The Decibel - How Greece got its economic groove back

Episode Date: June 8, 2023

The 2007-2008 financial crisis hit countries around the world hard. But, Greece’s economy really faltered. At the peak of Greece’s crisis, unemployment hit 28 per cent, a figure higher than unemployment during the U.S.’ Great Depression. Greece required three hefty bailouts from the European Central Bank, the European Commission and the International Monetary Fund which totalled almost €300-billion. The Greek population suffered under strict austerity measures which cut salaries and closed hospitals.Fast forward to today and the economy is showing remarkable signs of a bounceback. Eric Reguly is The Globe’s European bureau chief. He’s on the show to explain what went wrong in Greece, how they’re turning things around and what other countries can learn from Europe’s surprising comeback kid.Questions? Comments? Ideas? E-mail us at [e-mail]

So I was in Syntagma Square on the late afternoon covering an anti-austerity protest. It was very, very peaceful. Syntagma Square is the big square, open square, right in front of the Parliament buildings. Eric Reguli is the Globe's European bureau chief. And in 2012, he was covering protests in Athens, Greece. A young man, all dressed in black, came up to me and he said, I can tell you're a reporter. I was scribbling in a notebook, talking to people.

And he said, you should watch out because in about 20 minutes, this place is, quote, going to explode. Half an hour went by, nothing happened. Then the so-called anarchists, all dressed in black, started throwing stones and oranges. They were just picking them off the trees and throwing them at the police. The police were just like sphinxes doing nothing. Then all of a sudden, the police went absolutely nuts. And within seconds, Syntagma Square was full of tear gas.

You could see the tear gas canisters swirling through the air, trailing white smoke. 45 buildings went up in flames that night and it looked like a war movie. It looked like a napalm strike that hit the entire city. Greece's economy was in freefall. The country was being bailed out by the Troika. That's a decision group made up of the European Commission, the European Central Bank, and the International Monetary Fund. And in exchange for these bailout loans to keep the government solvent,

they demanded cutbacks, spending cutbacks, government firings, just a massive crunch of spending. And so this is what triggered the anti-austerity riots because there was no money for anything. Things were so dire for Greece that there were concerns they might leave the European Union. But now, just over a decade later, Greece is making a big financial comeback. And it wasn't easy to do. So today, Eric is here to explain how they pulled it off, what challenges still lie ahead, and what the rest of the world can learn from Greece. I'm Mainika Raman-Wilms, and this is The Decibel from The Globe and Mail.

Eric, thanks for being here today. Thanks. Great to be back. We are going to talk about the present-day economic successes of Greece, but to get there, I think we need a sense of really where Greece came from, right? Because what makes this story so remarkable today is that Greece's economy was in a really dire state for years after the 2008 financial crisis and everything that came after that. At the height of the crisis, unemployment was at 28 percent, which is higher than the unemployment rate in the U.S. during the Great Depression. That's significant, right? We know the financial crisis was hard on many countries across the world. But

Eric, why was it particularly bad in Greece? Okay, that's a good question. It was particularly bad because Greece's debt was extremely high. They had no fiscal discipline in the decade before the 2007, 8, 9 financial crisis. They were spending like it was a party. They were buying, you know, military items like submarines, which they didn't need, all sorts of weapons because, you know, they're always afraid of a war from Turkey. But mostly they were just adding to the bureaucracy. So politicians trying to buy votes were hiring civil servants by the hundreds of thousands and paying them essentially to do nothing. And so it was it made the economy uncompetitive. It raised the overall debt to crazy levels.

And when the crisis came, the prices fell on the Greek bonds, which means the yields, the interest rate, went in the opposite direction. And they went to double-digit levels, which is, you know, a crisis. Yeah, and I think it can get a little complicated when we're talking about bonds, right? But bonds are kind of essentially like an IOU, right? So people are buying a Greek government bond and Greece promises to pay them the money back with interest. But if the value of that, as you're talking about the yields, right, if the value of that

changes, people don't have confidence that Greece can actually pay them back. That's where they get into trouble then. Yeah, the bond price, let's say the bond is 100 euros. When investors lose confidence in a bond, the price sinks, right? You think, well, look, this bond was sold at 100 euros, but we don't think Greece can pay back this 100 euros. So it's now trading at 85 euros. So below par, Bonds are like a teeter-totter. When the price goes down, the interest rate goes up. And that's how they got shut out of the debt markets. They could not fund themselves.

And this is why the international bailouts had to come. Or else Greece would have been just obliterated from the map. So often when a country is in economic trouble, Eric, one way they can help themselves get out of it is to devalue their currency, right, make their money worth less. And that means that every other country's money essentially goes further and they can buy more exports from that original country, which helps them financially, right? But Eric, it wasn't as easy as just doing that in Greece. So what was the situation there? Well, Greece joined the Eurozone in 2001. That

meant it, for the first time in its history, it got rid of its own currency, the drachma. As Italy did, it got rid of the lira. As Germany did, it got rid of the Deutschmark, which meant they don't have their own central bank. Their central bank is the European Central Bank, and it's a common currency for everyone. Therefore, it's a one-size-fits-all currency. But guess what? One size doesn't fit all because all these economies, two dozen economies, are moving at different speeds. Greece was effectively bankrupt.

