Where does the Greek debt come from? Part 2/3: European roots

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Where does the Greek debt come from? Part 2/3: European roots

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Greece’s debt has been a concern for the European Union since 2009. Little by little, attention was drawn away from the first countries within the euro zone to have austerity measures imposed – Ireland, Spain and Portugal – and eventually, the focus came to rest on Greece. But where does its debt come from?

European roots

Precrisis beginnings (2008)

  • Undertaken to integrate Europe and signed in 1992, the Maastricht Treaty established budgetary criteria for the Economic and Monetary Union (EMU). One of the obligations of the treaty was for members to keep “sound fiscal policies, with debt limited to 60% of GDP and annual deficits no greater than 3% of GDP.”
  • The Maastricht Treaty prohibits Member States to borrow from the central bank or the European Central Bank (ECB), (Article 104); States are therefore obliged to obtain financing from private banks. These banks borrow from the European Central Bank at very low rates and lend at much higher rates. These rates are usually calculated from the states’ credit ratings established by private rating agencies. The lower the credit rating, the lower the confidence the creditors will have in the country, and the higher the rate. Member States borrow from banks throughout Europe.
  • The Lisbon Treaty, signed in 2007, contains this provision (Article 123). It also prohibits solidarity between Member States in case of default (Article 135). The international agreement amends the Maastricht Treaty and the Treaty of Rome which form the constitutional basis of the European Union (EU).

The Greek debt crisis explained

Weak economic policy

  • Before the 2008 crisis there was no common economic policy in the euro zone. The ECB was not permitted, for example, to devalue the euro, something that has long allowed States to adapt and respond to the economy. With the crisis, the euro area has been forced to revise this economic governance. In 2010 the ECB was authorised to purchase debt securities of States.
  • There is no political common ground in terms of tax policy, public investment or financial market regulation.
  • In 2012, the European Stability Mechanism (ESM) was created and replaced, in part, the European Financial Stability Facility (FESF) and the European Financial Stability Mechanism (EFSM), which had been launched in urgency during the 2008 crisis. The ESM may provide loans to States or allow the recapitalisation of banks at lower rates than financial markets. It may also buy bonds of beneficiary Member States and require the enforcement of austerity policies and economic measures, as was the case for Greece in 2010.

> Read the third part: Where does the Greek debt come from? The crisis of 2008 (Part 3/3)

By Marie Jamet