Letter to the Delegates
Welcome to the Greek National Cabinet at YMGE 2018! My name is Jacob Malinowski, and I am a junior at Yale studying Political Science. This is my second YMGE, and if you were here last year, might recognize me as a member of the Committees staff. I am excited to be returning to Budapest and chairing this conference, and in particular discussing the Greek National Debt Crisis.
Unlike many Model UN committees and topics, there may not be a correct answer to the financial crisis in Southern Europe. At the time of writing, the Greek government has finally begun a solid recovery path, but Turkish and Italian governments face their own Euro crisis. While these nations are not the primary focus of our discussion, they will help illustrate why huge structural reforms might be the answer to the EU.
As we begin to debate, remember that the questions we are tasked with at YMGE are the same ones professionals around the world need to answer — and they have failed to do so. This is your opportunity to show clever and creative ideas. Listen to your fellow delegates: the task of fixing an integrated economy is not as easy one, and the person sitting next to you might have the breakthrough idea needed to push the world forward.
Banking, the Euro, and many other aspects of this topic are incredibly complex. Debate will be substantially worse if you don’t understand the basic mechanics. Because of this, I highly recommend doing background research on the euro and how it works. I will also do my best to highlight relevant (and easy-to-understand) guides.
Please feel free to reach out with any questions or comments. My email is firstname.lastname@example.org, and I will be more than happy to assist your research or position development. I’m excited to see you in November!
Since its transition from a military junta in 1974, Greece has remained a parliamentary democratic republic throughout the modern era, with a Constitution, separate heads of government and state, and a judiciary. There have been 18 cabinets since the conception of the Ministerial Council. The Prime Minister of Greece suggests cabinet ministers to the President, who then appoints them at a swearing-in ceremony.
The first 16 cabinets featured 1 of 2 political parties as a majority government: New Democracy (ND) or Panhellenic Socialist Movement (PASOK). These parties are historical rivals and were both conceived in the foundation of the republic in 1974. ND represents the center-right of Greek politics, traditionally with a pro-Europe and neoliberal policy platform. PASOK represented the center-left of parliament, also with a Pro-Europe stance, and often traded majorities with ND.
However, since its founding in 2004, the Coalition of the Radical Left (SYRIZA) has taken control of Greek politics. A unitary party for far-left, green, and socialist politics, SYRIZA capitalized on the Greek Crisis and gained 58 seats in the two elections in 2012, and then another 78 seats in the 2015 elections, forming the first non-ND or PASOK cabinet. We will discuss the rise of SYRIZA (and fall of PASOK) in context of the financial crisis.
There are 14 ministries in the current Greek cabinet structure, with many ministries including alternate ministers with special legislative prerogatives. Ministers are typically pulled from the government’s party or coalition parties, which can sometimes lead to differences in opinion or legislative priority.
History of the Greek Financial Crisis
Part 1: Before the Global Recession
Greece joined the European Communities (the precursor to the EU) in 1981, which supported growth and led to a booming economy in the region. Membership in the EU brought integration: tourism, infrastructure, industry, trade, and other areas became intertwined with the EU through the 80’s and 90’s and transformed life in Greece beyond anything seen before the junta. Greece joined the Euro in 2001 and this reliance on one currency only heightened growth. GDP per capita skyrocketed and investment in the country increased.
But most of this was just a cover. Prior to the Euro, the Greeks had just elected a fiscally irresponsible left-leaning government in response to the collapse of the junta (PASOK). This government spent out of control, and it was only the conditions to enter the Euro which brought the Greek government under control. Yet after joining the Euro, Greece returned to its old spending habits: structural problems had not been solved; they had only been hidden from plain sight. Now backed by a solid currency shared across most of the EU, Greece had no warning signs for its crazy spending or poor credit history. The growth was unsustainable and waiting to collapse.
Summary: Post-junta, Greece overspent and undertaxed, leading to structural problems within the country. Joining the EU, and subsequently the Euro, led to short-term gains while simply hiding the root issues.
Part 2: The Global Recession and Greek Sudden Stop
It’s unfair to say the global financial crisis of 2008 caused the Greek crisis, but it was the trigger. As might be familiar to you, the burst of the U.S. housing bubble and the subsequent collapse of the subprime mortgage market (both of these concepts are interesting, but you do not need a thorough understanding to contribute to committee) led to a global banking crisis. Markets crashed around the world, and financing was hard to come by in leading economies, much less in places like Greece. Furthermore, it turns out that Greece had been misreporting statistics for years in order to gain access to the Euro, leaving the economy in an even worse state than previously thought.