If they still had the drachma, it would have been sort of an insurance policy. They could have said, OK, we're going to devalue the drachma by 40 or 50 percent. That means we're going to be more competitive on our trade portfolios. So whatever is produced in Greece and is exported, all of a sudden is going to be, I don't know, 30, 40, 50 percent less. And that keeps the economy going. In this case, Greece didn't have its own currency, which it could not devalue. It was like a straitjacket. And that's why Greece was seriously considering leaving the Eurozone. In fact, it elected a far left government that was exploring that idea very, very seriously.

OK. And what prevented them from from doing that? So it sounded like, you know, there was speculation that this might happen. Why didn't Greece leave the eurozone? Because the fear of even more economic damage if it did leave the eurozone was greater than the fear of staying in the eurozone. How can that be? If Greece had ditched the Euro and taken back the drachma, which would be immediately devalued, it doesn't mean its debts would go away.

The debts would still be there. So all of a sudden, if the drachma was devalued by 50% against the Euro, that meant that the debt payments would double. So you're paying off the same amount of debt in euros with a currency worth half as much. So in effect, your debt payments double. Okay, so Greece decides to stay in the eurozone because it is better for them. But they were still in a bad financial state, right? I mean, they were bailed out three times in the span of eight years. That's nearly $300 billion in those bailouts. That's a huge amount of money. So what's the catch, Eric? What did Greece have to agree to in order to get that money? Well, they had to agree to a severe austerity program that meant civil servant pay cuts for

hundreds of thousands of people, tax hikes, it slashed pension plans. I mean, entire government departments were shut down, like the state broadcaster. I was there the night they shut it down. They just imagine just closing the CBC overnight. Kaboom. That's what happened. This is where the Troika, again, the EC, the EU, the IMF, they pushed too hard in demanding less payment in exchange for these bailout loans. They thought the Greek deep recession, actually depression, would last, I don't know, two, three, four years. It went on for, God, many, like double that, because the spending restrictions were just too tight. When you stop spending, your economy shrinks. And the other thing that happened is that a lot of young people, 500,000 of the best and brightest young people in Greece just left. That really

hurt. And it's still hurting because most of them haven't come back. Yeah, that's a really important point, right? That's a kind of a brain drain on a big scale if you're losing your productive workers in that way. Let's fast forward to today, Eric. I mean, where is Greece now in paying down this debt? They had to borrow a lot of money. So what's the status of this now? The debt situation is still high, but not crippling high at the moment. There's two reasons for that. One is the fiscal situation because of the spending cuts, because they're getting their fiscal house in order. Their debt to GDP is now 170%. The peak was a few years ago, 210%. So it's come down 40 percentage points, which is good. That's still well north of the

European average. Greece probably will get its investment grade credit rating back later this year. And what does that mean? That means it'll soon be able to sell investment grade level bonds, which is a huge plus. It makes funding government operations a lot easier. So its fiscal situation will improve even again. So I mean, overall, it's a much better situation than it was last year. GDP was up 5.9%, which is the second best in Europe after Ireland. We'll be right back. Things aren't perfect in Greece right now, but it sounds like Greece is turning things around. So let's talk about some of the factors here, Eric. One of the things that you've reported on as a big factor here is the government's digital revolution.

Can you explain what that is? Oh, I love this story. Before the new democracy government was elected in 2019, most of the government services were paper-based. And the Greek bureaucracy, like the Italian bureaucracy, is notoriously inefficient. You have to line up several times in decrepit offices with computers that are broken. Just a complete waste of time.

Then this new government decided that it wanted to digitize all government services. This project is about 80% complete now. So you can, as of today, there are 1,550 services you can do just off your computer. You don't have to line up. You don't have to see anyone. You don't have to take a day off work. It's really easy.

For example, you can set up a one-person business, incorporate a one-person business on five minutes just on the computer. You can do registered birth certificates. You can apply for a pension plan. well ahead of most of Western Europe on this front, maybe all of Western Europe, ahead of Canada, ahead of United States. And it's made the Greek economy more efficient, friendlier, easier to deal with. But it's also been a huge boost for businesses because they have to waste less time and money doing, you know, simple operations. And what they're finding is that young people love this digital revolution. And this has been a big lure to get some of these 500,000 kids who left the country during the crisis back because they're digitally savvy. One of the industries that's booming now is tourism in Greece, which might be kind of an obvious one because it's quite a destination

these days. But another area that's thriving that might not be as obvious for people is the tech sector, which I found really interesting. Can you tell me about Greece's growing tech sector here? Yeah, there's Amazon, Google, Microsoft, TeamViewer. They've all invested in data centers in Greece. So it's become sort of a regional data hub. Why are they doing that? First of all, because of this digital revolution in Greece, which has been hugely successful.

