Greece's Annual Budget Deficit Research Paper

Greek Debt

The European Commission on Wednesday adopted a series of recommendations to ensure that the budget deficit of Greece is brought below 3% of GDP by 2012, that the government timely implements a reform programme to restore the competitiveness of its economy and generally runs policies that take account of its long-term interest and the general interest of the euro area and of the European Union as a whole (Europa, 2010)

The opening statement made by Europa, the official website of the EU on February 3, 2010 provided in a nutshell the end result of two significant and yet colliding considerations: the nature of the Greek financial system as it has been for upwards of 100 years, and the administrative shortcomings of the operational realities of the Euro Zone. Both entities have significant problems in their own rights that have resulted in major infrastructural shortcomings and effectively driven them both deeper into cash management challenges. The Euro Zone has found itself on the edge of dealing with financial support and debt repayment obligations that could well knock it out of existence. And Greece has now been put in the position where even the best of intentions will not make it easy to return to the place where its debt even begins to look again like it is just 3% of its GDP. The costs of undertaking the agreement are extremely uncomfortable for its people and they may not be enough to rebuild an ingrained distrust that was amplified by some serious national deceptions.

But in saying this, one should not assume, as some have said directly, that having a bad government or a bad government initiative (like the consolidation ideas explicitly developed into the fiscal conversion to the Euro Zone) does not mean the country itself is at fault (Collignon 2010:4). Many smaller and larger nations in the same general vicinity of Greece are in similarly bad economic straights even though they do not draw as must hostility (Kaufman, 2010). Instead, nations like Greece are likely bearing the brunt of a deeper sense of Euroscepticism (Collignon 2010:2). Some people simply do not like the idea of a unified collaboration of nations nor the development of a unified monetary system that could end up making one country pay for the mistakes of another (James and Butters, 2007).

The Europa RAPID press release that was the source of the opening quotation actually offered an even deeper indication of the systemic problems. It noted that Greece's recommended steps toward absolving itself of its current conditions were drawn from past treaty elements earmarked specifically for debt crisis interventions and structural stability; part of the confirmation of the Stability and Growth Pact (SGP). Where the problem lies can be seen better in this expansion: "It is the first time that the budgetary and economic surveillance instruments foreseen in the Treaty are used simultaneously and in an integrated way" (Europa, 2010). From the initial passage of the time of the first introduction of the Maastrickt Treaty in 1992 to its formalization into an Economic and Monetary Union that initiated the SGP in 1997, it was very much the intention of the collaborative partners to help create a better and supportive alternative monetary system (James and Butters, 2007). Yet even as recently as 2005 the SGP itself was almost completely disavowed and ultimately changed because so few of the 17 Euro Zone nations could or would abide by their own rules (James and Butters, 2007).

But this explanation is only part of the critical understanding that is necessary to appreciate why Greece is the target of hostilities and why it now finds itself trapped in a place where returning to a 3% debt situation seems nearly impossible. Two distinct factors have to be understood. One is about Greece's past and one is about what it did to make its own future.

Greece has a history of unique financial constructs that are built into its system. A number of independent conditions gave rise to the situation and must be addressed in their entirely if Greece and the Euro Zone itself (and possibly the EU) are to survive. A look back on The Borrowing Requirements of the Greek Public Sector (covering the period from 1844-1869) presents an interesting set of stages of development that Greece went through in its early modern earns (Petrakis). The country found itself in an up and down cycle where it was often spending its fairly regular surpluses for immediate needs, rather than building in what financial stability it might have so as to ensure a growth trend that was based on earned revenues (from agriculture in those days).In not doing this, they instead found that they were building a foundation of instability that would stay true to form until much bigger crises took control. As Petrakis put it in the introduction of his historical review:

The main conclusion of the following analysis is that, from the very start, the conditions required for the developmental path of the Greek economy were competing with those determining the economy's operation and very survival. The trade-off which developed between the conditions of development and survival of the Greek economy exhausted the resources which could have been made available for the financing of development (Petrakis 35).

Jumping ahead to the 1980s and 1990s suggests that not a good deal evolved (Matziorinis). Even with the extensive control exercised by a socialist government, it was unable to adjust to its financial circumstances and continued similar short-term tactics. Its inability to modernize the banking, capital markets or tax collection systems served aggregated the problems that had made the nation internally weak and the government excessively controlling of the banking sector (Matziorinis 58). Such distractions made it impossible for import or export competitiveness to stay on par, which meant that the banks had to pick up greater responsibility for the nation's major debts. The government had such intensive influence on the banks that they often required below market rates and investments in unwise opportunities. The external debt nearly tripled from 1980 (about 11% of GDP) to 1990 (33% of GDP) during this time. This, of course, brought about a significant growth in government spending, raising the GDP by 31% in 1980 and by 51% in 1990. Debt as a portion of the GDP went from 3% to 19%, foretelling a continuation trend that is now eerily familiar (Matziorinis, 58). "The way the Greek government has been financing its deficit requirements has undermined the soundness of the banking system, impeded the efficient functioning of credit, money and bond markets, and has contributed directly to inflation in the country" (Matziorinis, 59)

The fact that Greece had a history of this kind of financial instability should have demonstrated to the other nations that it might have difficulty living up to the Euro Zone commitments. Yet they were allowed to enter and thus underwent the transformative involvement that would bring about the elimination of their local currencies in favor of the Euro which was envisioned to counter the power of the U.S. dollar (Kaufman, 2010:2). But even that did not matter until 2009 when the straw that could break the Euro Zone's back was put down, adding even more pressure as the full weight of the global economic and housing meltdown hit home.

The precipitation event was the announcement by Greece's newly elected government that, contrary to what past administrations had claimed, the nation's debt was not 5% of GDP (just above the required 3%), but was actually 12.7% (Capanoglu, 2010:2). Eurostat, which is charged with monitoring applicable data for the EU, found that it had been misled if not directly lied to, thus calling into question the veracity of its solutions and its representation of its member's true worth. As it would turn out, Greece was soon shown to be in much worse conditions that were expected. It full situation had been accepted as being much better than it was because of the artificially low banking rates caused by unfair government influence. Which meant that once freed of these constraints, the markets would push those rates to where they should be -- driving Greece's true debt situation to the near catastrophic conditions that prevailed until they were forced to do something about it (Capanoglu, 2010).

The release of this information and the countervailing reaction of the banking industry brought about a cascading effect that has made it nearly impossible for Greece to be viewed in the same light as other nations. Bond ratings and interests costs for loans and loan repayments skyrocketed. The costs of these changes alone would begin the full size of the debt to point where the annual rate would be forced to stay at about 12.7% annually while the total public debt would continue to grow in size to the point where it would move to 113.4% in 2009 and then to 121% in 2010 (.Capanoglu, 2010: 2-3). This reality alone would bring about such major loan cost increases that….....