Now that the Greek Parliament is eager to beef up the nation’s defense, it faces a serious problem: the economy is so weak it can barely keep its population at a standard of living from 20 years ago.
The Greek tragedy, a sophisticated theatrical tradition from the ancient world, has maintained its influence over performing arts into the modern day. Sadly, in recent years this great Hellenic heritage has been overshadowed by another, far more sinister Greek tragedy.
In a few short years, from 2009 to 2014, the Greek economy imploded. One quarter of all economic activity in Greece vanished. Household earnings, consumer spending, jobs, investments, industrial production, trade… all of it was crippled in a way that normally does not happen to a country in peacetime.
The loss of one quarter of the nation’s economy was directly attributable to a decade’s worth of austerity policies. Today, when Greece is in dire need to rebuild its military, the policies that caused the economic implosion come back to haunt the lawmakers in Athens.
A region plagued by tensions
Tensions are rising in the Eastern Mediterranean. When Israel and the nations on the Arab Peninsula signed the Abraham Accords, things looked different; today, being a stone’s throw from Ukraine does not inspire comfort. The Greeks also face rising tensions with an increasingly aggressive Turkey.
As icing on the conflict cake, Turkey has meddled in the plans for a natural-gas pipeline from Israel to Greece and other European countries. In an apparent move to appease President Erdogan, the Biden administration has cancelled U.S. financial support for the EastMed Pipeline project.
The Biden administration, which falsely tried to claim no such commitment existed, has been heavily criticized by members of Congress for its pull-out of the project. It is not difficult to see how this has affected relations between Greece and Turkey, especially since President Biden appears to have acted out of abject fear of displeasing the Turkish president.
One can only hope that the Biden administration’s desire for comfortable relations with Ankara have not led to heightened tensions in the Eastern Mediterranean. Nevertheless, given the level of conflict and tensions in the region, it is perfectly reasonable of Athens to want to modernize its military.
There is also another reason for this, independent of the present geo-strategic situation. The plans for a stronger, more modern Hellenic navy and air force come on the heels of years of decline in the nation’s defense budget. The appropriations for 2019, €3.6 billion, were the lowest since at least 2003. While the 2020 budget was €600 million better, Greece is still a far cry from the €6-8 billion they spent annually on their military in 2007-10.
From 2009, the height of the defense budget, to 2013 the Hellenic armed forces lost half their funding.
There is a sinister story behind this fiscal butchering of the Greek military. It is a story that serves as a precipitous lesson for other countries—including but not limited to the United States. The lesson it teaches us is one of how a country afforded itself a large, socialist welfare state, larger and more costly than a modern, industrialized nation could afford, which then brought that very country to its knees.
The Greek economy implodes
This modern Greek tragedy is not a play. It is a real economic collapse the likes of which Europe has not seen since the Weimar Republic. In its wake, Greece lost not only its future, but very likely its ability to effectively fund its military.
As mentioned, the story begins in the last century, the heydays of socialist welfare-state expansion. Leading politicians in Greece wanted nothing less than what other European countries had. Inspired in no small part by the Swedish socialist transformation in the 1940s and 1950s, the Greeks began expanding their government in the 1960s. As Dan Mitchell reports for Center for Freedom and Prosperity, they continued for the next two decades until economic redistribution dominated the Greek government’s outlays.
According to Eurostat, by the turn of the millennium, total spending by the Greek government exceeded 45% of gross domestic product, GDP, and by 2008 that share topped 50%.*
When the Great Recession started in late 2008, Greece followed the world into a deep slump. Consequently, tax collections tanked: from 2008 to 2014 total government revenue fell by 15.2%.
During this period, GDP declined by a catastrophic 25%.
The only reason why tax revenue did not decline as much as the economy did, is a series of economically destructive tax increases. In response to a huge budget deficit, the Greek government raised taxes on everything in the economy that still showed signs of life. The result was one of the largest, most rapid increases in a country’s tax burden:
In 2009, total taxes equaled 39% of GDP;
By 2016, taxes consumed half the Greek economy.
It does not take a degree in economics to understand just how destructive these tax increases were—especially in the middle of a deep recession. The figure below reports GDP in Greece, in current prices; the black line marks GDP for 2021. This is the image of a man-made disaster; today, the Greeks live with an economy that is just a hair bigger than it was in 2003:
Source: Eurostat
Crippling tax hikes
This modern Greek, man-made tragedy emerged from an ideological will to create a large, burdensome structure for economic redistribution. As the welfare state matured, it not only imposed an impossible cost on the economy in the form of taxes, but it also mandated a redesign of large sectors in the image of its socialist architecture.
Health care, education, economic security, retirement benefits… they were all provided not by the private sector, but by government. As a result, those sectors were removed from the free-market economy, and resources were allocated based on central economic planning. This planning introduced inefficiencies and waste on a broad scale; in combination with high taxes, the planning of up to half the economy had its inevitable end point: fiscal insolvency.
