Greece's debt crisis: How did we get here?

There were encouraging smiles yesterday at the press conference between Angela Merkel, the German chancellor, and Alex Tsipras, the Greek prime minister. But although the two leaders are doing their best to get on personally, there’s still an enormous gulf between the two countries, and if that gulf isn’t somehow bridged, the result could be another Greek default — and possibly even a devastating exit from the eurozone. What’s at stake, and how did we get here? Well, it all starts 15 years ago…

2000: The journey to the promised land

Our story begins in June 2000, a year and a half before all the Deutschmarks and French francs and Italian lire and Spanish pesetas were to be eradicated forever, and converted into euros. That was the date at which 11 became 12: Greece was invited to be one of the select dozen countries who would be part of the euro at its inception. Greece was always the poorest country of the group, with the weakest controls over its domestic finances. Its government would spend beyond its means and make up the difference by borrowing — or printing — a lot of money. (Borrowing created a huge build-up of debt; printing caused the Greek currency, the drachma, to consistently weaken, or devalue, against stronger currencies like the Deutschmark.)

Still, Greece looked like it was modernizing, and the European project was always about bringing countries in, not keeping them out. So in the spirit of European unity, worries about Greece’s debt and deficits were waved away. After all, the euro had built-in safeguards, and adopting the euro would surely help Greece on its road to prosperity.

2004-2007: The money rolls in

Which is exactly what happened, at least at the start. International lenders, from Germany and other countries, realized that Greece was no longer able to devalue its currency. The risk of lending to Greece in drachmas was always that the drachma wouldn’t be worth very much when the country’s bonds came due. But lending to Greece in euros was fine: those euros would be good as gold, thanks to the Germany-dominated European Central Bank.

The result was that Greece’s borrowing costs plunged: it became much easier and much cheaper for Greece to borrow money, with the predictable result that Greece did exactly that. Banks and other investors from all over Europe lent billions upon billions of euros to Greece, and in turn Greeks used that money to live very well…well beyond their means.

Greece consistently spent, every year, much more than it took in, in taxes, and it had no real ability to ever repay the money it was borrowing. Still, no one worried very much about whether Greece would ever be able to pay back the money, because everybody in the bond markets expected that the Greek government would always be able to refinance its debts as they came due. So long as you can always roll over debt, you never need to actually repay it.

2008: The crisis

But then the global credit crisis arrived, causing what economists call a “sudden stop.” No one in the bond markets really wanted to lend money to anybody, least of all Greece — especially after the new Greek government revealed that its deficit was way, way larger than the previous government had led people to believe. The former government had been lying about its deficits, and the news of the lie couldn’t have arrived at a worse time.

Greece couldn’t roll over its debts any more, and so the EU as a whole was forced to step in, with the help of the International Monetary Fund, and lend the money that no one else would.

2010-2014: The bailout and default

Unlike the banks and the bond markets, however, Greece’s new lenders — the EU, the European Central Bank, and the IMF — were in a position to start attaching conditions to their loans. In return for the troika keeping the money flowing, Greece promised to embark on a tough austerity program, cutting government spending and selling off state-owned assets wherever possible.

The program was designed to address Germans’ concern that Greeks were lazy layabouts, despite the fact that Greeks work an average of 2,037 hours per year, while Germans work just 1,388 hours per year.

The Greeks agreed to the Troika’s terms — but it wasn’t lost on them that however much cash they were being lent, they ended up paying out most of it back in interest payments to foreign banks and governments. Meaning that the money wasn’t really helping Greece so much as it was helping the institutions and governments that had lent money to Greece.

Meanwhile, the Greek economy was collapsing, as tends to happen when countries are forced to enact drastic spending cuts. Finding themselves in a full-blown depression, with soaring unemployment and no visible way out of the morass, the Greeks did the only thing they could: they expressed their anger and frustration at the ballot box.

2015: The election

Syriza, a somewhat ragtag Greek Marxist coalition party, came to power this year on a “we’re not gonna take this” ticket. Its politicians see money from the EU not as something they want and need, but rather as the Germans’ means of keeping control of Greece’s destiny in Brussels rather than in Athens. More money is not always good: sometimes it just means more indebtedness.

Syriza took its demands to the EU. It wanted debt reduction, an end to austerity, and the ability to forge its own path. But the Europeans, and especially the Germans, were having none of it. They still see the Greeks as dissolute wastrels, who need to be kept on a very short leash.

The problem is, if the two sides can’t come to an agreement, and the money stops flowing from Europe to Greece, then Greece will be forced to default on its debt for the second time in three years, and might even be forced to leave the euro. Which no one really wants. But the Europeans look like they might be able to live with that outcome, and it might be the only way to make the Greek economy competitive again.

The future: The end of the eurozone?

The big risk, of course, is that if Greece leaves the euro, then the impossible becomes possible. The euro was designed to be a roach motel: you could check in, but you could never check out.

That means a risk, if only a small one, that Spain and Portugal might leave the euro.

So here’s a question: given that risk, why would anybody keep euros in a country that might leave, if they could keep their euros instead in a country like Germany? The result of Greece leaving the euro could be massive capital flight out of all the Mediterranean countries, crippling them and their banks for possibly decades to come. And maybe spelling the end of the entire European project.

The stakes in Greece, then, are much bigger than just what happens to Greece. It’s entirely possible that the rest of Europe might now be insulated from a Greek exit, and that the spillover consequences would be manageable. But there are very few European politicians who really want to find out for sure.