For the past decade, various narratives have been established as to how this came to pass and who was to blame. Indeed, the European Stability Mechanism (ESM) just released a lengthy report reflecting on what went wrong. But in hindsight, what becomes increasingly clear is that the first Greek bailout programme was an unmitigated catastrophe, opened Pandora’s box of nationalism and established a troubling legacy for the Union. Ahead of crucial decisions on the post-Covid recovery plan, the EU will do well to remember the legacy of the Greek bailout programmes.
It is certainly true that successive Greek governments had criminally mismanaged tax collection for years and lied about the state of public finances to obtain short-term political benefits. Endemic corruption was left to fester, while the state enjoyed the confidence of the markets, embarking on a series of spending programmes like the Athens metro and the 2004 Olympic Games. The 2008 financial crisis brought the party to a halt, shifting the attention of speculators from banking to cash-stripped economies with high deficits. It came as no surprise then that a target was placed on Greek bonds and the “weakest link in the Eurozone” was forced out of the markets and into the cold embrace of the IMF and the Eurogroup.
The bailout programmes plunged the Greek economy into deeper recession, instead of re-establishing market confidence. Less than 2 years after this sign of “significant European solidarity”, the Greek economy needed to be bailed out again. And again in 2015. Domestically, youth unemployment increased, peaking at 60%. The country was also rocked by massive protest movements, that were mired in police brutality (often condemned by Amnesty International) and even deaths. Suicides increased by 40%, hundreds of thousands of businesses closed and the healthcare system collapsed. At its peak, school teachers started reporting that children could not concentrate in class because of starvation. The country also lost more than 300,000 young, often well-educated people, who chose to emigrate, despite the ridicule and animosity they faced abroad. All in all, the “Economic Adjustment Programmes for Greece” resulted in the longest peacetime financial depression in the history of capitalism. By the end, 27% of the country’s Gross Domestic Product was wiped out and one in three Greeks were in risk of extreme poverty and social exclusion.
There are many macroeconomic and structural reasons that led to the failure of the bailout programmes. The interest rates on the loans were initially much higher than the European average and resulted in substantial profits (estimate for Germany at 3 billion euros profit, ECB at 7.8bn euros profit). The debt repayment schedule was also thorough and tight. When revenues would fall short, the Greek government was often “asked” to resort to quick fixes such as privatising state assets or decreasing the threshold of taxable income for all levels of the economy. No one was left unaffected. This would often cause termly, if not monthly, hikes that further impacted stability and trust in the economy, while also failing to shield the most vulnerable.
Despite the extent of this internal devaluation, consumer prices in Greece did not drop as soon or as much as predicted. This exasperated financial misery and deepened the recession. In a recent talk for the Hellenic Observatory at LSE, Poul Thompsen, the IMF’s representative in the troika, cited this as one of the main reasons Greece faced a greater recession than “planned”, eventually requiring additional bailouts. This was partly due to geography, as Greece lacked open borders, relying on the transport of consumer goods via sea routes or the Balkans and exposing them to tariffs and crony capitalist practices. The IMF economists also failed to consider the straitjacket that a single currency would impose on an economy that could not default or devalue its currency.
Ultimately, Greek businesses and prices could not adapt as fast as American macroeconomic models predicted. Instead of combatting crony capitalism, the bailout agreements obsessively focused on reducing labour costs and deregulating labour rights, while being blind to the realities of the Greek economy that deviated from the neoliberal textbook. As early as 2013, the IMF (informally) apologised for their mismanagement of the crisis.
The political class in the EU, however, did not - and could not - explain to their voters that the recipe implemented in Greece was not working. Other than loans, there was no coordinated investment plan by the European Investment Bank (EIB), nor any substantial bilateral agreements to increase Greek manufacturing and exports. In fact, the EU Council had on occasion prevented Greece from accepting competitive bids from “non-friendly” countries, such as a China or Russia. Greek bonds were only allowed to be included in the ECB’s bond buyback scheme in April 2020. In the absence of a commitment to keep Greece in the Euro “whatever it takes”, or a “Finanzhilfe”(the euphemism for bailout loans in Germany) which was actually helpful, the bailouts continued to fail.
The bailout agreements also failed to take into account the Greek people. The institution of the ‘troika’ was granted ultimate executive power in Greece, with most cabinet decisions needing prior negotiation and approval. Greek assets were earmarked for privatisation and placed in the management of an independent organisation that could not be supervised by any government. The strict timetables on revenue-raising “reforms” also resulted in new laws getting no scrutiny by Parliament. Behind closed doors, the Council would often openly threaten Greek government officials, demand elections be postponed and altogether ignore their pleas for a revaluation of the programmes. This certainly did not go unnoticed by a society with recent memories of military takeovers. In hindsight, the bailout agreements brought about an unprecedented surrendering of democratic sovereignty that could only be described as ‘colonial’.
Following the election of Syriza and the intense summer of 2015, European creditors quietly conceded to reconceptualise the programme by extending maturities, reducing interest rates and telling the troika to keep their distance. Greece exited the programme in 2018, but still faces termly budget reviews and debt repayments to the ESM till 2060.
Ten years on, the EU is reaping the fruits of its delayed response and lack of accountability throughout the debt crisis. Directly electable institutions such as the European Parliament were barred from joining the troika until 2015. Important decisions were instead relegated to the ESM and the Eurogroup, which are not enshrined in, or regulated by, the EU treaties. These still dominate decision-making, while institutions with a common European outlook, such as the ECB and ECJ, are now being undermined.
Last but not least, the bailout agreements and the handling of the Greek debt crisis, created the false divide between the “prudent north” and the “corrupt south”. Instead of challenging this populist narrative, the EU stood by it, while autocrats in Warsaw, Budapest and London tapped into the same populist resource, in order to justify their Euroscepticism and their reactionary nationalism. The protracted failure of the bailout programmes broke the trust in the EU and between European countries. Who can now explain to German voters that it is acceptable to trust the Italian and Greek governments with a post-pandemic, no-strings-attached stimulus? Who is going to convince eastern Europeans to agree on reinforcing European institutions, after the affront to democracy and sovereignty that these enabled in the South?
The legacy of the bailouts still informs European realities. After their ordeal, the Greeks are now seeing the light at the end of the tunnel, hoping that the EU will revert to being a guarantor of democracy, human rights and welfare. Nevertheless, their high debt remains; a reminder of their own national sins and Schuld. To move forward towards an “ever closer Union”, Europeans should not forget. But it’s now time to start forgiving.
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