Undermining the euro zone was not George Papandreou’s intention when Greek voters elected him to be Prime Minister. Yet soon he adopted a ‘united we stand, divided we fall’ motto, and responsible reaction to the Greek debt crisis is now a question of self preservation for the entire euro currency group.
Here are the mechanics of Greece’s predicament:
Over time, its national budget spending versus income produced a 12.7 percent imbalance.
The debt that accumulated now means the country owes far more than it is earning: 113 percent of its gross domestic product (GDP).
With euro zone entry, Greece celebrated modernity.
Yet the conservative predecessors of the Papandreou government were less than strict in keeping track of costs. Today, the national deficit is more than four times the level accepted in the European Union Stability and Growth Pact as sustainable, and the debt is near double the limit set in the fiscal pact.
Paying back what has been borrowed requires more borrowing. For this, a government issues bonds — promises to return original investment, plus an agreed-upon level of interest. Banks, pension funds and insurance companies buy the lion’s share of these bonds.
These bonds are also traded, with credit rating companies playing a lead role in evaluating borrowers’ ability to repay their debts. How the borrower behaved in the past — the credit history — plays a large part in establishing credit worthiness, and Greece had to struggle to meet the euro membership criteria when it ditched the drachma a decade ago.
If a country falters with its regular debt interest payments, it gets even harder to borrow, players speculate on failure, and the risk of default — bankruptcy — increases. With this comes a potential for heavy impact on other euro members facing similar weakness.
Main actors on the European stage Germany and France have said they will make sure Greece is not isolated. Yet in spite of Athens’ determination to go straight, public opinion against handouts — notably on the part of the Germans — complicates plans to support the Greeks.
Their Socialist government’s austerity plan includes, on the spending side, a freeze on public sector salaries and raising the retirement age.
On the income side, an increase in taxes is to be introduce, albeit in a country where tax evasion has proved notoriously challenging to eradicate.
As Greece more and more turns into a social-fiscal battle zone, people who have grown used to robust public spending in the past appear now to be facing a future where — under austerity measures — they will be forced to adopt a more Spartan philosophy.