By electing Syriza leader Alexis Tsipras to be premier, Greeks voted to end the draconian economic measures imposed by Germany and other international lenders. After the dust settles, German Chancellor Angela Merkel will either backpedal on the austerity imposed on Athens or accept Greece’s exit from the euro.
When the single currency was established in 1999, prices, bank accounts and debts in each member state were translated from domestic currencies into euro at prevailing exchange rates.
Prices for most products that were traded within the Eurozone reasonably reflected differences in productive efficiency and wages among its members. However, owing to differences in national geography, law and culture, productivity advanced more rapidly in Germany and other northern states. Greece and other Mediterranean members increasingly borrowed to pay for imports as their exports became uncompetitive and inadequate.
By 2008, just as many U.S. homeowners were too deeply in debt to ever repay what they owe, Greece and several other southern European governments couldn’t service their debts.
Led by Merkel, the International Monetary Fund, European Central Bank and European Union (the Troika) fashioned aid packages that essentially refinanced government debt but imposed large losses on private bondholders.
In exchange for loans from the Troika, Greece agreed to huge tax increases and spending cuts, privatization of government assets and market-oriented deregulation.
The goal was to boost efficiency, lower labor costs and make exports more price competitive so that the Greek economy could grow. And with a broader tax base, Athens could then service its restructured debt.
By any measure, the exercise has failed.
Since 2008, the Greek economy has shrunk by 25 percent, and the stock market is down more than 80 percent.
Starved for investment, the Greek private sector has fallen further behind the rest of Europe—one in four small and medium sized enterprises have shuttered.
