One of the biggest news stories this summer has been the Greek financial crisis and its impact on the markets of the E.U. and U.S. One can debate whether extending a financial lifeline to Greece was a wise necessity or a foolish one but in the end how did Greece reach the end of its financial rope? Even today with the latest E.U. agreement, Greece is still looking at more austerity with hopes of getting back on a stable financial footing.
Other countries at one time or another have been confronted with a financial meltdown but managed to find a way out of it. The two countries that can be reviewed are indeed Greece today but also Britain who went through its austerity period of its own from 1945 to 1951.
Post War Britain
The weather in the winter of 1946–1947 was one of the coldest of the century and only compounded the misery of post war Britain. Even though the country was victorious the country was near bankruptcy. Rationing of all kinds that existed during wartime continued afterward leading housewives to organize in protest of the austerity. The nation has simply become impoverished leaving the people unable to buy new clothes, many food stuffs, services overcrowded and neighborhoods derelict. Britain still had commercial and military obligations globally which put additional financial pressure on the government not to mention the rebuilding in London and elsewhere that had been bombarded during wartime.
In 1945 election the Labour Party took power and Clement Attlee became Prime Minister. Attlee and Labour brought with them a manifesto that included nationalization of industries and more services to the poor. One of the most well known was the creation of the National Health Service designed to provide free medical care for all. Upon winning the election the new Prime Minster stated:
“This is the first time in the history of the country that a labour movement with a socialist policy has received the approval of the electorate.”
As a result almost one fifth of the economy would be under government control including the Bank of England, coal, electricity, gas and steel industries and eventually spread to other areas of British commerce.
As a result the scheme was not designed to bring more efficiency and much needed modernization but to rather sole decision makers on how these businesses were to operate. Employees were then made into government workers and company stock holders were issued government bonds as their investment in the new nationalized companies. Even if the business had wanted to expand or modernize the lack of available capital was one of their main problems, the government now in control was broke financially.
The Labour manifesto of 1945 found itself mired in all matter of problems as the decade was coming to an end. Very little improvement was felt by the workers and management in their private and working lives not to mention the ongoing rationing of various items such as clothes and certain foods. Labour narrowly won re-election in 1950.
Britain’s problems were not only domestic but global issues brought forward complicated financial issues as well. One bright spot was the Marshall Plan which did bring in much needed cash for businesses at home and ease trade barriers with Europe. It was during this period of time that the British Empire began giving independence to Burma, Ceylon, India and Pakistan. Maintaining the empire and its commitments in post World War II had become financially too burdensome to continue.
In the 1951 election the Conservatives regained control from Labour and with Winston Churchill as their leader began reforms that included an end to rationing, ending regulations on businesses and began the course of re-privatizing industries such as steel in 1953. This set the stage for an era of prosperity for Britain going into the 1960’s as businesses modernized, quality of life improved and investment in the nation’s infrastructure took place. Between 1950 to 1965 real wages for workers increased 40%.
So how did Greece find itself in the current austerity predicament that has now lasted five years? Joining the Euro in 2001 an optimistic Greece hoped for a better long term economy and something the country needed more of, foreign investment.
But Greece had to make reforms which were part of the agreement when it joined the Euro. First, its public sector employees and their overly generous retirement pension schemes that allowed workers to cease being employed in their 50’s. The other is its complicated tax system that has led to continuous non payment of owed taxes to its Treasury. There are six different VAT tax rates with varying rates and that also vary where you might reside. Lower taxes are in place for staples like food and health. The lower VAT rates were created to keep people and businesses, especially in the hospitality sector, on the remote islands for its tourism industry. In 2012 according to Transparency International’s Corruption Perception Index, ‘…Greece, with a score of 36/100, ranked as the most corrupt country in the EU.’ It was estimated that at one point there has been as much as 80 billion Euros stashed in Swiss banks by Greek depositors.
Unfortunately for Greece its debt problems were only getting worse and compounding the problem was the global financial meltdown that started in 2007 and by 2009 Greece found itself in more of a dire situation. In 2009 the Greek government released economic data that turned out to be misrepresentative of the actual situation the country was in and with that confidence in the country economy eroded. As it turned out the Greek government debt was 299.7 billion Euros rather than 269.3 billion originally reported or 130% of Greek GDP. In 2010 the credit rating for Greek debt was reduced to junk status.
In May 2010 the now famous ‘Troika’ consisting of the European Commission, the European Central Bank and International Monetary Fund provided a 110 Billion Euro bailout loan to help Greece fulfill its obligations and avoid default until 2013. The loan also had terms such as austerity, privatization of industry and government reforms. One year with its economy in recession Greece was loaned an additional 130 billion Euros. As a result creditors holding Greek bonds saw a 53.5% loss in value.
Reforms by Greece were slow if nonexistent. Especially for privatization as the agreements imposed by the Troika called for 50 billion Euros of state assets be sold to private entities. The target amount was reduced and eventually only about 3 billion Euros of assets has been sold.
As expected the Greek people were tired of the five years of austerity, 26% unemployment and the payback scheme to the E.U. Many have been left homeless and penniless. The toll this all had on society left many angry and perhaps considering ending their association with the E.U. altogether.
The 2015 election of leftist brought forth Alexis Tsipras and his new Syriza party with its populist message of telling the E.U. in not so many words either work with us or we go. But what Tsipras found was the stark reality that Greece was going to be held accountable for repaying the loans and fulfill the countries agreements of reforms. His main adversary Germanys Angela Merkel and Finance Minister Wolfgang Schaeuble were not going to play his game thus leading to an unprecedented financial and social that bordered on chaos. Banks closed, ATMs with no money, capital limits, riots and a closed stock market. And while talks on agreements continued the country eventually Tsipras agreed to a settlement package of sorts that most felt betrayed his original goals of standing up the powers of the E.U. (mainly Germany) and economic improvement for all which really meant abandoning the Euro and going back to the old ways that brought about all of the misery.
Article by Kevin Murphy: www.kevinmurphy.london