What Caused the Greek Financial Crisis?
The Greek economy is again in the news, as today marked the fifth day of demonstrations by Greek truck drivers. They are protesting the deregulation of their industry, which was a reform required by the International Monetary Fund (IMF) as part of the Greek bailout. The strike is starting to affect the economy, as firms and stores are starting to run low on supplies. In addition, it threatens to harm the fragile tourism industry, one of the major sectors of the Greek economy. The truckers’ strike may convince even more foreigners that this is not the year to visit Greece—keeping the beaches and the government coffers empty.
As a tourist in Greece last week (incidentally departing just hours before the latest strike), it is clear that despite being well into the summer holiday season, the tourists are indeed avoiding Greece. The beaches were indeed empty and even the Acropolis was empty enough that people were able to get good pictures of themselves with the Parthenon in the background. Of course this made Greece much more enjoyable to the travelers who have braved Greece’s troubles to see its monuments, but it may be exasperating the Greek government’s problems. Fewer tourists of course mean fewer euros and dollars being spent in the country, and thus less tax revenue for the government. As result, while the government cuts spending, tax revenue is also falling, reducing the effectiveness of the cuts in reducing the government deficit.
The international press has painted the main culprit of the Greek deficit crisis as pensioners who retire earlier than in other European countries. Of course, the problem is more complicated than that, and other journalists comment on how once Greece joined the Eurozone, its interest rates dramatically fell compared those of Germany. As a result, it was then much easier for the Greek government to borrow money internationally. It is clear traveling around Greece that the government took advantage of this, perhaps too much.
For instance, while traveling around the Peloponnese, one sees plenty of construction, but must wonder if it was necessary to build this entire infrastructure at once. Some of the infrastructure will quickly produce large economic benefits, such as the Rion-Antirion Bridge. Crossing the Gulf of Corinth, the bridge was completed in 2004, and will dramatically reduce travel times between the Peloponnese and western Greece. Similarly, many multilane highways are still under construction, which will dramatically reduce travel times and auto accidents. However, on my trip, I saw construction crews building tunnels through the mountains along the multilane highway between Athens and central Peloponnese, which would only save small amounts of time since each tunnel tended to reduce travel by maybe a few kilometers.
In addition, the Greek railways have been undergoing major renovations since the introduction of the euro. All of the railroads in the Peloponnese were narrow gauge, yet after more than 100 years of operation, they are now being widened to standard gauge. Again, the results will be greater efficiencies—for instance, passengers and freight from northern Greece will no longer have to transfer in Athens—but one wonders if Greece can afford all of these upgrades at the same time. Many of these projects also benefit from EU assistance and signs advertising EU funding for construction projects dot the Greek landscape. However, the EU generally requires governments to provide partial matching funds, meaning that the Greek government is still footing part of the bill.
As a result, while the Greek economy will benefit from this infrastructure, one wonders if Greece is not trying to accomplish too much at once. There has not been much in the news about Greek infrastructure spending being a cause of its fiscal problems, but the scale of these activities cause suspicion. Greece might have been able to afford these improvements while its economy was growing, but it is now paying the price once the global financial crisis began.