By Eric Vandenbroeck and co-workers
Greece is no stranger to economic crises such
as the current one. The country has been in debt since its independence and has
gone through a cycle of borrowing and defaulting numerous times. Foreign powers
have always had an interest in maintaining Greece’s stability, so previously
they always agreed to refinance its debts. The only new factor in Greece’s
ongoing crisis is that the country is not as strategically important to
outsiders as it was before the end of the Cold War, so foreign governments are
not as interested in loaning Athens money.
Greece has been in debt since its war for
independence from the Ottoman Empire in the 1820s, which means international
creditors and foreign sponsors have played a role in Greek finances, politics
and economic development since then. Even though Greece has failed to achieve
the expected gains from the reforms its Western creditors have demanded it make
in order to pay back its loans, foreign powers have always had a strategic need
for Greece and have thus refinanced or forgiven its debts despite numerous
defaults.
Indebted
from the Start
The modern state of Greece was born after 11
years of fighting against the Ottoman Empire (from 1821-1832). However, it was
not until Western intervention in 1827 that the conflict turned decidedly in
Greece’s favor. The war had disrupted commerce in the Eastern Mediterranean,
and France and the United Kingdom were concerned that a power vacuum in the
region would give the Russian Empire an opportunity to expand and gain direct
access to the Mediterranean. They thus sought to balance any expansion of
Russian power by positioning themselves strongly in a newly independent Greek
states. When Greece finally achieved its independence, it was these three Great
Powers — France, the United Kingdom and Russia — that negotiated the terms of
that independence.
Despite the nationalist origins of the Greek
conflict, the Treaty of Constantinople — negotiated by the Great Powers in 1832
— declared the Kingdom of Greece an absolute monarchy and appointed a Bavarian
prince, Otto, as monarch. Since the 17-year-old Prince Otto was a minor when he
was named monarch, a council of regents consisting of three Bavarian advisers
who came to be known as the “Troika” — incidentally, the same term used for the
International Monetary Fund (IMF), European Central Bank and European Union
officials today — were appointed to rule in Otto’s name. One member of the
Troika was particularly instrumental in establishing the framework for the new
country: former Bavarian Finance Minister Josef Ludwig von Armansperg,
who ultimately was appointed prime minister of Greece when Otto assumed the
throne.
During the fight against the Ottomans, Greece
accumulated a large external debt — a debt on which it defaulted in 1826,
greatly restricting the new country’s ability to access international credit.
The United Kingdom, France and Russia agreed to loan the new country 600
million francs. As a condition of the loan, the three countries maintained
diplomatic representatives in Athens who were heavily involved in the creation
and oversight of the Greek government. The Great Powers wanted to see immediate
returns on their loans after the new country began taking shape. However, the
only immediate source of internal revenue for Greece was agriculture. Loans
were given to farmers to expand cultivation on land that was nationalized after
the war. The financing terms of the state loans, which required a 3 percent
down payment in cash, combined with an immediate and heavy tithe on the lands’
production, forced most agriculture laborers to borrow from the few private
individuals who had access to large amounts of capital — mostly the wealthy
members of the Greek diaspora and the merchant class. This created a cycle of
debt wherein the state’s attempts to pay off its international debt resulted in
an increasingly indebted population.
The
Cycle Continues
Greece’s economic growth stalled altogether
in the 1870s. The country’s limited success at servicing its external debt
continued to prohibit it from accessing international credit markets and
threatened to spark an income crisis for the state. However, Greece’s strategic
importance again prompted Western intervention to stave off a financial crisis
for another couple of decades. The accelerated decline of the Ottoman Empire
and the emerging power vacuum in the newly independent Balkans drew the
attention of the Western European powers hoping to use their relationship with
and influence over Greece to counter the expansion of Russian or
Austro-Hungarian power in the region. Immediately after the 1878 Berlin
Congress, the United Kingdom, France and Germany wanted Greece to increase its
military development and become a stronger force in the Balkans. The three
countries agreed to act as intermediaries between the Greek state and foreign
creditors to facilitate additional international loans and successfully
negotiated several large foreign loans for the country. Greece used some of the
credit for defense spending but also built a large public debt that went
primarily toward servicing its pre-existing debt. Then, in 1893, Greece
defaulted.
Athens had too little political authority at
home or abroad to negotiate on its debt and thus had to surrender its economic
development and fiscal authority to an International Financial Control
Committee run by representatives of foreign bondholders — the United Kingdom,
France, Germany, Italy, Russia and Austria-Hungary — which imposed strict
fiscal discipline. This committee administered Greece’s monetary and fiscal
policy for the first decades of the 20th century. Under this
supervision, Athens made progress in rationalizing its budget, reforming its
banking system and making other changes.
However, despite this progress, little
structural economic growth occurred over this period; the institutors of the
reforms were more concerned with recouping payment on their loans than with
developing Greece’s economy. Very little money was used to invest in the
development of badly needed infrastructure, such as roads, that would connect
the cereal-producing regions of continental Greece with the domestic markets of
the populous coastal cities. Despite the annexation of Thessaly in 1881, which
provided Greece with enough cereal production to be self-sufficient in wheat,
the country remained a net importer of wheat until after World War II because
it was far cheaper for coastal populations to import the grain from foreign
producers in the Mediterranean basin.
The combined effects of the First and Second
Balkan Wars, World War I, the Greco-Turkish War and the Great Depression were
too much for the Greek economy. Additionally, the International Financial
Control Committee’s authority weakened greatly after the outbreak of World War
I, as representatives from both Allied and Central Powers were tasked with
administrating the committee. Greece defaulted again in 1932.
By the end of World War II, Greece, along
with its European sponsors, was in economic ruins. In March 1947, the United
Kingdom had to end the financial assistance it had provided Greece in varying
degrees since the 1820s. However, the Communist insurgency that engulfed Greece
immediately after World War II once again presented the threat of Russia (now
the Soviet Union) controlling strategic points in the Eastern Mediterranean.
This made Greece strategically critical to the single remaining Western
superpower: the United States, whose military and economic aid to Greece during
the Cold War prevented Communist forces from gaining influence in the country.
In 1981, Greece became the 10th member of the European Economic
Community (the predecessor of the European Union). After this, Greece received
large loans and subsidies from the European bloc in addition to aid from the
United States. Nonetheless, by the early 1990s, Greece’s lack of economic
growth and massive budge t deficit led the IMF and European Commission to
supervise the country’s finances.
A
Familiar Position for Athens
Greece’s current problems — a large external
debt, high defense expenditures, a political system entrenched by its ability
to provide its supporters with continual patronage, a capital-poor and
import-dependent economy, an ineffective tax collection system, exclusion from
international credit markets and the forfeiture of its fiscal sovereignty to
external creditors — are problems Greece has faced throughout its modern
existence. It has been in major powers’ strategic interest to ensure Greece’s
stability since its independence from the Ottoman Empire, but it seems that
nearly 200 years of international interest in developing the Greek economy has
not done much to change Greece’s circumstances.
For updates click hompage here