Greek Economic Crisis

Universite La Sagesse
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Faculty of Business Administration & Finance
Advanced Managerial Finance
Dr.Charles Manih
The Greek Economic Crisis
Summer 2015
Prepared by:
Nour Balhawan
Lama Nassar
Youssef El Zein

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Table of Contents Page
1. Introduction……………………………………………………3
2. Start and initiation of the European Union……..4
3. Greece Joining the European Union………………..5
4. Greek Olympics of 2004…………………………………8
5. 2008 World Crisis…………………………………………13
6. Repercussions of Crisis on Europe and Greece..16
7. Beginning of Greek Crisis……………………………20
8. Austerity and Reforms……………………………….26.
9. Lucas Papademus…………………………………….30
10. Antonis Samaras…………………………….32
11. Alexis Tsipras………………………………….35
12. Public Sensus and recent updates…….38

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Since the introduction of modern economics, trade unions have been known
to increase and facilitate production and efficiency of nations. NAFTA, ASEAN, GCC,
and the European Union are the world's most renowned trade unions to be working
under the supervision and guidance of WTO for decades now. The concept of a
trade union, a group of countries usually with geographic proximity, coordinating
together for specialization of production, reduced taxes and custom duties, proved
to be a success in most of the cases until this day.
Nowadays, we are all hearing and reading about the Greek economic crisis
and its implications on the world economy, and the European economy especially.
Greece is the 1st developed economy to default on IMF loans, how did it get here?
How did the crisis start and how is it going to end? Will it really have an impact on
its region and surrounding countries? Will the European Union be able to survive
this crisis and help Greece? We will discuss all those questions and further more in
the following paper.
First, let's remember a bit how the European Union started and when. What
were its goals, and who were the main players that initiated it. Back in 1991, the
European Economic Community, represented by the following states: Belgium,
France, Germany, Italy, Luxembourg, and the Netherlands, convened in Maastricht,
Netherland, and signed what is known as the Maastricht Treaty on December 10,
1991. As it came in force on November 1st 1993, it lead to the creation of the

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European Union, and the adoption of a single currency, the Euro. This treaty was
then amended by the treaties of Lisbon, Nice, and Amsterdam.
Earlier agreements between those founding partners of the EU included Coal
and Steel community in 1951, and the European Economic Community in 1957. This
community was more ambitious on the economic level, rather than political, and
aimed at establishing a single or common market where goods, services, capital, and
people could move freely within those states.
Completion of the single market in the late 1980s and early 1990s had a
powerful magnetic effect on Austria, Finland, Norway, Sweden, and Switzerland,
which applied to join the EU. Between 1973 and 2004 the EU grew from six to
twenty-five member states. On January 1st 1994, European Economic area came
into force, giving birth to European Free Trade Association (EFTA) and the Single
European Market. The Schengen Agreement (signed in 1985) came into effect on 26
March 1995 between Belgium, France, Germany, Luxembourg, Netherlands,
Portugal and Spain. Austria signed up on 28 April followed by Denmark, Finland and
Sweden, alongside non-EU members Norway and Iceland, on 19 December 1996. On
22 July 1997, leaders of the Western European Union met and adopted a declaration
in the city of Amsterdam that was signed by foreign ministers on 2 October. The
treaty entered into force on 1 May 1999.It sought to create an "area of freedom,
justice and security". There would also be institutional reforms to make the Union
more democratic and adjust it to enlargement. Another main outcome of
Amsterdam treaty is the European Central Bank.

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Established in 1998, headquarters in Frankfurt, Germany. The owners and
shareholders of the European Central Bank are the central banks of the 28 member
states of the EU. The primary objective of the European Central Bank, as mandated
in Article 2 of the Statute of the ECB, is to maintain price stability within
the Eurozone. The basic tasks, as defined in Article 3 of the Statute, are to define and
implement the monetary policy for the Eurozone, to conduct foreign exchange
operations, to take care of the foreign reserves of the European System of Central
Banks and operation of the financial market infrastructure. The ECB reserves the
right to issue all Euro banknotes and coins under article 16 of its Statute. The ECB is
governed by European law directly, but its set-up resembles that of a corporation in
the sense that the ECB has shareholders and stock capital. Its capital is five billion
euro held by the national central banks of the member states as shareholders.
Regarding Greece, it was first introduced to the European Union in 1981. At
first, they had their doubts into full integration in the EU and were skeptical about
the goals and interests on the Union. On later stages, Greece started having pro-
adoption policies as steps into full integration. Moreover, as of 1987 Greece
projected as its main goal the accession of Cyprus to the European Community. For
this purpose, Greece supported the Nicosia Government in their application for
accession, submitted in June 1990. The third period of Greece's participation in the
Community / Union commenced in 1996 and has been characterized by even
further support for the idea and process of European integration and increasing

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integration in every department, going in compliance with the suggested federal
model. It is also characterized by an effort towards greater economic and social
convergence with the fulfillment of the "convergence criteria". Greece's
participation as a full member in the single currency (euro) and the Economic and
Monetary Union (EMU) since January 1, 2002.
Strategically located at the northeastern corner of the Mediterranean Sea,
Greece forms the southern tip of the Balkan Peninsula in south-east Europe. Its
territory includes several hundred islands in the Aegean, Ionian and Mediterranean
seas, of which only 227 are inhabited. Eighty per cent of Greece is mountainous and
Mount Olympus is the highest point in the country (2 917m).
The most important sectors of Greece’s economy in 2014 were wholesale and retail
trade, transport, accommodation and food services (26.3 %), public administration,
defense, education, human health and social work activities (20.8 %) and real estate
activities (18.5 %).
Greece’s main export partners are Turkey, Italy and Germany while its main import
partners are Russia, Germany and Iraq.
Greece has 21 members of the European Parliament, out of 751. The
European Parliament is a directly elected body every 5 years with legislative,
supervisory, and budgetary responsibilities. The last elections were in May 2014.
Another governing body in EU is the European Council.
The Council of the EU doesn't have a permanent, single-person president. Instead,
its work is led by the country holding the Council presidency, which rotates every 6

