From a cheap country to a very expensive one
The Athens Metro system was built in the early 2000s, amid the euphoria of joining the eurozone, heralding that Greece was joining the big time. And it's still an object of awe. Even as rioters crowd central Athens and taxi workers strike, Metro passengers race at 48 mph from the Port of Piraeus to the far suburbs. The cars and platforms are immaculate. Entering the station at Syntagma Square downtown, one gets the calm, ordered feel of a cathedral. Unfortunately, the Metro is just about the only thing left in the country that works.
The problems that befell Greece as a eurozone member resemble those of Italy, Spain, and other weaker economies: a consumption boom that masked big flaws in the economy, a substantial loss of competitiveness, and the madcap government borrowing that created today's crisis. When Greece adopted the euro at the start of 2001, it appeared to reap a gigantic windfall as rates on everything from car loans to mortgages dropped from over 15% in the late 1990s to the mid single digits, in line with those in Germany. The cheap credit ignited an explosion in consumer spending. For the next seven years the economy expanded at a strong annual rate of 4.2%.
But the spending did little to increase Greece's capacity for building durable wealth by selling goods and services to the rest of the world. Instead the euros flowed mostly toward imports of everything from German cars to French TVs. Both the government and private sector rapidly increased wages, helping push inflation well above the average in France and Germany. "Our salaries in Greece doubled in seven or eight years," says Tawfic Khoury, EVP of Consolidated Contractors of Athens, the civil-engineering giant. "Greece went from a cheap to an expensive country very quickly." Greek exports of fish, vegetables, and medical equipment lost ground to products from northern Europe and the Balkans. The big tourism sector was hit especially hard because rising prices made its sun-drenched islands far more expensive than resorts in Turkey or Tunisia.
The high growth rates also blunted any effort to reform the thicket of regulations hurting competition in everything from pharmacies to trucking. And low interest rates encouraged big public spending that first matched, then far exceeded, the growth of the economy. From 2001 to 2008 public employment surged 15%. Tax evasion, always a major problem, became absolutely rampant in the mid-2000s when the Conservative government eliminated the aggressive core of tax collectors known as the "Rambo" contingent. By 2008 public debt surged to over 110% of GDP and kept climbing.
When the credit crisis struck in 2008, Greece's sudden descent from a fast-growing to fast-shrinking economy made it impossible to service that Olympian debt. In May 2010, the "troika" of the International Monetary Fund, European Commission, and European Central Bank essentially agreed to loan Greece the money to keep operating by providing a $160 billion bailout package. It wasn't enough: On July 21, 2011, the troika pledged a similarly sized package to support Greece through mid-2013. By then, the plan prescribes, Greece will implement a draconian list of reforms that will enable it to start paying down debt.
The reform plan has two main parts: radically lowering deficits and elimination of barriers to true free trade. On the former, Greece has shown progress under Prime Minister George Papandreou, lowering its budget deficit from 15.5% in 2009 to 10.4% last year, and aiming for less than 8% in 2011. The toughest part, just as it will be for Italy and Spain, is shedding a maze of rules that strangle competition. So far Greece has been erratic in showing either the will or the skill to get it done.
A case in point is cruise lines. For decades it's been virtually impossible for big carriers such as Princess to begin or end journeys in Greece, since the law requires that they employ at least 20% Greek sailors on their vessels, at extremely high wages. As a result the big lines start and finish in places such as Genoa, Haifa, and Istanbul rather than in Greece. Last year the Greek government passed a law that waived the requirement to hire the Greek sailors but instead demanded the cruise lines sign three-year contracts guaranteeing numbers of cruises and destinations, as well as a big tax going to the Greek sailors' health care and unemployment fund.