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
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
ofÀcial ties to the much larger and more
in 2008 to over six percent the following
stable economies of Germany and France.
year. Greece followed this trend, but,
These lower rates were a boon to the Greek
starting from a much higher initial level,
economy during the expansionary years
this increase produced an unsustainable
preceding the subprime mess. However, in
deÀcit of 12.7 percent—later revised
Value of the Euro
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.
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I N T E R N AT I O N A L B U S I N E S S R E V I E W
11/27/2010 3:13:08 PM
Fall edition of the IBR magazine at the Wharton School.