Greece has always had a thriving underground economy. The long history of human civilization there and even the geography of the island nation has created long-standing traditions and deep kin relationships that bypass official governmental channels, which leads to a significant percentage of the economic activity happening outside of the purview of the political powers. This is the way many Greeks have lived for hundreds of generations.
It is important to understand this point. The Greek people are no less hardworking than the French or the English, and if the underground economy is included, the per capita economic production of Greece is not that far off of France or Italy (at least until recently when the EU started choking their economy to death). The truth of the matter is Greece never really joined the rest of Europe in reforming and modernizing its economy in the post-war years.
The whys and wherefores of the situation are complex cultural questions, but it boils down to political will… they didn’t want to and they never had to (until now). The overall effect of a huge underground economy is, of course, that a lot of economic activity occurs (money changes hands) without the government taking its share (as no one involved pays any taxes, fee and so forth). The other overall effect is a general cultural belief that it is OK to cheat the system… I mean my neighbor and my brother are making a lot of money and not paying any taxes, so why should I pay mine and just barely get by… ? And, of course, this attitude about the system comes from the top and spreads from parent to child by cultural transmission… and on one level can even be justified by the fact that the politico-economic system is largely “rigged” with politicians and civil servants almost all making very comfortable salaries.
When you couple this socioeconomic situation with two or three generations of self-serving, inept and increasingly bureaucratic political leadership, and you throw in a major international financial crisis and hard-headed creditors with a different cultural perspective who demand you now play by their rules if you want to stay in the EU, then you have created the “Perfect Storm” that is Greece today.
In fairness to the Greeks, it should be mentioned that they are certainly not the only society in the world (or in Southern Europe for that matter) where underground economies have historically flourished and still exist today. Italy, Spain, Portugal, Albania and Serbia (non-exhaustive list) all have large black markets of various sorts, and therefore a great deal of economic activity occurs in the unofficial economy.
Ramifications of a Greek Debt Default
The issue can be reduced to whether the Greek government should accept the austere terms from the EU for yet another major bailout of their debt, or simply default and start over from scratch. But viewing the situation as a simple dichotomy ignores the elephant in the room… that is, what happens to Europe and even the world economy if Greece defaults on some or all of their $375 billion sovereign debt.
Most economists and financial analysts believe (although only a few have said so publicly) that this entire two-year-long dog and pony show with Greece and the EU negotiating bailouts has really been about buying time to build an economic “firewall” to protect the rest of Europe from the fallout of a Greek default. In other words, most reasonably realistic European political (and financial) leaders expect that Greece will default on their debt on some level at some time. The devil, of course, is the details.
The EU has had time to cobble together various mechanisms to constitute the “firewall” they hope to use to insulate the rest of Europe from the fallout of a Greek default, but the mainstay is the $1 trillion European Stability Fund (ESF). With that amount of money, the issue is not covering any losses from a Greek default, but rather what happens to the financial system at large given the systemic shock of a several hundred billion dollar sovereign default.
A few doomsayers predict a “Lehman-like” collapse of the financial system due to the shock of a Greek default, with Italian, Spanish and Irish debt costs spiraling out of control, but most economists now seem to believe the odds of complete default that could possibly produce that kind of systemic disruption are very low, and that a “controlled default” where the various creditors agree to take a haircut is the most likely outcome.
Future of the Greek Economy
The first point to be made is that this whole situation is only partly Greece’s fault. Sure, they racked up the debt, and worse, together with Goldman-Sachs and other Wall Street Crooks, fudged the accounting through out the mid 2000s so it didn’t look so bad, but the reality of Greece’s culture and economy is common knowledge to all and those who loaned them the money did so with this knowledge. Furthermore, as numerous economists and historians have pointed out, Greece and Spain, Portugal and even Italy were essentially forced into the EU before they were ready (in terms of financial and regulatory infrastructure), and other nations like Germany and France profited handsomely from the unequal economic relationship in the first decade or so of the union.
The second point is that the draconian austerity measures the EU is insisting on as part of the bail out guarantee that the Greek economy will be in a severe recession/depression for at least the next 5 to 7 years, and maybe even as long as decade. Given this now inescapable fact, there is absolutely no question that the Greek economy and the Greek people would have been better off defaulting a year or two ago, and yes, leaving the EU. Having control over your own currency is an invaluable tool in dealing with sovereign debt, and if the Greeks had been able to deflate their debt (like we are doing right now) then they would have been able to right their economy much more quickly and the many years of suffering that the Greeks now face would have been significantly reduced.
What a Greek default would have done to the European or international economies in 2009 or 2010 is a completely different story. Truth be told, it would probably have significantly worsened the financial crisis and certainly slowed down the economic recovery that most of the rest of the world is enjoying today. So in that sense we all owe the Greeks a big thanks, and ironically those who owe the Greeks the most of all are the ones who are pushing them off the figurative edge of the cliff.