital flows dried up sharply after the 2008 crisis, forcing Greece to seek help from Eurozone governments and the International Monetary Fund in 2010.
Q. But all that was 5 years ago. How has Greece not managed to turn the corner since then, when every other Eurozone country that took a bailout has?
A. Greece was the first country to ask for help, and the Eurozone was totally unprepared for it on all levels–political, technological, emotional, whatever. The IMF, too, had no experience of dealing with a country in a monetary union. Consequently, the bailout was badly conceived (a point admitted at the weekend by Dominique Strauss-Kahn, who was head of the IMF at the time), focusing too much on the budget balance and not enough on fixing Greece’s uniquely dysfunctional state apparatus. In a normal recession, government spending can offset the negative effects of private demand contracting, but in this case, the budgetary austerity drove Greece into a vicious spiral. The economy contracted by 25% between 2010 and 2014, fatally weakening Greece’s ability ever to repay its debts.
Q. But didn’t Greece already get a load of debt relief?
A. Yes, €107 billion of it in a 2012 debt restructuring, the biggest in history. But it was only private creditors–i.e., bondholders–who took the hit. The Eurozone and IMF refused to write down their claims (although they did soften the repayment terms), and the new bailout agreement was based on more assumptions (since exposed as too rose-tinted) that Greece could grow itself out of its troubles. The economy continued to shrink in absolute terms and unemployment shot over 25%, forcing an ever bigger burden of taxation onto fewer and fewer shoulders. That created the political environment for this year’s crisis.
[Of course, any first-year economics student knows that you can’t “grow yourself out of troubles” by running budget surpluses and using the money to pay off foreign debt. I mean, this is just arithmetic, after all. But Germany can’t admit that they screwed up because, well:]
full article
How much worse can it get? Following Germany’s advice their GDP is down 25 percent, pushing their debt/GDP ratio up even as their total debt has gone down (people always seem to focus on the numerator, forgetting the equal importance of the denominator), so that even the IMF says the situation is “unsustainable”, yet the Germans are insisting on more of the same–which is, quite literally, crazy.