Alexander Langer Global Horizons International Law & Policy Investment Trade Western Europe

A Guide to the Euro Crisis (Part II)

In 2009, Greece’s Socialist Party, PASOK, defeated the ruling conservative party, New Democracy (ND), and formed a center-left government. Yet, within six months, with deficits soaring and the economy stagnating in the face of the global recession, the government was forced to meaningfully reduce government spending, the first of many occasions. Since then, Greece has spiraled downwards into political turmoil and socio-economic catastrophe. While Greece is the most severe case of the Euro-zone crisis, austerity, suffering and political crisis are a clear and ominous pattern throughout Europe since the beginning of the Euro crisis.

Greece Protests
Greek protesters gather in Athens [BBC]

The past ten years had been kind to Greece due to its fast-growing economy. Governments of all parties had taken advantage of historically low borrowing costs to finance new government spending and stave off necessary economic and political reforms, such as changes to the country’s feeble tax collection system. Yet, as Greece’s economy – reliant on vulnerable industries like tourism and shipping – stagnated, deficit spending and debt soared. Markets, suddenly spooked by the absence of a guaranteed bailout and credit downgrades for Greece, began to demand much higher interest rates on debt. As Greece relied on debt to finance government spending, this only made the problem worse.

Greece, then, was forced to implement ‘austerity’: tax increases and spending cuts to reduce its deficit. However, these cuts and new taxes reduced public and private spending significantly, making the economy shrink and reducing tax revenue further. Thus, austerity was only semi-effective in reducing deficits while causing economic pain. To make matters worse, as Greece was a member of the Euro-zone, they were not able to use monetary policy to cushion the blow. However, the European Central Bank (ECB) would not tailor its monetary policy to help Greece. This left the country with the unappetizing choice of staying in the Euro-zone and suffering, or leaping into the unknown of a new currency.

By late April 2009, Greece had had enough, and asked the ‘Troika’ (the EU, ECB and IMF, with Germany as the primary loan guarantor) for a bailout. Given after tough negotiations, this bailout provided cheap loans to Greece in order to allow the government to continue functioning. In exchange, Greece was forced to make drastic cuts, laying off hundreds of thousands of public employees, privatizing state assets and increasing taxes. This led to political turmoil, as strikes, protests and clashes with police overtook Athens. A cycle of bailouts, emergency financing and exacting cuts began, with each new wave of austerity harsher than the last.

Golden Dawn
Nikos Mihaloliakos, leader of the Golden Dawn party, was arrested in 2013 [CBC]

Two back-to-back Greek parliamentary elections in 2012 devastated PASOK, and narrowly returned ND to power as the head of a centrist unity coalition. The biggest winners of the election were SYRIZA, a radical leftist coalition which vowed to end austerity and became the second-largest party in parliament, and Golden Dawn, an openly Neo-Nazi party which later had its leaders arrested for plotting a coup with sympathetic members of the military and police. While Greece’s economy has stopped shrinking, it remains in a deeply depressed state, with unemployment near 30% and youth unemployment at 65%. Drug abuse, homelessness and food insecurity have become rampant problems in a country that was once promised a future of prosperity in Europe.

Other countries, of the group known as the “PIIGS” (Portugal, Ireland, Italy, Greece and Spain) have seen similar situations. Spain and Ireland’s governments were relatively fiscally responsible. Yet, they both had huge housing bubbles that burst with the global recession, and both governments were forced to bail out their banks, creating huge debt burdens overnight. They then faced harsh terms for their own bailouts. Both rulingparties at the time of the beginning of austerity measures have since been forced out. Ireland, after several years of quietly suffering through immense economic pain, saw the interest rates on their bailout loans reduced and their repayment period extended as they exited formal bailout. However, unemployment is still very high and the country’s debt-to-GDP ratio is well over 100%

Eurozone Cartoon
[The Guardian]

Meanwhile, Spain’s economy, with pre-existing problems of low productivity and a labour market split between temporary contracts and lifetime employment, has a tremendously high unemployment rate, nearing 50% for young people. This sparked a major protest movement, the indignados, and a subsequent crackdown, disturbing in a country that was a brutal dictatorship in recent history. Italy’s most recent parliamentary elections placed the Five-Star Movement, more a scream of popular outrage than a coherent political party, a close third and holding the balance of power. In Portugal, the government’s borrowing position has recovered, although the country remains deeply depressed.

Across Europe, it is much the same. Immense economic suffering has resulted from the inflexibility of the Euro and the insistence of European elites from both left and right on the ‘medicine’ of austerity. This has ripped societies and political systems apart at the seams, with fierce competition to avoid being harmed by the next wave of cuts. The identification of ‘Brussels’ (the EU’s capital) as the source of the austerity program has alienated an entire generation from the European project. This can be seen with the rising influence of radical leftist parties like SYRIZA, populist movements like the Five-Star Movement, and far-right parties like Golden Dawn, Hungary’s Jobbik and the Front Nationale in France, who are united only by their disgust for the European Union. As Europe’s leaders call for ‘resolve’ in the face of public anger and declining economies, they ought to re-examine their beliefs. Otherwise, their resolve may do nothing but place the last nails in the coffins of their own careers, and the European project’s too.

Author

  • Alexander Langer

    Alexander Langer was a Junior Research Fellow with the NATO Association of Canada. He is a U2 student in the Joint Honours Political Science/History program at McGill University. His research interests focus on ethnic and sectarian conflict, civil war and population movements, particularly in the modern Middle East and Southeastern Europe. He is currently an intern at the Social Justice Committee of Montreal, and is the editor-in-chief of the McGill International Review, a student journal of international affairs

Alexander Langer
Alexander Langer was a Junior Research Fellow with the NATO Association of Canada. He is a U2 student in the Joint Honours Political Science/History program at McGill University. His research interests focus on ethnic and sectarian conflict, civil war and population movements, particularly in the modern Middle East and Southeastern Europe. He is currently an intern at the Social Justice Committee of Montreal, and is the editor-in-chief of the McGill International Review, a student journal of international affairs