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months. During which ministers from that country's government chair help and
determine the agenda of Council meetings in each policy area, and facilitate dialogue
with the other EU institutions. Greece held the presidency of European Council on
the following dates:
Jul-Dec 1983 , Jul-Dec 1988 , Jan-Jun 1994 , Jan-Jun 2003 , Jan-Jun 2014.
In the Council of the EU, national ministers meet regularly to adopt EU laws
and coordinate policies. Council meetings are regularly attended
by representatives from the Greek government, depending on the policy area being
addressed. Greece has 12 representatives on the Committee of the Regions, the EU's
assembly of regional and local representatives. This advisory body is consulted on
proposed laws, to ensure these laws take account of the perspective from each
region of the EU. Greece also communicates with the EU institutions through
its permanent representation in Brussels. As Greece's "embassy to the EU", its main
task is to ensure that the country's interests and policies are pursued as effectively
as possible in the EU.
Member countries' financial contributions to the EU budget are shared fairly,
according to means. The larger your country's economy, the more it pays – and vice
versa. The EU budget doesn't aim to redistribute wealth, but rather to focus on the
needs of all Europeans as a whole.
Breakdown of Greece's finances with the EU in 2013:

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 Total EU spending in Greece – € 7.215 billion
 Total EU spending as % of Greek GNI – 3.97 %
 Total Greek contribution to the EU budget – € 1.794 billion
 Greek contribution to the EU budget as % of its GNI – 0.99 %
After this general overview of Greece and its participation in EU, we will start
tackling how and when the economic crisis we are now witnessing has started, and
what were the main reasons behind it. Back in 2004, Athens hosted the 2004
summer Olympics. The Helliniko Olympic Complex in Athens was supposed to be
thriving long after the 2004 Summer Olympics had ended. There were big plans to
turn much of the complex into the largest metropolitan park in Europe, but that
never happened, largely because of the bureaucracy that hampers most
development in Greece. Today, the complex sits amid overgrown weeds, virtually
deserted.
Hosting the Olympics certainly isn’t the main cause of the financial mess.
Greece has a long history of systemic problems with labor productivity, public-
sector debt and corruption at the core of its lack of growth. It came at a moment
when the euro, which Greece adopted a few years before, had brought the country a
remarkable degree of wealth in a short period of time.
But in fact, the 2004 Olympics were a microcosm of Greek economic
dysfunction: missed budget estimates, poor planning, and financial mismanagement.

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It cost Greece about $11 billion, at least double what the Greek government had
initially budgeted , that doesn’t include the money the country has spent trying to
maintain its rarely used Olympic facilities over the past eight years. It was forced,
mainly by the U.S. and the U.K., to spend $1.2 billion on security alone because of
fears over terrorism, and in the months leading up to the opening ceremonies,
Athens had to rush its schedule just to get construction projects completed on time.
For years, studies have shown that holding the Olympics often has severe
negative economic effects on host cities, despite the temporary burst of tourism and
global attention. The competition between cities often causes governments to go
financially overboard merely to win an Olympic bid. Once construction gets under
way, governments often fail to budget properly. And after the Games are over, many
cities are left with infrastructure that suddenly has no real use.
Not everyone, however, accepts that rationale. Some argue, for instance, that
hosting the Olympics brings cities much-needed infrastructure projects.
“Because of the Games, we now have the metro, a new airport and new
roads,” says Isidoros Kouvelos of the Hellenic Olympic Committee. On the other
hand, others claim that no one wants to talk about the Olympics. “Many Greeks
believe the 2004 Games was all built on a big lie", a lie that we had the money to pay
for all these lavish centers and ceremonies. Perhaps, the huge increase in spending
that year was the kick-starter of Greek debt. Those 11 billion most probably could

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never had been spent, if the mother of Olympics, hadn’t chosen to host them again.
And maybe this gap in spending and borrowing could never have been created. The
timing of those games was also very critical, a couple years before the world crisis,
nobody knew what the upcoming years were bringing to the world economy. And
especially the European Union. The years that followed, the next Olympics
ceremony to be precise in 2008, witnessed the world's worst economic depression
since decades, and that will be discussed along with its effects on Greece in the
following graphs and paragraphs:

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The Financial Crisis of 2008
In 2008 the world economy faced its most dangerous crisis since the Great
Depression of the 1930s. The contagion, which began in 2007 when sky-high home
prices in the United States finally turned decisively downward, spread quickly, first
to the entire U.S. financial sector and then to financial markets overseas. The
casualties in the United States included the entire investment banking industry, the
biggest insurance company, the two enterprises chartered by the government to
facilitate mortgage lending, the largest mortgage lender, the largest savings and
loan, and two of the largest commercial banks. The carnage was not limited to the
financial sector, however, as companies that normally rely on credit suffered
heavily. Still more ominously, banks, trusting no one to pay them back, simply
stopped making the loans that most businesses need to regulate their cash flows
and without which they cannot do business. Share prices plunged throughout the

