Joining the eurozone was seen as a miraculous solution to all the economic problems the country had faced so far. Therefore, any way of achieving this goal, including manipulating economic statistics, was perfectly justified. With a debt of over 100% of GDP and a budget deficit of over 3%, Greece would have had no chance of joining the eurozone, which is why, with the support of Goldman Sachs, it “concealed” part of its external debt, while the budget deficit was underestimated. Once in the eurozone, the path to cheap financing for the traditional budget excesses and economic laxity was open.
The moment of truth came with the 2008 crisis when financing costs exploded, making Greece’s external debt unfundable. Greece’s economic statistics were recalculated correctly under external pressure, showing a disastrous picture. The external debt had to be restructured from the ground up. An international financial assistance package was offered along with partial cancellation and rescheduling of Greece’s debt, but conditional on an economic restructuring program. This consisted of drastic spending cuts to a budget that was totally unbalanced due to an oversized state apparatus and low tax collection. Pensions were cut and 25,000 civil servants were laid off.
Popular anger at its peak created the wave that brought a populist, far-left party, Syriza, to power. After having around 5% electoral support before the crisis, the virulent political discourse against the European Union, Germany and the IMF, promises to default on foreign debt and resume public spending were all the Greek electorate wanted to hear. And Syriza came to power and the party’s president, a vocal critic of all previous economic arrangements, was appointed Prime Minister. It was finally time to implement all the measures he had promised while in the opposition.
Default and exit from the eurozone were no longer complete fantasy. The moment to flex his muscles in the face of European leaders, sovereign and institutional creditors, and “external enemies” plotting against Greece had come. And Syriza’s referendum on a new austerity program provided support for Greek Prime Minister Alexis Tsipras’s policy of frondism. (What a surprise…)
But Greece is on the brink of the abyss. It was already the first developed country to miss a payment to the IMF, the European Central Bank was limiting its credit lines to Greek banks, depositors could only withdraw limited amounts from banks. Greece was on the verge of economic collapse and the populist rhetoric from the opposition no longer matched the harsh economic reality of a country on the edge of bankruptcy.
Exposing in all its splendor the political hypocrisy of Syriza, which held the referendum against reforms despite European leaders’ request not to do so, the parliament decided just days later to ignore the referendum result and continue the austerity program to obtain a new financial package. All the populist rhetoric from the opposition and from the first months of the government was worthless. Syriza was turning, tail between its legs, back to economic rigour.
In 2008, the Romanian economy was “booming” accompanied by the explosion of the external deficit, Romania’s eternal problem. Sustained economic growth that had reached 9% gave wings to populist policies that were boosted by the approaching parliamentary elections. The budget deficit had reached 5.4%, an unprecedented level, despite solid economic growth. Pro-cyclical fiscal policies were promoted with the pedal to the metal. In 2007 alone, pensions had risen by 32%, and spending on budget wages had gone up from 6.3% of GDP in 2006 to 8.5% in 2008. The upcoming parliamentary elections had to be prepared…
And then the crisis hit, halting the economy, collapsing budget revenues and throwing the budget deficit to an improbable 9%. But what had been given away freely (and recklessly) could not be taken back. And with no one lending to anyone else, with the deficit financing lines blocked, Romania had no choice but to knock on the EU and IMF’s door. Economic rigour was returning, and the imbalances between spending and budget revenues had to be eliminated. A government of sacrifice followed.
Turkish President Recep Tayyip Erdogan stunned the economist world with his fanciful monetary policies. According to his own economic theory, high interest rates are the cause of high inflation. As a result, the Central Bank of Turkey has been ordered (forget independence…) to cut the reference rate in order to … lower inflation. The interest rate fell in just two years from 19% to 8.5%. During the same period, inflation in Turkey reached 85%, a 24-year high. In just three years, the lira has depreciated by 64% and, according to the Financial Times, in 2023 alone the central bank spent $23 billion of reserves to prop up the lira despite a growing external deficit. Elections were approaching…
The election gifts only exacerbated the economic problems, but secured President Erdogan victory, albeit a narrow one. But even for him it has become clear that Turkey’s economic situation is not sustainable, which is why he seems to be returning to economic rigour. The prospect of orthodox economic policies this time seems to be suggested by the appointment of professionals to the positions of central bank governor and finance minister, instead of just obedient civil servants.
In an unprecedented statement, Erdogan agreed that “based on the thinking of our treasury and finance minister, we have accepted that he will take quick, comfortable action with the central bank.” If indeed the president won’t interfere, the central bank should at least double the interest rate quickly to bring inflation under control and stem capital flight from the country. But the whole process of stabilising Turkey’s economy is hampered by the strong distrust that investors have in the Erdogan regime’s economic decisions. For now, however, economic rigour seems to have been restored.
Populism is an extremely attractive drug for both politicians and voters. The problem is that, just as you cannot live as an individual by constantly spending more than you earn, neither can you as a government provide a medium-term standard of living that the country’s economy cannot sustain. Moral or political justification, unfortunately, is irrelevant in the absence of creating sustainable economic resources. Living on debt will inevitably lead you into a tailspin, both as an individual and as a country. Curbing illusions and returning to economic rigour will be inevitable. The only uncertainty will be whether the landing will be soft or hard.
Have a nice weekend!