In late 2009, Greek Finance Minister George Papaconstantinou announced that the deficit would reach 12 percent of the country’s GDP, which is twice the expected percentage and quadruple what is set in the Stability and Growth Pact, an agreement between all members of the Euro. Because expectations were wildly different than reality, all three credit rating agencies (Fitch, Standard and Poor’s, Moody’s) downgraded Greece’s credit rating in the next two months significantly. This caused a sudden stop in the country which means Greece was cut off from borrowing.
In early 2010, it looked like Greece was headed towards bankruptcy and a default on its debt — something never before seen in the Eurozone. Greek collapse laid a lot on the table:
Contagion of debts: If a country is allowed to default on its debts in the Eurozone, then any country is allowed to default on its debts. In the middle of a financial crisis, the prospect of other struggling nations — especially Italy — defaulting would lead to the end of the euro.
Greek exit: A recurring theme, as you will soon notice, is that if a nation can’t control its currency, it can’t print money to pay off debts. However, if Greece returned to the drachma, it could suddenly “solve” its crisis. The euro is strong because it is large, and if the Greeks leave at the first sign of trouble, other nations (Portugal, Ireland, Iceland to name a few) might also.
Greek creditors: Most of the Greek debt under threat of default was owned by German and French banks. If Greece is unable to pay, then these banks lose all of their money. Being two of the most powerful nations in the Eurozone, these huge losses were unimaginable for Germany and France.
Perhaps the entire Greek crisis could have been solved in 2010 if the banks were willing to default. If Greece was allowed to restructure its debts and force short-term losses, it may have avoided the next eight years of bailouts and economic (as well as political) turmoil. Instead, because of the fears mentioned above, a bailout was inevitable.
Summary: When it became really hard to borrow money across the world, it became impossible to borrow money in Greece. Greece faced a sudden stop due to wild and unmanageable expectations, and faced the first real bailout in Eurozone history.
Part 3: The 1st and 2nd Bailout:
In May of 2010, the European Commission, the European Central Bank (ECB), and the International Monetary Fund (IMF) (known as the Troika) worked together to prevent a Greek default and funneled 110 billion euros into Greece. This bailout, intended to stimulate the Greek economy and push Greece towards economic recovery, worsened the situation immensely.
The bailout went towards Greek creditors: As mentioned above, French and German banks owned much of the junk Greek debt. In order to save their own banks, France and Germany contributed a significant portion of the EU’s share of the bailout — at the expense of French and Germany taxpayers. This money arrived at Greek banks, which was used to pay off French and German banks, doing absolutely nothing for Greek citizens.
The bailout had strict austerity conditions: The Greek government was justifiably seen as reckless and fiscally irresponsible, so the Troika set strict conditions on the bailout to hopefully “fix” the Greek economy. Austerity measures from 2010-2011 include:
Freezing and cutting government salaries.
Cuts in bonuses, overtime pay, work-related reimbursements.
Value Added Tax (VAT) increases, gas, luxury, import, sin, profit tax increases.
Huge budget cuts, notably in education.
Pension “reform,” including increasing the retirement age, lump sum decreases, lowering payments, taxing high pensions, payment limits, and more.
Because the money was not used to “stimulate” the economy, but rather to bail out foreign banks and keep key agencies from going under, there was no counter to the extreme austerity measures. Greece entered a cyclical recession: lowering wages to increase net exports made the recession even worse. Furthermore, Greece has very few speciality exports as compared to the rest of Europe. While its agricultural industry is the primary sector of business, its only leading EU exports are cotton and pistachios (many believe Greece has a huge olive industry, but it comes in third worldwide, with Spain producing more than double the amount every year). Tourism accounts for 18 percent of Greece’s GDP, but travel was low during the global financial crisis. Greece was in the ultimate feedback loop, which led to massive protests throughout 2010 and 2011.
