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sectors alike to accumulate increasingly large amounts of external debt, ultimately culminating in the unsustainable levels seen this year. Government Debt

Percent of GDP

140 120 100 80 60 40 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

The Economist argues: “Greek governments have… spent years buying social peace and votes with public spending, government pensions, tax breaks, EU money and jobs for life, directed to an array of rent-seeking interest groups.” Indeed, Greece’s 2001-08 average Àscal deÀcit of Àve percent was more than double the Eurozone average. Factors driving this imbalance included inefÀcient public administration, tax evasion, and generous healthcare and pension programs. As a result, government How This Happened

euro in 1999, and Greece’s subsequent

expenditures grew an estimated 87 percent

Sovereign debt crises, like the one

adoption two years later.

since adoption of the euro, while revenues

recently experienced in Greece, have

Following

adoption,

Greece

saw

increased only 31 percent.

unfortunately occurred all too frequently

its borrowing costs drop dramatically.

When the subprime crisis struck,

throughout the history of capitalism.

Investors no longer feared devaluation,

deÀcits increased across the board in

and they recognized the government’s

Europe, tripling from around two percent

1.5

ofÀcial ties to the much larger and more

in 2008 to over six percent the following

1.4

stable economies of Germany and France.

year. Greece followed this trend, but,

1.3

These lower rates were a boon to the Greek

starting from a much higher initial level,

1.2

economy during the expansionary years

this increase produced an unsustainable

preceding the subprime mess. However, in

deÀcit of 12.7 percent—later revised

EUR/USD

Value of the Euro

1.1 Jan-10

Mar-10

May-10

Jul-10

Sep-10

Nov-10

many ways they both enabled and disguised

upward to 13.6 percent. It was this deÀcit

James Bullard, president of the St. Louis

fundamental problems facing the small

increase that spooked investors and

Federal Reserve Bank, reckons that there

nation, problems that ultimately led to this

ultimately caused what is now known as

have been at least 250 instances of full

year’s near catastrophic debt crisis.

the Greek Debt Crisis.

or partial government default in the past

Greece’s rapid growth prior to the

While Àscal irresponsibility was no doubt

200 years. Moreover, such events are

À nancial crisis was in large part driven

the proximate cause of the crisis, deeper

particularly likely following À nancial

by government spending and personal

structural problems, leading to a lack of

crises, which often lead to increased

consumption; exports, on the other hand,

international competitiveness, in many

deÀcits and frozen capital markets. Still,

grew less rapidly than in much of Europe.

ways constituted a more important driver.

this particular crisis, beginning in Greece

Implicit within this composition are the

Warren Coats, a former assistant director

and threatening to spread throughout the

two primary problems facing Greece:

at the IMF, argues that Greece’s pre-crisis

E.U. periphery, was in many ways unique

Àscal irresponsibility and a lack of

growth not only led to a growing Àscal

in its causes. To understand these causes,

external competitiveness. Together, these

deÀcit, but also to rising prices, leading

one must look back to the birth of the

factors pushed the private and public

to worsening external competitiveness.

FA L L 2 0 1 0

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11/27/2010 3:13:08 PM

Profile for Daniel Hellwig

International Business Review - Fall 2015  

Fall edition of the IBR magazine at the Wharton School.

International Business Review - Fall 2015  

Fall edition of the IBR magazine at the Wharton School.

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