A brief history of the Greek debt coverup

The problem with not giving anyone central monetary control of a shared currency is that it can become very chaotic and disorganized if everyone is pursuing contradictory fiscal policy at the national level. To avoid this, when the Eurozone was being designed, members agreed that they would have to meet certain deficit and debt targets — keeping the budget deficit (amount spent more than collected) below a certain ratio for a few years — to join and then even below that initial target every year after becoming members.

(Sidebar: The major downside to this strategy is that the economies and parliaments remain separate despite sharing a currency, yet they can’t respond to specific economic conditions in their own countries without violating their deficit and debt targets. This extends recessions in some places, even as other members of the Eurozone continue to do well.)

By 1998, eleven countries had met their targets for joining the Eurozone. Greece was not one of them.

As of 1999, when the currency virtually launched for trading purposes but not ordinary people, Greece had still not met their target to join the Eurozone when it would launch on paper a few years later. In large part, this resulted less from generous social spending and pensions and more from Greece’s chronic inability to collect tax revenues from its citizens – one of the most tax-evading populations in the world.

They were also five years away from hosting the 2004 Summer Olympics, which they had been awarded in 1997. The games had run into huge budget problems and cost overruns, which the government (as a matter of national pride, being Greece) had to help manage. They needed to take on even more debt to pull off the games, which was the opposite of what they needed to join the Eurozone before currency began circulating.

US Investment Bank Goldman Sachs came up with some very elaborate and expensive schemes (see this detailed video explanation of the mechanics from the BBC), which essentially allowed Greece to get the money it needed, while hiding how big their debt (and yearly deficits) had become. This scam allowed Greece to join the Eurozone in 2001, while it was still in its virtual stage, in time to participate when the physical currency launched in January 2002.

greek-euro-10-acropolisOutside observers started exposing the Goldman scam in 2003, and Greek government officials (from a new cabinet) revealed the deal in 2005, but EU regulators essentially pretended it had never happened until well after the crisis hit in 2009 (and continued to deny prior knowledge of it).

Meanwhile, Greece’s already bad debt situation was exploding from 2000 to 2008, as a direct result of the terms of the deal.

In a sense, like so many American homeowners before the end of 2007, Greece was given subprime loans it couldn’t possibly repay. Regulators and monetary authorities failed to perform due diligence ahead of the accession of Greece to the eurozone and then ignored the escalating danger as long as the rest of the global and European economy was doing fine. They only stepped in after the house of cards collapsed and then demanded round after round of budget cuts and other measures that hurt average Greeks who had nothing to do with the bad debt decisions that the rest of the Eurozone should have stepped in to prevent years earlier.

Greece played a part in setting up its own crisis, but the bigger picture is that Greece was failed by its peers and partners in the monetary union, and it was failed by abusive and manipulative lenders, who preyed upon a desperate government and gave them loans it never should have received in the first place.

Croatia and the drawbacks of the EU

There have definitely been some benefits to Croatia through the process leading to E.U. membership (some of which I’ve seen firsthand), especially in terms of anti-corruption efforts and resolution to some lingering war crimes/human rights problems from the Balkan wars.

But there have also been some serious drawbacks, and the E.U. regulations and anti-tariff/subsidy rules are going to cripple a lot of smaller, locally-owned businesses and put a lot of workers in subsidized industries out of work. The latter has already begun due to forced-privatization as part of membership planning.

Generally, I’m supportive of increased international trade and decreased restrictions, but European Union governments over the past two decades have proved extremely bad at managing the resulting social/economic problems and helping the people hurt. This is only going to get worse with tightening budgetary restrictions from the eurozone crisis, as national governments are forced to cut deficits by cutting unemployment benefits, jobs programs, and social programs.

What’s more, the E.U. has — I now believe — been a fundamentally undemocratic, elite-level project from the start that has not brought the popular support I might once have expected because it has not helped average people.

Croatia, rather unusually, has taken the step of opening the membership decision to a popular referendum. However, this referendum is being held just 20 days after it was announced/scheduled, and the government is putting $800,00 USD in public money behind the pro-E.U. campaign, while the opposition coalition has just $5,000 in private funds to campaign against membership.

Even if one supports membership and the continued growth of “the European project” (despite the current crisis), this seems massively unfair and undemocratic and will continue the trend of the Union being a very undemocratic project executed in a deeply problematic manner.

A New York Times article yesterday provides a lot more specific examples of how the path to membership has both helped and hurt Croatia, and perhaps more importantly who’s going to benefit from membership and who’s not. Hint: A lot of big corporations from other E.U. countries are going to benefit from reduced trade restrictions and industry standardization. Local companies, not so much.