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world—the Dow Jones Industrial Average in the U.S. lost 33.8% of its value in
2008—and by the end of the year, a deep recession had enveloped most of the
globe. In December the National Bureau of Economic Research, the private group
recognized as the official arbiter of such things, determined that a recession had
begun in the United States in December 2007, which made this already the third
longest recession in the U.S. since World War II.
Each in its own way, economies abroad marched to the American drummer.
By the end of the year, Germany, Japan, and China were locked in recession, as were
many smaller countries. Many in Europe paid the price for having dabbled in
American real estate securities. Japan and China largely avoided that pitfall, but
their export-oriented manufacturers suffered as recessions in their major
markets—the U.S. and Europe—cut deep into demand for their products. Less-
developed countries likewise lost markets abroad, and their foreign investment, on
which they had depended for growth capital, withered. With none of the biggest
economies prospering, there was no obvious engine to pull the world out of its
recession, and both government and private economists predicted a rough recovery.
The Crisis unfolds
The first major institution to go under was Countrywide Financial Corp., the
largest American mortgage lender. Bank of America agreed in January 2008 to terms
for completing its purchase of the California-based Countrywide. With large shares

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of Countrywide’s mortgages delinquent, Bank of America was able to buy it for $4
billion on top of the $2 billion stake that it had acquired the previous August—a
fraction of Countrywide’s recent market value.
There were competing theories on how so many pillars of finance in the U.S.
crumbled so quickly. One held the issuers of subprime mortgages ultimately
responsible for the debacle. According to this view, when mortgage-backed
securities were flying high, mortgage companies were eager to lend to anyone,
regardless of the borrower’s financial condition. The firms that profited from this—
from small mortgage companies to giant investment banks—deluded themselves
that this could go on forever. Joseph E. Stiglitz of Columbia University, New York
City, the chairman of the Council of Economic Advisers during former president Bill
Clinton’s administration, summed up the situation this way: “There was a party
going on, and no one wanted to be a party pooper.”
As alarming as the blizzard of buyouts, bailouts, and collapses might have
been, it was not the most ominous consequence of the financial crisis. That occurred
in the credit markets, where hundreds of billions of dollars a day are lent for periods
as short as overnight by those who have the capital to those who need it. The banks
that did much of the lending concluded from the chaos taking place in September
that no borrower could be trusted. As a result, lending all but froze. Without loans,
businesses could not grow. Without loans, some businesses could not even pay for
day-to-day operations.

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The Bush administration did little with tax and spending policy to combat the
recession. Sen. Barack Obama, who was elected in November to succeed President
Bush as of Jan. 20, 2009, prepared a package of about $1 trillion in tax cuts and
spending programs to stimulate economic activity.
International Repercussions
Although the financial crisis wore a distinct “Made in the U.S.A.” label, it did
not stop at the water’s edge. The U.K. government provided $88 billion to buy banks
completely or partially and promised to guarantee $438 billion in bank loans. The
government began buying up to $64 billion worth of shares in the Royal Bank of
Scotland and Lloyds TSB Group after brokering Lloyds’ purchase of the troubled
HBOS bank group. The U.K. government’s hefty stake in the country’s banking
system raised the specter of an active role in the boardrooms. Barclays, telling the
government “thanks but no thanks,” instead accepted $11.7 billion from wealthy
investors in Qatar and Abu Dhabi, U.A.E.
Variations played out all through Europe. The governments of the three
Benelux countries—Belgium, The Netherlands, and Luxembourg—initially bought a
49% share in Fortis NV within their respective countries for $16.6 billion, though
Belgium later sold most of its shares and The Netherlands nationalized the bank’s
Dutch holdings. Germany’s federal government rescued a series of state-owned
banks and approved a $10.9 billion recapitalization of Commerzbank. In the banking
centre of Switzerland, the government took a 9% ownership stake in UBS. Credit

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Suisse declined an offer of government aid and, going the way of Barclays, raised
funds instead from the government of Qatar and private investors.
The most spectacular troubles broke out in the far corners of Europe. In
Greece street riots in December reflected, among other things, anger with economic
stagnation. Iceland found itself essentially bankrupt, with Hungary and Latvia
moving in the same direction. Iceland’s three largest banks, privatized in the early
1990s, had grown too large for their own good, with assets worth 10 times the
entire country’s annual economic output. When the global crisis reached Iceland in
October, the three banks collapsed under their own weight. The national
government managed to take over their domestic branches, but it could not afford
their foreign ones.
In an atmosphere that bordered on panic, governments throughout Europe
adopted policies aimed at keeping the recession short and shallow. On monetary
policy, the central banks of Europe coordinated their interest-rate reductions. On
December 4 the European Central Bank, the steward of monetary policy for the euro
zone, engineered simultaneous rate cuts with the Bank of England and Sweden’s
Riksbank. A week later the Swiss National Bank cut its benchmark rate to a range of
0–1%. On fiscal policy, European governments for the most part scrambled to
approve public-spending programs designed to pump money into the economy. The
EU drew up a list of $258 billion worth of public spending that it hoped would be
adopted by its 27 member countries. The French government said that it would

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spend $33 billion over the next two years. Most other countries followed suit,
though Germany hung back as Chancellor Angela Merkel argued for fiscal restraint.
By year’s end, all of the world’s major economies were in recession or
struggling to stay out of one. In the final four months of 2008, the U.S. lost nearly
two million jobs. Forecast after forecast showed lethargic global economic growth
for at least 2009. “Virtually no country, developing or industrial, has escaped the
impact of the widening crisis,” the World Bank reported in a typical year-end
assessment. It forecast an increase in global economic output of just 0.9% in 2009,
the most tepid growth rate since records became available in 1970.
Measured by its impact on global economic output, the recession that had
engulfed the world by the end of 2008 figured to be sharper than any other since the
Great Depression. The two periods of hard times had little else in common,
however; the Depression started in the manufacturing sector, while the current
crisis had its origins in the financial sector. Perhaps a more apt comparison could be
found in the Panic of 1873. Then, as in 2008, a real estate boom (in Paris, Berlin, and
Vienna, rather than in the U.S.) went sour, loosing a cascade of misfortune. The
ensuing collapse lasted four years.

