Why is austerity necessary in Greece

Protocol of the Greek crisis


The government under Georgios Papandreou reveals what no one in the EU institutions in Brussels could imagine, but also no one had controlled: Greece owes 350 billion euros. That corresponds to 160 times the gross domestic product. The budget deficit is 12.7 percent instead of the maximum allowed three percent. In 2009 the German government was still vehemently against aid to Greece.


Greece's economic power is shrinking by five percent. Athens receives its first financial aid package. It amounts to a total of 110 billion euros. Of this, 30 billion euros come from the International Monetary Fund (IMF) and more than eight billion euros from Germany. The Bundestag and Bundesrat passed a law to save Greece in a hurry. Opponents of the aid from Germany fail with their application for rejection before the Federal Constitutional Court. To this end, the heads of state and government of the EU agree in Brussels on a crisis mechanism with a euro protective umbrella (EFSF), the maximum guarantee of which is around 780 billion euros. Germany is liable for a maximum of 211 billion euros.


Papandreou and Merkel after negotiations in Berlin

Greece's situation continues to deteriorate. The economic power drops by around seven percent. Several rating agencies rate the creditworthiness significantly more negative than before. There are violent protests against the austerity measures associated with the financial aid, and three people are killed. A first general strike puts the government under additional pressure. A real estate tax and sales of the last cash reserves are being considered, then a haircut should help. Private creditors should waive half of their claims. 100 billion euros in new loans and 30 billion in additional loan guarantees are decided at special EU summits. Giorgos Papandreou, the Greek Prime Minister and long-time chairman of the social democratic party Pasok, wants to have the austerity measures put to the vote in a referendum, but after protests by the donors, he waives it and resigns from his office. The former Vice President of the European Central Bank, Loucas Papademos, takes over the transitional government.


Greece's economy is down 6.4 percent. The second aid package for the country amounts to 130 billion euros. There is noticeably less approval for this in the German Bundestag. The EU finance ministers are releasing a large part of the new loans and halving the interest rates for the first bailout package. In return, they expect tough austerity measures in Greece. The Greek citizens acknowledge this in the elections by helping the left-wing alliance Syriza and its rejection of the austerity measures with a strong increase in votes to a political second place.

Tsipras is still subject to Samaras in the 2012 elections

The new head of government is Antonis Samaras from the Nea Demokatia party. Observers attest him little willingness to reform. The crisis continues, despite persecution of tax fraudsters and the confiscation of foreign accounts of rich Greeks. Suspicions are growing that Greece will soon go bankrupt and that it will not be the only euro country in financial difficulties. The President of the European Central Bank, Mario Draghi, countered this with the sentence: "We will do everything we can to preserve the euro." This initially calms the financial markets. Draghi worked for three years in London for the investment house Goldman Sachs, which advised the Greek government until 2009.


Demonstrations and strikes accompany the crisis

In Greece, economic power is shrinking by a further 3.9 percent. The debt is 160 percent of what Greece can generate in a year. Unemployment is increasing. More than half of the young people are without a job. The defense against the experts of the donors, the troika made up of the EU Commission, the European Central Bank (ECB) and the International Monetary Fund (IMF), is increasing. The austerity measures are not enough for the inspectors. Critics in Greece portray the German Chancellor Angela Merkel in Nazi uniform because they consider her to be the driving force behind the EU's demands for reform. The resistance is so fierce and the situation so confusing that the EU Troika is postponing a planned test date to next year. The new motto is: "Give Greece more time." The Greek parliament adopts measures against the crisis, including tax increases and the sacking of more than ten thousand civil servants.


The Acropolis as a symbol: Greece is a building site

Finally a glimmer of hope. Greece's economy recorded a small growth of at least 0.6 percent. The Greeks even manage to take out loans on the free capital market for the first time. Prime Minister Antonis Samaras is certain: "We don't need any new aid packages." Around eight billion euros, which were previously blocked, will be paid out from the aid packages that have already been decided. Shortly before the turn of the year, the election of a new president in parliament fails - for Greece this becomes a political turning point.


The left-wing alliance Syriza wins the election on January 25th, which has become necessary. Party leader Alexis Tsipras and his finance minister Janis Varoufakis feel committed to their election promise to defuse the austerity requirements of international donors. But they come up with new problems: Tax revenues are falling. Budget targets are not met. The Tsipras government is following a zigzag course: it initially rejects a haircut and the extension of the aid program. Then she says yes. The terms of the EU: Greece to submit a list of measures to stabilize the financial situation. This led to an ongoing dispute until the negotiations were broken off.

On Tuesday the Greek government had to repay 1.5 billion euros in loans to the ECB. For this she would have needed the seven billion euros from the latest aid package, which according to the latest state of negotiations will no longer be paid out.