It could be said the second bailout was inevitable from the day of the first bailout. While similar to the first bailout, the second bailout of 130 billion euros also included debt relief on substantial amounts of private debt. While this helped finance many private holdings, it essentially ruined public pensions and made Greece default on its own banks as opposed to foreign debts (and since many of Cyprus’ banks were invested in Greek banks, the country went into full destabilization simply as a side effect of the second bailout). So far, only about 11 percent of both bailouts actually subsidized Greek spending.
Economically, the country began to look better. Credit ratings improved, Troika continued to improve its bailout deals, and Greece returned to financial markets. Yet austerity continued and four more packages passed between 2012 and 2014. This austerity hurt Greek citizens and dramatic protests spread across the nation. Though the budget looked fine (and was even predicted to post a surplus), the country was not succeeding. These three years saw political turmoil, with fringe political parties gaining seats and a coalition government between ND and PASOK, an incredible feat considering their fourty-year history as rivals. And the Athens Stock Exchange, a measure the general public often (incorrectly) uses to gauge fiscal health, fell throughout the period. For the first time in the crisis, politics will dictate the economy.
Summary: Two bailouts poured 240 billion euros into Greece, but barely any of it reached Greek citizens. Strict austerity measures ruined pensioners and created a recession feedback loops. Austerity led to political turmoil ripe for a revolution.
Part 4: SYRIZA and the 3rd Bailout
SYRIZA played a pretty small role in Greek politics prior to the 2012 elections. In 2007, it managed to grab 5% of the vote which led to 14 seats in parliament, but it still sat firmly in the opposition party. The far-left voice was not new to Greek politics, but with SYRIZA it was stronger: they were outside the political forray throughout the entire Greek crisis. POSAK was sided with the unions, and ND with big business, so there was ample opportunity for an anti-establishment party to grab regular Greek citizens. Furthermore, SYRIZA was willing to work with other left-leaning parties, capturing green politics and many independents.
SYRIZA campaigned as an outsider and the only viable alternative. Their policy platform was anti-bailout and anti-austerity, which worried many European leaders. Their economic plan read like a European New Deal and asked for investment from Europe, not debt relief. These monies would be spent on social security programs, combating tax evasion, and employment through national infrastructure. Anti-austerity was what the Greek electorate was waiting for: It put SYRIZA into power in January of 2015. New Prime Minister Alexis Tsipras promised to refuse payment to the IMF unless his new plan passed through bailout renegotiations.
European leaders were justifiably worried for a few reasons:
An expired bailout is essentially a default: A developed country had never missed a payment to the IMF, and by refusing to pay, Tsipras told the world that he “could not afford” to make a payment. While not actually a default, this is next closest option.
The EU had seen some gains in Greece: 2012–2014 was marginally successful for Greece’s economic appearance and this threatened reversal.
If Greece wants immediate funds, its best option is to leave the Euro: Greece has little leverage and no ability to fund its social programs, so if SYRIZA wants this New Deal-esque program, its best plan is to print drachma.
Troika and SYRIZA negotiated, but it turns out that brand-new political parties led by inexperienced politicians tend to make plenty of mistakes. SYRIZA had nothing to bring to the table; besides the promise of reform after stimulus, Greek had no leverage. Furthermore, Tsipras met with the Russian Federation and promised closer cooperation, which angered many Western leaders. Finally, Tsipras promised to force a referendum on anything the EU offered, and Troika withdrew. Tsipras was forced to close the banks and limit withdrawals for Greek citizens.
He also capitulated to Troika demands, and forced more austerity through parliament — despite directly campaigning against these same tactics. A third bailout ensued, which lasted through August 2018.
Part 1: Greek Financial Crisis at the end of the third bailout
Written August 25, 2018
For now, it appears as though the Greek financial crisis, which lasted longer than the American Great Depression in the 1930s, is “over.”
The government has returned to borrowing: As of August 20, the final bailout has ended and so has the crisis — officially. Greece has returned to the markets, and can issue sovereign debt like any other country. It feels as though this is for good.
Greece has a primary-budget surplus: As of right now, the Tsipras administration is committed to running a surplus in the primary budget. Though mostly a relic of austerity measures, this is heartening for critics who believe the Greeks have a tendency to overspend.
The economy is growing and unemployment is decreasing: There’s no doubt that for the first time in a decade, simple economic metrics look good for Greece.