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The Greek Debt Crisis: Origins and Implications
The financial crisis that unfolded in mid-2008 led to a dramatic increase of
public debt in many advanced economies. During the recent months, we have seen
the transformation of the 2007 US subprime mortgage loan market crisis into a
sovereign debt crisis in the Eurozone. This overwhelming increase in the public debt
has been to some extent the outcome of the effort by the governments to reduce the
private debt that was accumulated during the years preceding the recent financial
turmoil (De Grauwe, 2010). Based on the ECB Quarterly Euro Area accounts for the
years 1999 – 2010, a number of observations can be made. First, there are periods
during which private debt increased substantially in the eurozone whereas there
are other periods that private debt has been reduced with a great speed. Second,
during periods of economic booms, private debt has risen by an accelerating rate.
Third, for the whole period the increase in private debt was substantially greater
than the percentage increase of public debt.
The Greek debt crisis that began in late 2009 was followed by respective
fiscal and banking crisis in Ireland, Portugal, Spain and recently Italy. The entry of
Greece in the euro area and the adoption of euro in 2001 gave to the economy a
reduction in interest rates never experienced before. Following the announcement
of the Greek government in 1994 that it intended to take the necessary steps to
fulfill the Maastricht criteria in order to bring Greece in the euro area by 2001 the
nominal interest rate on 10-year Greek government bonds declined from about 20

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per cent to 3 and a half percent in 2005. As the Greek financial crisis erupted in late
2009, interest rates began to rise substantially with the 10-year government bond
yield increasing to almost 27 per cent at the beginning of November 2011 (see
Hardouvelis, 2011a, b).
The adoption of the euro gave several benefits to all its members, particularly
to countries like Greece with historical high levels of inflation and lack of economic
policy credibility. Thus, the introduction of the euro supported by the monetary
policy of the ECB led to a reduction of inflation and inflation expectations in
countries with high inflation experience and thus reducing the uncertainty resulted
by inflation distortion. In addition, the adoption of the euro led to the reduction of
exchange-rate uncertainty and finally the reduction in the nominal interest rates
and risk premia led to the reduction of the costs of servicing the public-sector debt
and facilitating fiscal adjustment leading to resource allocation to other uses. During
the period prior to the entry of Greece in the EMU the interest-rate spreads between
10-year Greek and German government bonds were reduced drastically from 1,100
basis points in early 1998 to about 100 basis points one year before the entry.
Following the entry in the eurozone the spreads fell to 50 basis points whereas
during the period 2002 until the end of 2007 the spreads fell even further ranging
from 10 to 30 base points (see Gibson et al., 2012; Hardouvelis, 2011a, b).

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Unfortunately, the Greek governments of the period 2001-2009 did not take
advantage of the low inflation environment and they ran fiscal deficits of 6 per cent
of GDP on the average while they also increased the share of the government
spending in the economy (Antzoulatos, 2011). Thus, when the negative effects of the
2007-2009 financial turmoil reached the eurozone and worries over the fiscal
problems of Greece and other European countries started to emerged then it was
made clear that two hidden problems of the Greek economy remained unaddressed
were brought to the surface emphatically once again. The tranquil years of 2001-
2009 have led the markets to ignore these two fundamental problems of the Greek
economy. As Gibson et al. (2012) argue the markets partially made the successive
Greek governments to believe that the low interest-rate environment would be a
permanent feature of the Greek economy. Their econometric evidence shows that
the drastic reduction in interest-rate spreads occurred over the 2001-2009 period
were not justified by the country’s fundamentals. In contrast, they detect an
overshooting of the spreads relative to fundamentals when the Greek financial crisis
broke up. Gibson et al. (2012) argue that such a bias effect could be subject to a
“peso problem”.
Unsustainable Fiscal and External Imbalances
The financial crisis brought to the surface the two long time existing
macroeconomic imbalances and structural weakness of the Greek economy. During
the last three decades the Greek government has run excessive budget deficits.

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Focusing on the period 2001-2009 (i.e. after the adoption of the euro) the data on
fiscal deficits as well as on the government expenditures we conclude that they have
been rising as percentages of the GDP whereas the government revenues as
percentage of GDP decline continuously during this period. Two features regarding
fiscal policy are worth noting: First, despite the robust growth rate that the Greek
economy experienced and the favourable macroeconomic environment, the Greek
governments were not successful in reducing the budget deficits below 3% of GDP
in line with the requirements of the Stability and Growth Pact. As a result of such
fiscal easiness Greece was under fiscal control by EU since 2004 with a short break
in 2007.
However, given that when joining the eurozone Greece gave up the conduct
of monetary and exchange rate we would expect that fiscal policy would be counter-
cyclical in nature in order to act as automatic stabilizer in the presence of country-
specific shock.
Therefore, the pro-cyclicality of the fiscal policy could be considered as a
major source of shocks (Antzoulatos, 2011; Gibson et al., 2012; Hardouvelis,
2011a,b). The lack of competitiveness of the Greek economy is an even more acute
problem. This is a chronic problem that dates back to the 1970s. The loss in
competitiveness is reflected in the huge current account deficit. During the period
2001 to 2009 both inflation and wages increases, adjusted for productivity changes
exceeded the average increases in the rest of the euro area. During this period

