Greece’s Debt Crisis Explained

Indeed, Greece’s labor productivity (GDP per worker) is only 72% of the level in the UK and Italy, and a mere 57.7% of that in Germany. And surveys indicate that mean life satisfaction in Greece is far below that found in the wealthiest EU countries (the EU15). Contrary to claims by the Greek government, corporatism impoverishes the less advantaged. EU data on poverty rates in 2010 put Greece at 21.4% – far higher than the mean EU15 rate of 16.7%.

To be sure, Greece saw productivity gains after World War II – but mostly from increases in education and capital per worker, which can go only so far. Two important sources of broad prosperity are blocked by Greece’s system. One is an abundance of entrepreneurs engaged in detecting and exploiting new economic opportunities. Without them, Greece does a poor job of adjusting to changing circumstances (an imperative emphasized by Friedrich Hayek). Greece’s much-lauded shipowners, for example, were too slow to adapt to containerization, and thus lost their market share.

The other source of broad prosperity is an abundance of business people engaged in conceiving and creating new products and processes – often termed “indigenous innovation.” Here, Greece lacks the necessary dynamism: venture capital investment flows are smaller, relative to GDP, in Greece than in any other EU country. So Greece’s economy has scant ability to create sustained productivity growth and high human satisfaction.

Some economists believe that these structural considerations have nothing to do with Greece’s current crisis. In fact, a structuralist perspective illuminates what went wrong – and why.

For several years, Greece drew on the EU’s aptly named “structural funds” and on loans from German and French banks to finance a wide array of highly labor-intensive projects. Employment and incomes soared, and savings piled up. When that capital inflow stopped, asset prices in Greece fell, and so did demand for labor in the capital-goods sector. Moreover, with household wealth having far outstripped wage rates, the supply of labor diminished. Thus, Greece went from boom to outright slump. 

The structuralist perspective also explains why recovery has been slow. With competition weak, entrepreneurs did not rush to hire the unemployed. When recovery began, political unrest last fall nipped confidence in the bud.

The truth is that Greece needs more than just debt restructuring or even debt relief. If young Greeks are to have a future in their own country, they and their elders need to develop the attitudes and institutions that constitute an inclusive modern economy – which means shedding their corporatist values.

Europe, for its part, must think beyond the necessary reforms of Greece’s pension system, tax regime, and collective-bargaining arrangements. While Greece has reached the heights of corporatism, Italy and France are not far behind – and not far behind them is Germany. All of Europe, not just Greece, must rethink its economic philosophy. 

What if Greece left the eurozone?

At the height of the debt crisis a few years ago, many experts worried that Greece’s problems would spill over to the rest of the world. If Greece defaulted on its debt and exited the eurozone, they argued, it might create global financial shocks bigger than the collapse of Lehman Brothers did.
Now, however, some people believe that if Greece were to leave the currency union, in what is known as a “Grexit,” it wouldn’t be such a catastrophe. Europe has put up safeguards to limit the so-called financial contagion, in an effort to keep the problems from spreading to other countries. Greece, just a tiny part of the eurozone economy, could regain financial autonomy by leaving, these people contend — and the eurozone would actually be better off without a country that seems to constantly need its neighbors’ support.