Tourism and related industries are booming: While tourism always remained relatively high throughout the crisis, with new money in the economy, the construction sector is also growing at the same speed
Through the new agreement in June of 2018, Greece has a 24 billion euro cushion: With excess funds from the EU, Greece is not on the brink of collapse
Debt extension gives the Greeks a window: Most of the debt obligations held by Greece have extended their maturities, giving the government another ten years to pay it back.
Greece is still in the Eurozone: The argument for keeping the Greeks on the euro may pay off as an example to other countries: You will make it through if you stay with us. Despite the long decade of instability, Greece stayed — in large part due to other Eurozone members giving up key beliefs.
We have no assurance the primary-budget surplus will persist: The elections in Greece will take place in October 2019 (unless they’re called earlier), giving the Tsipras administration little time and the world few assurances that this sort of budgetary discipline will stay if SYRIZA is voted out. Remember, when Greece was applying to enter the Eurozone, it temporarily reigned in much of its spending and then immediately returned to its old habits
The economy is in shambles: Growth is terribly slow in Greece. GDP is about 25 percent of what it was in 2007; investment is 33 percent. The IMF projects it will take Greece twelve more years to return to pre-recession levels.
The jobs are temporary: Much the employment being filled is construction or infrastructure, and these jobs are temporary. Long-term success means stable jobs that a citizen can retire into, and these are not returning to Greece very fast.
Austerity ruined life for large portions of the population: The normal citizen in Greece has a substantially lower wage, higher taxes, and no prospect at retiring with any semblance of a pension. Years of tightening the belt and shifting the burden onto everyday taxpayers created poor living conditions for many.
There are still restrictions on current debt relief: Greece must hit certain metrics, especially on funding targets for its primary budget. Missing these targets spell trouble for the Greek government in terms of extending maturities.
There wasn’t any real debt relief: Greece still owes all of its debts. Other nations wouldn’t let Greece skate by unharmed, and the burden of a debt worth 180 percent of GDP means two or three generations of Greeks will suffer paying it back. Furthermore, the IMF, which did not contribute to the final bailout because of its uncertainty on Greek repayment, is urging no concessions be made.
Young people are leaving Greece in droves: Over 400,000 Greeks left during the recession, and more under-30’s will leave due to factors like 40 percent youth unemployment and low property values. This brain drain means working-aged people will begin to dwindle (enhanced by Greece’s low fertility rates) and economic activity will decline into the future.
The Eurozone is not guaranteed: While nations like Germany hoped that Greece would serve as an example to other Eurozone nations, Italy is currently spending at incredibly high rates. Its populist government refuses to listen to EU rules, and it seems like it might also collapse at the first hint of another American recession — which is dictated by the business cycle and due within the next two years.
Structural reforms were never imposed: Greece’s economy is inefficient, and with austerity as the poster child for recovery, the Greek government never actually solved what contributed to the crisis. Tax evasion and overwhelming bureaucracy remain, and its junk loans are still in many portfolios.
There is no guarantee that Tsipras will do what is necessary to recover the economy: With SYRIZA already experiencing infighting and living conditions remaining the same in Greece, Tsipras threatens his majority in parliament. Pushing the Greek government to do what is necessary might cost him politically, and it is unclear whether or not Tsipras will take this risk.
It is not a given that Greece is out of the woods: The IMF still considers Greece a huge risk, and political turmoil always threatens long-term economic forecasts. An already weak Greek economy is ripe for exploitation, and a full reversal is possible.
Your Task: Fix the Greek Economy
Points to adhere to:
You must run a primary-budget surplus
Your credit rating is mediocre at best
Tsipras promised further austerity
You represent Tsipras’ SYRIZA and must maintain political power (Acting as Tsipras, I will veto any resolution which will cause considerable electoral losses)
Solutions to consider:
Where is Greece currently succeeding, and is there any way to heighten this success or redistribute it to other areas?
Where was Greece weak in 2007 (or even 1974) and are there ways to make structural reforms which don’t cost much money?
What are the best ways to stimulate an economy?
How can you increase the number of working-aged individuals who could contribute to the Greek economy?
What steps can you take in order to put Greece in a better negotiating position with Eurozone members?
What are the best ways to maintain political power during an economic recession?
Further Topics to Research:
Research other nations which have recovered from their recessions:
The United States: 1930s, 1970s, 2008
Spain, Portugal, Ireland, Iceland, Cyprus: 2000s–2010s
Research other nations currently suffering from financial crises:
Research Eurozone reforms: