National Beat Reporter
Greek and European finance ministers have reached a deal to approve Greece’s request for an extension of its bailout program that has kept the country from falling into bankruptcy. With the bailout program set to expire within a week, the extension allows Greece’s newly-elected leftist government time to further negotiate the terms of a debt relief plan to help settle the country’s nearly €323 billion debt. But what exactly does this extension deal mean? Why is Greece’s new government so important? And how did Greece get to this point?
The Bailout Extension
After the Great Recession of 2008, Greece found themselves on the brink of an economic collapse as it was unable to pay back debt that it had been accumulating since the creation of the Euro and the European Union. In 2010, Greece accepted a bailout package worth €110 billion ($124.4 billion USD) from other Eurozone countries to keep the economy afloat and avoid declaring bankruptcy. This bailout package was set to expire last week, but a deal was reached to extend the bailout package for another four months, giving Greece some time to work out a more long term solution to their debt crisis. To put it simply, they reached a deal to attempt to reach another deal four months from now.
When Germany and other big Eurozone economies bailed out Greece in the wake of the Great Recession, they did so on the condition that the Greek government implement strict austerity measures. Austerity simply means that Greece had to cut spending, borrow less money, and pay back more debt. Although austerity seems like a simple solution, it doesn’t always work out this way. When a government has to cut spending, it cuts the earnings of its citizens, which leads to people losing their jobs and the population collectively earning less money. When earnings are reduced, tax revenues reduce with it, which means the government has even less money to pay back its debts.
The New Greek Government
Greece has had financial problems for a long time, but dramatic change came in the form of a national election in January that brought Syriza, a new populist leftist political party, to power along with a new Prime Minister, Alexis Tsipras. Tsipras and the Syriza party ran on promises of cutting unpopular austerity measures that restrict government spending in order to pay back its debts. The election of the Syriza party came as a response to the harsh economic conditions that have plagued Greece since implementing these austerity measures. Under the current bailout program, Greece’s unemployment rate has tripled. Tsipras had originally requested a six month extension, but the Greek government settled for four. Tsipras and the Syriza party also ran on a platform to eliminate corruption in government and put an end to Greek tax evasion.
Although it may seem like an ideological fight over austerity measures, Greece is actually running what is called a “primary surplus,” meaning that current government spending is covered by tax revenue, at least the tax revenue it’s getting from non-evaders. The immediate problem is the Greek banking system.
Banks need money. Greek banks get their liquidity—short term loans that a bank needs in order to operate—from the European Central Bank (ECB). The ECB has control over how much money it gives to banks within the Eurozone. If the ECB puts enough stress on Greek banks by holding back financial support, the Greek banking system could collapse and Greece could be forced to leave the Eurozone and discontinue its use of the Euro. If Greece wants to stay in the Eurozone, which is what everyone seems to want, then they must keep the ECB satisfied by reaching a deal with its Eurozone creditors, which it has managed to accomplish for now.
A Brief History Lesson
As we recall from our high school history classes, European countries have been fighting each other for pretty much the majority of Europe’s history. For a long time, European countries had many tariffs, trade barriers, and different currencies. If one European country wanted to do business with another, they would have to pay a combination of currency exchange fees, tariff fees, and others. These fees tended to get in the way of European countries making profits and growing their economies. After World War II, the task of rebuilding Europe seemed much more difficult with these obstacles, so European countries started eliminating these trade barriers and tariffs. As a way to make business and trade within Europe easier, as well as deter any future wars, the European Union was established in 1993, and soon after the Euro became the official currency for certain member nations of the EU in 1999. The EU countries that have adopted the Euro as its currency form what is known as the Eurozone.
Countries abandoned their previous currencies and adopted the Euro. Control over all policies regarding the money supply, including how much money goes into the economy and determining the interest rates for borrowing money, was given over to the European Central Bank (ECB). Here is where the problem lies; although all Eurozone countries have the same currency, controlled by the ECB, they each have different sets of laws regarding how much their governments collect in taxes and how much they spend within their own countries.
Before the Euro, Greece could only borrow a very limited amount of money from other countries, and at high interest rates. After the creation of the Euro, Greece was able to borrow much more money at lower interest rates. This is because when the Euro was created, it was a lot like lumping together the credit history of all EU countries, most notably Germany, the strongest and most fiscally responsible Eurozone country. This meant that countries like Greece were able to borrow and spend much more than they previously could because lenders believed that if they were unable to pay back their debts, Germany and other big European economies would be there to bail them out since all these Eurozone countries are bound by the same currency. And this is exactly what happened.
Summing it all up…
When the Great Recession hit, Greece was unable to borrow more money from other Eurozone nations, which meant it was unable to pay for all the social programs and government benefits it had established, let alone fund all the jobs it had created. The Greek economy couldn’t function because they were unable to borrow new money to pay their old debts. Germany and other Eurozone countries bailed out Greece in 2010, and Greece was required to implement austerity measures to ensure that this type of crisis didn’t happen again. Since then, the Greek economy has had trouble bouncing back because of these austerity measures. Greeks were so fed up with this that in January 2015 they elect a new government made of politicians who promise to put an end to these austerity measures. These new government leaders try to negotiate with other Eurozone countries to extend the bailout for six more months in order to get more time to plan out a longer-term debt relief plan that better suits Greece’s needs. Unsuccessful at first, a four-month extension deal is passed and Greece avoids bankruptcy… for now.
I suppose if you’re not planning to study abroad in Greece, none of this really matters to you. I understand. But here’s the thing: This world is much more intricately interconnected than it appears. If something drastic happens in Europe, and it leads to the collapse of the Eurozone, it could have a ripple effect throughout the global economy. But why should YOU, a California university student, care at all? Because one day, sooner or later, we will inherit this planet. We will be the ones running countries, negotiating bailouts, leading revolutions, running for office, doing all that good adult stuff. How can we run the world if we don’t learn from the mistakes of our predecessors?