Greece joined the European Union, the EU, in 1981. Spain and Portugal joined five years later. The addition of these countries caused concern among many economists and financial analysts, since their economies were not as developed as other EU members.
This was a controversial matter, especially as the EU prepared to launch the euro to replace national currencies in 1999.
Today, the euro has replaced the local currency in 19 of 28 EU nations. Since Greece, Spain and Portugal became EU members, other smaller countries with lesser-developed economies, such as Latvia, Slovakia, Estonia and Slovenia, have joined.
The concern of adding economies to the EU not on par with the larger, more developed economies centers on the need for the less-developed economies to follow strict fiscal and monetary policies, so that if the euro is adopted as their national currency, it will not cause economic crises. The European Central Bank, the ECB, manages monetary policy for the EU and its effects are felt throughout the membership. If the ECB wants to control inflation, it will raise interest rates. This may assist larger members such as Germany and France, but it may totally disrupt the economies of countries like Greece and Portugal, which have turned over their monetary policy to the ECB to be able to implement the euro.
In other words, monetary policy that may fit one country may not be good for another.
Greece joined the EU with a high debt-to-GDP level and major structural deficits in its economy. To implement the euro, it pledged to get these indicators under control. In 2008, the country slipped into one of three subsequent recessions. In the following two years, Greece’s debt-to-GDP ratio climbed to 127 percent and 146 percent. International creditors started to worry that the country would not be able to service its debt, and the country’s bonds went into “junk bond” status.
In 2010, EU countries such as Germany, along with the ECB, and the International Monetary Fund – commonly referred to in financial circles as the “Troika” – jointly put together a 110-billion euro bailout package. The country slipped further into crisis and the Troika lent another 130 billion euros. As the crisis lingered, the IMF put up an additional 8.2 billion euros.
On Jan. 25, parliamentary elections were held in Greece and the left-wing party Syriza gained power for the first time. The party and its appointed prime minister, Alexis Tsipras, have been adamant in their opposition to the bailout plan and the payback agreement that they feel was imposed upon Greece. This opposition has further increased the concern that Greece is on the edge of financial bankruptcy, and this has made international investors even more nervous.
Greece’s prime minister and financial minister are currently in heated discussions with the Troika to come up with a solution.
Greece’s leaders are particularly unhappy with Germany, whose banks hold most of Greece’s debt. They accuse Germany of manipulating the ECB to pursue national interests at the expense of countries like Greece. They also say that Germany is being self-righteous by insisting that Greece tighten its belt and control government spending.
On a more personal level, Germany is accused of being hypocritical, given that it was provided a generous restructuring program by the Allies following World War II.
The vitriol has gotten so bad that Greece is turning to the history of bad blood between itself and Germany in World War II. During the war, more than 58,000 Greek Jews were sent to German concentration camps after Germany occupied Greece.
After the German invasion, another 300,000 Greeks died of famine. Now Greek Jewish leaders, with the approval of the current administration, are contemplating issuing a demand to Germany for reparations of the citizens and property that were lost.
Also being discussed is a demand that Germany compensate Greece for the loss of national treasures and art stolen by the Nazis during the war.
Germany holds to the position that compensation to Greece was settled decades ago, and that the subject is simply a smokescreen for the country to draw attention away from its dire situation and its unwillingness to make hard decisions that need to be made so the country doesn’t go bankrupt. The fight promises to get worse if Greece’s crisis intensifies.
At stake is the larger issue, discussed decades ago, of whether a European Union comprised of developed and developing economies could co-exist, especially if a membership-wide currency is to be implemented. The Greece situation is a major test for the EU.
Jerry Pacheco is executive director of the International Business Accelerator, a trade counseling and training program of the New Mexico Small Business Development Centers Network. Call (575) 589-2200 or e-mail firstname.lastname@example.org.