Around the World: Greece

Editor’s Note: This is the first in a new series called Around the World, in which The Pitt News breaks down world news with the help of local experts to give you the low down on what’s going on internationally. In this first installment, The Pitt News spoke with Pitt history professors Bernard Hagerty and Irina Livezeanu and Pitt economics professor Steven Husted to take a look at Greece’s debt crisis and what it means for the United States.

After 14 years of stability, this summer has pushed Greece into an economic downward spiral. As the crisis unfolds, the chances of a smooth landing seem slight.

In 2001, Greece joined the Eurozone, a partnership of European countries that share one form of currency to increase trade and efficiency. In 2008, the Great Recession, a worldwide economic downturn that caused the U.S. stock market to lose 778 points in one day and had after-effects that took years to recover from, hit both the United States and European countries.

One year later, the Eurozone discovered that Greece had been hiding a tremendous amount of debt, using a falsely circular flow of money to cover up the growing expenses. Now, in 2015, Greece is still struggling to dig its way out.

This summer, it became clear to other members of the Eurozone and the Greek government that Greece would not be able to pay its outstanding debts. To convince European allies to grant Greece debt forgiveness, Greece agreed to make reforms to its economic system, including stricter tax regulations and cutting government spending. After two failed attempts to follow through with its promises, Greece is now working on its third try. But how did the economy get to the staggering point it is at now?

According to Bernard Hagerty, a history professor at Pitt, it started in the early 2000s, when Greece began borrowing money it couldn’t pay back.

In the past, Greece had maintained a frontier similar to a Ponzi scheme, in which it circulated money between new and old investors without ever really paying the entirety of its debt, according to Hagerty. When the worldwide recession hit in 2009, the flow of money slowed, and Greece’s Ponzi scheme came to a screeching halt, revealing just how much debt Greece was in.

When Hagerty visited Greece in 2012 he saw firsthand the devastating state of Greece’s economy.

While visiting Athens, he stopped into a local coffee shop. Observing the linoleum floors, rickety tables, lack of air conditioning and lack of customers, Hagerty struck up conversation with the store owner.

Hagerty said the proprietor told him 20 to 30 people used to come in for a shot of ouzo and a cup of coffee each day. After a while they would only have a cup of coffee, and then they stopped coming at all.

“By 2012 this was all that was left, three or four people nursing one cup of Greek coffee,” Hagerty said.

In attempts to repay the debt, Greece has been in negotiations with the other members of the Eurozone in the hopes of striking a bailout deal. Having agreed to three now, Greece was reluctant to maintain the reforms required by the first two for a deal, which were mainly more austerity measures, including stricter enforcement on taxes and tighter safeguards against corruption.

Hagerty doubts Greece will follow through with these reforms, blaming the governing party, which openly announced that it did not agree with the changes.

“It’s hard to imagine that [the governing party] will expend the energy and make the decisions necessary to make [these reforms] happen,” Hagerty said. “I don’t think they will live up to their agreement. I don’t think they will reform.”

Steven Husted, an economics professor at Pitt, said increasing taxes and other reforms may not be the best solution.

“The problem is that you collect more taxes when the economy is strong,” Husted said. “All of these measures are weakening the economy. The more they try to fix things, the more they are making it harder to meet these obligations.”

In Husted’s opinion, Greece will have to default on its debt soon, which would lead to a neverending cycle.

“For a while they can’t borrow from anybody, and then overtime people forget the past and turn around and start making loans again,” Husted said. “And then they default again.”

In addition to the default, Husted said Greece will most likely have to leave the Eurozone and return to its own form of currency, the drachma.

If Greece were to leave, the remaining countries in the alliance would remain stable, Husted said. However, catastrophe would strike if other countries followed a similar trajectory, a likely path in Husted’s opinion. Several other countries in the Eurozone, including Spain, Portugal and Ireland, are on the edge of facing similar economic crises. If multiple countries were to default and leave the Eurozone, the European economy would be in shambles as a result of too much instability within the countriesmaking trade and economic activity difficult, and the United States would feel the effects, according to Husted.

“The immediate impact [of the dissolution of the Eurozone] is for the economic health of these countries to get even worse,” Husted said. “We do business with these countries so anything that hurts them can come back and hurt us.”

For now though, Husted said the United States’ relationship with Greece is small enough that its economic crisis will have little impact on our economy.

But there are other concerns to focus on as well.

Irina Livezeanu, a history professor at Pitt, said it was important to remember the political effects of this crisis. The strain and disagreement that the situation with Greece’s economy has caused could easily lead to more strain and disagreement with other issues, making tensions run high and decisions hard to make, Livezeanu said.

“It’s a really important crisis and it does have consequences for the United States — even though the economic impact is not a great one,’” Livezeanu said.

For college students and recent graduates in Greece, the effect can be more pronounced. The rise in unemployment rates makes it hard for youth to find jobs and many are moving to other countries in Europe or the United States to find better opportunities.

Hagerty is calling this a “brain drain.” In this scenario, America is one of the lucky spickets to catch the brightest drops.

“Every group that comes over brings something, in this case it’s intellect and skills,” Hagerty said. “It’s the way the U.S. was built, the way we still are. We are fortunate enough to get some of the very best people in our country.”