B, the government's paying for part of this, which is a big point. C, young people are starting to come back and they're tech savvy and eager to work. And D, Greek wages fell during the crisis years. So to employ a young techie, I don't know, a 25-year-old in Greece is going to cost you a lot less than in Italy, than Germany, than in France. So this is why some of these investments are going in there. And the only problem is that, you know, Greece needs more than tech investments. It needs, you know, manufacturing. It needs a whole bunch of other investments. But this has been a real, real

bright spot. This is billions, equivalent to billions of dollars is going into the tech center in Greece. So you mentioned that wages are still low in Greece. That's, I guess, is that still a hold off or hold over from the austerity measures? Is that why? Or why is that? Since they couldn't, since Greece couldn't devalue its currency because it does not have its own currency, it had to devalue in other areas. So what it did was it pushed down wages. And that helped make the economy more competitive because you could produce goods and services at a lower price in Greece. The problem, of course, is it pushed down wages to the point that, you know, a lot of families, hundreds of thousands were in economic distress for a long time. And, you know,

there's still an underclass in Greece, you know, the poor, the unskilled people are still having a rough time. And, you know, prices are rising. There's an inflation problem all over Europe. And Greece is actually not as bad as, say, Britain's or Italy's, but it's bad, right? So, you know, energy prices are very expensive now. Eating food is expensive. The unemployment rate has fallen by a half, but it's still very, very high. It's still well above the European Union average, and it's coming down too slowly. I think it's almost at 11%, right? In comparison, Canada's at 5%, so it's a lot. Yeah, it's still double. The GDP per capita, per capita, meaning per person, is still below what it was in 2008 levels. So it's still got a long way to come back.

So, you know, this sounds like, you know, some parts are good, but it isn't all rosy. So, Eric, what have financial experts told you? Like, what challenges are still ahead for Greece here to tackle? Oh, yeah, lots. Okay, in no particular order. The challenges would be the judiciary. The judiciary is broken. It doesn't work in Greece.

Now, what does that mean? That means, let's say I'm a company. I set up shop in Greece. I get into a problem with one of my suppliers. I sue the supplier because he's not delivering the goods he promised. It goes to court. It can take 10 years to get a judgment. That's how bad it was.

I was interviewing the governor of the Bank of Greece in Athens two weeks ago. He said, this is the thing that's gotta get fixed because it scares away investors. If you can't get a judgment, it's a disincentive to invest. Here's another problem is tax evasion. That's been a huge problem, always has been. They haven't fixed it yet. Another problem would be the national investment rate. Investing in the country is still half of the EU average. That's got to come up. So yeah, there's a lot of problems. But look, there's a lot of confidence that the government,

which has been reelected, will be able to fix these. Just last couple of questions here, Eric. What can other world economies learn from Greece, from what happened in Greece? I mean, the easy answer to that is don't spend more than you earn. The better answer is keep your banks in shape. And I mean, one of the main factors that plunged Greece into crisis was its banks were weak. What does that mean? The banks were lending to anyone. And, you know, it's like the subprime crisis in the United States, which triggered the financial meltdown in 2007. I mean, they were given mortgages to buy houses for people who didn't have jobs, you know, had virtually no income. The Greek banks were almost as bad.

They had very lax lending standards. The banks effectively shut down during the crisis. They had to be bailed out to prevent their absolute collapse because they couldn't function. They couldn't loan. And if you can't make loans to businesses, lines of credit, businesses shut down. That's what happened. So now that has been fixed and they will not allow this to happen again. So if you keep your banks intact during a financial meltdown,

the lows are not going to be as low as it would be in an economy where the banks were completely unregulated. So Greece, it sounds like, was kind of the problem child of Europe for a while, right? And now things are starting to turn around, Eric. But I wonder, who is Europe's problem child now? I would say the country I live in, Italy. But again, it's a high debt story. And again, a lot of young Italians who are among the most skilled, educated workers in the world, you know, let alone Europe, are leaving. So I would say that the worry focus among economists and analysts has shifted from Greece to Italy. Having said that, I don't think Italy is, you know, anywhere near a crisis point like it was in 2007, 2008. But economic mismanagement

could push this country into the hole. That's for sure. Yeah. Eric, thank you so much for taking the time to speak with me today. Great fun. Thank you. That's it for today. I'm Mainika Raman-Wilms. Our producers are Madeline White, Cheryl Sutherland, and Rachel Levy-McLaughlin. David Crosby edits the show. Adrian Chung is our senior producer, and Angela Pachenza is our executive editor. Thanks so much for listening, and I'll talk to you tomorrow.