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competitiveness, as measured by consumer prices, declined by 20% while when
measured by unit labour costs, it declined by 25%. A more striking stylized fact was
the during this period wages appreciated in real terms by 5.5% in the tradeables
sector and by a huge 16.5% in the non-tradeables. Finally, the external debt of
Greece rose from 94% in 2003 to approximately 200% at the end of 2010 which
implies that the substantial interest payments to foreign holders of Greek financial
assets have led to a deterioration of the income account deficit and thus the deficit
of current account. (Bank of Greece reports, 2010, 2011a, 2011b; Bank of Greece’s
Governor Speech, 2010)
The Greek economy’s imbalances are the most profound in the Eurozone
several other euro area countries, namely Ireland, Portugal, Spain and currently
Italy have experienced similar problems which are also based on fiscal laxity and
loss of international competitiveness and in some cases as well as on problematic
financial sectors. An examination of the twin deficits relation for the eurozone
reveals that the fiscal imbalance is more important for the majority of the countries-
members. Greece and Portugal they have the largest government deficits and
current account deficits, but Ireland does not suffer from either problem and Spain
mainly suffers from loss in competitiveness, (Hardouvelis, 2011a,b).
Public sector inefficiencies and low entrepreneurship motives
There are several other features of the Greek economy that need to be

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discussed as they are related to the low productivity of the Greek economy and the
distortions that exist in the private sector which over the last three decades led to a
dramatic decline of the output production of the manufacturing and industrial
sector of the economy.
As we mentioned above, the real appreciation of wages in the non-treadable
sector (i.e. public sector, construction etc.) coupled with a dramatic increase of
public sector employees not only in the General government but also in
municipalities and public welfare companies (which until very recently the Greek
state held at least 51% of the shares). Such a combination led to a reallocation of
capital and labour away from the private sector and especially from export oriented
sectors leading to the loss in competitiveness and the increase in the current
account deficit. The private sector was in most cases tied closely with the public
sector as most of business contracts were in fact given by the government. This
deteriorated the competitiveness of the Greek economy since the private sector
learnt to depend mainly on government projects of any kind and less on its efforts
for research and development, innovationof products and export oriented
production. Furthermore, as Katsaitis and Doulos (2009) show that the large
amounts of funds transferred from EU to Greece had also adverse effects on private
investment. They argue that the impact of EU structural funds on a country’s FDI
depends crucially on the institutional quality of the receiving countries: High quality
institutions have a positive effect whereas low quality institutions have a negative

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impact. Thus, crowding out of private investment was observed in Greece from EU
funds. This outcome is supported by the evidence on the level of institutional quality
in the EU-16 countries provided by Jurdin and Cuckovic (2009). Greece was ranked
15th with only Italy being worse in institutional quality with an index value 80 well
below the EU-16 average of 100. It is also interesting to note that the index of
institutional quality deteriorated steadily since 2006.
Two additional facts for the Greek economy are crucial in understanding the
need for structural changes that must be imposed if a sustainable growth must be
achieved and the debt repayment becomes sustainable as well. First, the crucial
issue of tax evasion as a result of the huge shadow economy. The tax system as well
as the overall attitude of certain professional groups of the Greek society who
systematically avoid declaring their true income is one of the main sources of the
fiscal deficits.
Further evidence based on the World Bank indices show that a high degree of
difficulty for entrepreneurs to start up their business due to bureaucratic obstacles
that further inflate corruption (Greece is ranked 109th among all countries).
However, as we already explained the private sector has its share of blame in this
negative situation. Tepe (2009) provides evidence for the EU-16 on public spending
and employment in the public evidence and Greece is by far the country that during
the 1995-2005 period experienced the highest growth increase in public spending

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and public administration employment which resulted to a gigantic public sector.
Based on this competitiveness index the choice for the Greek economy to
regain competitiveness is either an internal devaluation or a long-run growth based
on FDI and in general increase in fixed capital through an increase of investment.
What is reform? The case of Greek and Europe
Why creditors’ demands would only prolong Greece’s crisis
The word, reform, has now become central to the tug of war between Greece
and its creditors. New debt relief might be possible – but only if the Greeks agree to
“reforms.” But what reforms and to what end? The press has generally tossed
around the word, reform, in the Greek context, as if there were broad agreement on
its meaning.
The specific reforms demanded by Greece’s creditors today are a peculiar
blend. They aim to reduce the state; in this sense they are “market-oriented”. Yet
they are the furthest thing from promoting decentralization and diversity. On the
contrary they work to destroy local institutions and to impose a single policy model
across Europe, with Greece not at the trailing edge but actually in the vanguard. In
this other sense the proposals are totalitarian – though the philosophical father is
Friedrich von Hayek the political forebear, to put a crude point on it, is Stalin.

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Modern Europe’s version of market Stalinism, so far as it affects Greece, has
three main prongs. The first concerns pensions, the second labor markets, and the
third privatizations. Then there is an overarching question of taxes, austerity and
debt sustainability, to which we can come back later.
With respect to pensions, the creditors demand that about one percent of
GDP be cut this year from pension payments, in a country where almost half of
pensions deliver sums below the poverty line. The specific demand would cut about
120 euros from pensions at the level of 350 euros or less per month. The
government replies that while the pension system requires reform – the present
early retirement age is unsustainable – that reform can only be done gradually and
alongside the introduction of an effective unemployment insurance scheme.
On labor markets, the creditors have already imposed the near-complete
elimination of collective bargaining and reduction of minimum wages. The
government points out that the effect is to informalize the labor market, so that
labor is not registered and pension contributions are not paid, which in turn
undermines the pension system. The Greek proposal is to design a new collective
bargaining system that meets the standards of the International Labor Organization
(ILO).
Turning to taxes, the creditors have demanded a hefty increase in the value-
added tax (VAT) – which already has a top rate of 23 percent. Among other things,
the burden would fall on medicines (and therefore on the elderly) and on the special

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rates enjoyed by the Greek islands (about 10 percent of the country by population),
where tourism is centered and where costs are higher in any event. The government
points out that tax increases on tourism hurt competitiveness, and that the overall
effect of the increased tax burden will be to reduce activity, worsening the debt
problem. What is needed, instead, is tax enforcement; reducing VAT evasion could,
quite readily, permit rates to be lowered.
What is missing from the creditors’ demands is, well, reform. Cuts in pensions
and VAT increases are not reform; they add nothing to economic activity or to
competitiveness. Fire-sale privatization can lead to predatory private monopolies as
anyone living in Latin America or Texas knows. Labor market deregulation is in the
nature of an unethical experiment, the imposition of pain as therapy, something the
internal records of the IMF as far back as 2010 confirm. No one can suggest that
wage cuts can bring Greece into effective competition for jobs in traded goods with
either Germany or Asia. Instead, what will happen is that anyone with competitive
skills will leave.
The plain object of the creditors’ program is therefore not reform. It is the
doubling-down on debt collection in the face of disaster. Pension cuts, wage cuts, tax
increases and fire sales are offered up on the magical thought that the economy will
recover despite the burden of higher taxes, lower purchasing power, and external
repatriation of profits from privatization. The magic has already been tested for five
years, with no success in the Greek case. That is why, instead of recovering as

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predicted after the bailout of 2010, Greece has suffered a loss of over 25 percent of
its income with no end in sight. That is why the debt burden has gone from about
100 percent of GDP to 180 percent, when measured in terms of face values. But to
admit this failure, in the case of Greece, would be to undermine the entire European
policy project and the authority of those who run it.
So the Greek talks remain at a stalemate. Actually, it is not quite a stalemate,
since the Greeks are under extreme pressure. Either they concede to the creditors’
positions, or they may find their banks closed and themselves forced out of the euro,
with highly disruptive consequences at least in the short run. The creditors know
this. So they keep backing the Greeks toward a wall – never changing their own
position while complaining that the Greek side isn’t working hard enough. And as
the Greeks yield ground, inch by inch, the creditors simply press for more.
It is the ugly dynamic of negotiation under duress, between a strong party
and a weak one, in this case complicated by the fact that the creditor side has no
unified leadership, and hence no one – unless Angela Merkel finally steps forward to
take up the role – who can make reasonable concessions and force through an
acceptable deal. So the choices narrow. Either the Greek government will concede
too much, lose its support and collapse, in which case whether the end result is
another receivership or Golden Dawn, democracy is dead in Europe. Or, in the end,
the Greeks will be forced to take their fate – at enormous risk and cost – into their
own hands, and to hope for help from wherever it might come.

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In what follows, we will discuss what the last three governments did to
reform the Greek economy, and what were the side effects of those reforms. The
Greek Economy suffered from contraction from the 2008 crisis until the end of
2011, then after the recovery, some decline was measured again around 2 years
after that. We will see later here how the prime ministers conceded in the past 5
years reacted to the ups and downs of the Greek economy and what were the
achievements of each.
Lucas Demetrios Papademos
Lucas is a Greek economist who was the Prime Minister of Greece from 2011 to
2012, leading a provisional government in the wake of the Greek debt crisis
Papademos was first suggested as a potential caretaker Prime Minister of Greece in
early November 2011, after Prime Minister George Papandreou offered to quit and
allow a temporary to deal with the major political confusion caused by the
country's debt crisis.
Two conditions were set by Lucas Papademos upon which he would take the offer of
being Prime Minister of this temporary government. The first was that the new
government would not have a very limited life span as New Democracy had
required, and the second was that political figures from both New Democracy and
the Panhellenic Socialist Movement (PASOK) would take part in the government.
Both of these were primarily banned by New Democracy, but after numerous days
of negotiations they surrendered and accepted Papademos' demands. This allowed

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Papademos to form a government made up of PASOK and New Democracy, with the
support of the far-right Popular Orthodox Rally.
As Papademos stated, the government's main task would be to facilitate
the financial bailout from the European Union, and to lead the country until
elections could be held. He also specified that his only importance as Prime Minister
would be to try and keep Greece within the Eurozone.
In January 2012, Papademos notified that workforces would have to accept
considerable cuts in their income to avoid the default. As well he told business and
union leaders that the "troika" — the European Union, the International Monetary
Fund and the ECB — was looking for Greece to take steps to open up so-called
closed professions, as well as modifications to the minimum wage, elimination of
Christmas and summer vacation bonuses and automatic wage increases. In January,
He also stated that his provisional government would last until at least April, instead
of February as was first planned, so that further austerity measures could be applied
before an election.
Papademos had proposed to stand down presently after the election of May 2012,
but it caused in a suspended parliament. Subsequently New Democracy, PASOK, and
the anti-austerity SYRIZA - which had jumped into second place - tried to form a
government, but all were unsuccessful.
The Negotiations in the aftermath of the election failed to form a government and
Greece will be forced to have a snap general election, which took place on 17 June

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2012. Papademos stepped down in the wake of the statement of the election while
proposing Panagiotis Pikrammenos - a judge and the President of the Council of
State - to substitute him as caretaker Prime Minister until a permanent government
can be formed.
Antonis Samaras
Samaras is a Greek politician who served as Prime Minister of Greece from 2012 to
2015. He is also leader of New Democracy. Samaras previously served as Minister of
Finance in 1989, as Minister of Foreign Affairs from 1989 to 1992, and as Minister of
Culture and Sport in 2009.
Following the May 2012 governmental election, Samaras was requested by Greek
President Karolos Papoulias to try to procedure a government. Yet, after a day of
firm discussions with the other parties in Parliament, Samaras has officially
announced he was giving up the order to form a government. The task delivered
to Alexis Tsipras, leader of the SYRIZA (the second largest party) who was also
unable to form a government. After PASOK also failed to negotiate a positive
agreement to produce a government, emergency discussions with the President
completed with a new election being called while the outgoing chairman of
the Council of State Panagiotis Pikrammenos was appointed as Prime Minister in
a caretaker government composed of independent technocrats.
Under Samaras, Greece reached a principal government budget surplus in 2013. In
April 2014, Greece returned to the global bond market as it successfully sold €3

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billion worth of five-year government bonds at a yield of 4.95%. Greece returned to
growth after six years of economic decline in the second quarter of 2014, and was
the eurozone's fastest-growing economy in the third quarter.
On 9 December 2014, the candidacy of New Democracy politician Stavros Dimas
was announced by Samaras for the position of President of Greece. Stavros Dimas
was unsuccessful to secure the requested majority of MPs of the Hellenic
Parliament in the first three circles of voting. According to the requirements of
the Greek Constitution, snap elections were held on 25 January 2015, which were
won by SYRIZA.
Samaras’ call for December vote may bring pro-default party to power for the first
time in the Eurozone’s debt crisis
Greece and the Eurozone are set for a hair-raising Christmas after a huge bet by
Prime Minister Antonis Samaras that could usher into power a party that says it
would rather default than repay hundreds of billions of euros in bailout loans.
The decision of Samaras was after Greece’s Eurozone creditors approved to keep
bankrolling it for another two months after the end of this year, when its €240
billion ($297 billion) emergency support program was due to end. It takes to head
political risks that have been simmering for the last couple of years since Greece’s
second bail-out, which despite forcing massive losses on private bondholders failed
to cut the country’s debts to a manageable level.

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His coalition of the center-right New Democracy party and PASOK is under big
pressure from the more essential left-wing party Syriza, headed by Alexis Tsipras.
Samaras desired to leave the bailout program the soonest to avoid making any
additional expenditure cuts or other actions stated by the totally unpopular “Troika”
of the European Commission, the European Central Bank and the International
Monetary Fund.
However, the creditors had not accept to pay out the last installment of the
emergency loans due to Athens’ failure to implement agreed cutbacks and reforms,
and had said they wanted to extend the program by six months. At a meeting in
Brussels Monday night, Greece and the rest of the Eurozone compromised
by agreeing a two-month extension.
That deal created the political space for Samaras’ gamble.
The review, which started in September, remains stalled, as the country’s
creditors raise doubts about the projections of next year’s budget and ask Greece to
adopt more budget savings to ensure that it meets its targets.
Samaras “knows he has to establish political clarity,” Michael Fuchs, the deputy
chairman of German Chancellor Angela Merkel’s party, said in an interview in
Cologne.

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It’s “a calculated risk taken by Samaras that’s actually a smart move,” said Fuchs,
who said he spoke with Samaras yesterday by phone. “Its chances of paying off are
more than fair. He knows what he’s doing.”
Alexis Tsipras
He is a Greek politician, Prime Minister of Greece since 26 January 2015 and leader
of Syriza since 2009. He was first elected to the Greek Parliament in 2009, and was
the Party of the European Left nominee for President of the European
Commission in the 2014 European Parliament election. On 25 January 2015, Tsipras
led radical left SYRIZA to victory in a snap general election, receiving 36% of the
vote and 149 out of the 300 seats in the Parliament and went on to become the
186th Prime Minister of Greece. In 2015 he was voted by TIME magazine as one of
the100 most influential people globally.
Tsipras led Syriza to victory in the general election held on 25 January 2015, falling
short of an outright majority in Parliament by just two seats. The following morning,
Tsipras reached an agreement with the right-wing populist Independent
Greeks party to form a coalition.
On the same day he was sworn in by then-President Karolos Papoulias as the
youngest Prime Minister in Greek history since 1865. Using the words "I declare in
my name, honour and conscience to uphold the Constitution and its laws." Tsipras
was also the first prime minister to take a civil rather than a religious oath of office,
marking a rupture with Greek orthodox ceremonial culture. While reaffirming the
good relations between his party and the Church, he generated further religious

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controversy during a meeting with Archbishop Ieronymos. Tsiparis explained that
as an atheist who neither married in a religious ceremony nor baptised his children,
he would not take a religious oath of office.
The first act after being sworn in, Tsipras visited the Resistance Memorial
in Kaisariani, laying down red roses to commemorate the 200 members of the Greek
Resistance executed by the German Wehrmacht on 1 May 1944.
During the first meeting of the new cabinet, Tsipras declared the priorities of his
government to be the fight against the "humanitarian crisis" in Greece, negotiations
with the EU and the International Monetary Fund on restructuring the Greek debt,
and the implementation of promises made by SYRIZA such as the abolition of the
previous government's privatization policies.[19]
On 3 February 2015, Tsipras made his first official trip, meeting with
his Italian counterpart, Matteo Renzi in Rome. They held a joint press conference
expressing concerns about austerity measures imposed by the Juncker
Commission and stated that economic growth is the only way to exit from the crisis.
After the press conference, Renzi presented Tsipras with an Italian tie as a gift.
Tsipras, who was notable for refusing to ever wear a tie, thanked Renzi and said that
he would wear the gift in celebration when Greece had successfully renegotiated the
austerity measures. On 20 February, the Eurogroup came to an agreement with
Greece to extend the Greek bailout for four months. Tsipras had also announced a
trip to Moscow on 8 April, in a bid to secure Russian support.

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On 31 May, Tspiras laid out his complaints and outlined his plan in a recap of events
since his election. He concluded that there were at least two competing visions for
the integration of Europe, both of which he seemed to reject, and that certain
unnamed institutional actors had "an obsession" with their own technocratic
programme.
On 22 June, Tsipras presented a new Greek proposal, which included raising the
retirement age gradually to 67 and curbing early retirement. It also offered to
reform the value-added-tax system to set the main rate at 23 percent. On 29 June
Greek banks stayed shut and Tsipras said they are to remain so to impose capital
control. Trading in Greek stocks and bonds halted as well.
Tsipras announced referendum to decide whether or not Greece is to accept
the bailout conditions proposed jointly by the Juncker Commission,
the International Monetary Fundand the European Central Bank.
Tsipras recommended a "No" vote. On 3 July, during an address to at least 25,000
people gathered in the capital's Syntagma square in front of parliament, he rejected
some leaders' warnings that a "No" result in Sunday's plebiscite could see Greece
forced to leave the eurozone. He declared "On Sunday, we are not simply deciding to
remain in Europe -- we are deciding to live with dignity in Europe".
Alexis Tsipras talks so much about democracy that one might think the Greek prime
minister is a paragon of virtue when it comes to dealing with the voters. This is not
the case. For a start, Tsipras has made a series of wild promises that he cannot

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deliver. Before January’s election, he pledged that he would tear up the country’s
bailout program while staying in the euro. The two are almost certainly
incompatible goals, as the Greek people are now discovering at huge cost.
In advance of Sunday’s referendum, he has given further assurances. One is that
savers’ bank deposits are safe. He also said he will have a deal with Greece’s
creditors within 48 hours of the plebiscite, if they vote no to the bailout plan. In fact,
deposits are at risk and the chance of a deal in two days is virtually nil. A good
democrat only promises what he or she can deliver. Tsipras is a demagogue.
International standards recommend that a referendum is held with at least two
weeks’ notice.
Now look at Sunday’s referendum. The people have been given eight days to take a
decision that will have repercussions for a generation. What’s more, the question is
convoluted. The people are officially being asked whether to accept or reject an offer
made by Greece’s creditors on 25 June. They are then referred to two complex
documents, which have been translated into Greek from English. One of these was
mistranslated to say that the country’s debt was unsustainable under all three
scenarios considered, whereas it actually said it was unsustainable under only one
of the three. The ballot paper also puts “No”, Tsipras’s favoured option, above “Yes”.
It is doubtful whether the referendum is legal. In Greece, plebiscites are not

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supposed to be held on fiscal matters. The country’s top administrative court was
due to rule on Friday whether the vote was constitutional.
Even worse, it’s not at all clear what the two options mean. Yes cannot mean
accepting the 25 June offer because it is no longer on the table. In practice, those
who vote yes will think they are voting for Europe. And what does no mean? Tsipras
says it means giving him stronger negotiating power with the creditors. In fact, it is
likely to mean that Greece quits the euro – something he denies.
The Council of Europe, Europe’s top human rights institution, told Associated
Press this week that the referendum. Its secretary general, Thorbjørn Jagland, said
international standards recommend that a referendum is held with at least two
weeks’ notice to allow sufficient time for discussion, with a clear question put to the
people and with international observers monitoring the vote.
If, despite all this, Tsipras loses the referendum and resigns, there will
undoubtedly be a narrative presented that Europe undermined a democratic
government because it didn’t like the fact that it was so leftwing. The real
explanation will be that Tsipras undermined himself with his undeliverable
promises, confrontational approach towards creditors, inexperience and inability to
read the situation properly.
Knowing now that the people voted as were mentored by the government,

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"No" to intervention of ECB and its reforms, or "Oxi" as they call it in Greece. Some
claim that Tsipras has lead the country into the unknown. Others see that this was a
statement of right and justice from the land of democracy.
With the minister of finance "Varoufakis" resigning on the same day of the
results, Tsipras was left alone to deal with the creditors. First, all banks and
monetary institutions were closed for a week. Greeks are only allowed to withdraw
cash from ATMs with a 60 Euro limit per day. The huge effects of that decision
reached the NYSE and the Chinese stock exchange, alongside the Euro rate hitting a
year low at 1.089 and decrease in oil barrel prices around the globe.
A basket of reform and demands are what is sought now from Tsipras, a
"Grexit", or Greece quitting the Eurozone, if that was an option. Will lead to similar
demand from suffering countries such as Spain and Italy. The same goes for any
loans that will be written-off whether by ECB or IMF. The "PIGS" are struggling for
survival of their monetary sectors, any help they can get now is very well needed.
Recovery is nowhere to be seen in the near horizon, thus whatever happens in the
following days or hours, is of utmost importance and significance to the history of
the EU, and the economic and monetary welfare of the world. Last but not least, it is
amazing what a small country (2% of EU income) can do to the whole economy and
markets of the world!

Greek Economic Crisis

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