Greek governments over the 20 years preceding the Great Recession kept feeding the welfare state with tax revenue. When taxes became intolerable, they did not cut spending. They ran deficits which inevitably became permanent. (Hello, Washington?) These deficits accumulated into a sizable government debt, which by the time the Great Recession emerged in late 2008, exceeded 109% of GDP.
The deficit that year reached an alarming 10.2% of GDP. The following year, 2009, a fiscal chasm opened up in Athens. The deficit exceeded 15% of GDP while the debt ran past 126%.
At this point, the sovereign-debt market began expressing doubts about Greek credit worthiness. In October of 2009, the interest rate on a 10-year Greek treasury security stood at 4.5%, a normal level at the time. Four months later, in February 2010, it had increased past 6%.
Then the genie got out of the bottle. By July 2010, lenders demanded more than 10% to buy Greek debt; a year later the rate exceeded 16%.
By February 2012, the Greek government had to pay a bone-crushing 29% in annual interest on its 10-year security, to motivate anyone to buy it.
It was in response to its collapsing credit status that the parliament in Athens drastically raised taxes. They also made big spending cuts. From 2009 to 2014, total outlays on unemployment benefits were cut by 43.5%—at a time when unemployment was skyrocketing. Health care spending dropped by almost 46%, the budget for disability benefits was cut by 18% and general family benefits by 15%.
Housing benefits, mostly for the elderly, were cut by 99%.
Outside the welfare state, defense spending took a hard beating. As mentioned, half the military budget vanished in four short years.
The goal of this crippling austerity policy was to close the government’s budget gap. This policy, reinforced by demands (and loan promises) from the European Union, the European Central Bank and the International Monetary Fund, remained in place even as the Greek people suffered economic and social hardship at levels unheard of in Western Europe since the Weimar years.
Perennial stagnation
Closing the budget gap was, in turn, imperative if the Greek government was to save anything of its welfare state. Yet doing so meant sending the nation off into perennial economic stagnation. Instead of reforming away an economic structure that was bringing the Greek economy to its knees, the political leadership decided to cripple the economy and save what they could of their programs for economic redistribution.
By 2016, they managed to balance their budget, but by that time they had raised taxes and turned so much of the economy into a wasteland that no real recovery took place. In 2016-2019, the period between the balancing of the budget and the 2020 artificial economic shutdown, average GDP growth in Greece was 1% per year (adjusted for inflation).
This growth rate is, of course, better than the -4.2% annual average from 2009 through 2015. However, as I explain in Industrial Poverty, a real growth rate of 1% per year does not even maintain a nation’s overall standard of living. Plainly speaking, even as the austerity era is over, Greece is slowly bleeding itself into perennial poverty.
The country is also losing its future. From 2013 through 2019, Greece lost 28,800 young workers aged 18-25. This is equal to 2.6% of the youth workforce, but it is also a net number, i.e., it likely conceals the fact that young Greeks with a college degree leave the country while being replaced with immigrants with little or no education.
The young Greek workforce declined by 77,000 from 2013 to 2019. During the same period of time, the number who had a job actually increased from 132,000 to 154,000. At the same time, this group’s unemployment declined from its height at almost 60%. In 2019, i.e., excluding the effects of the artificial economic shutdown, 37.4% of the young workforce in Greece were involuntarily unemployed.
This amounts to a reduction in unemployment by 99,000, which is 4.5 times more than the increase in employment over the same period of time. Where did the excess number go? Emigration.
Now that the Greek Parliament is eager to beef up the nation’s defense, it faces a serious problem: the economy that is supposed to fund a larger military is so weak it can barely keep its population at a standard of living from 20 years ago.
The migration patterns compound this problem. When young professionals with a college degree leave the country and are replaced with workers whose skills may not even match the workforce average, the demographic of the country shifts from tax-paying productivity to increased consumption of welfare-state benefits.
Over time, this shift perpetuates the fiscal problems that caused the austerity-driven destruction of one quarter of the Greek economy. Therefore, if the government in Greece wants to improve its ability to defend itself, its first order of business must be to drastically reform the very structure of its economy. The parliament must dare to part with economic redistribution as the overarching purpose of government; they must chart a course to lower taxes, less regulations, and economic growth by the traditional means that made Europe rich: free-market capitalism.
The choice is simple: socialism or national defense. There is no compromise.
Sven R Larson, Ph.D., is an economics writer for the European Conservative, where he publishes regular analyses of the European and American economies. He has worked as a staff economist for think tanks and as an advisor to political campaigns. He is the author of several academic papers and books. His writings concentrate on the welfare state, how it causes economic stagnation, and the reforms needed to reduce the negative impact of big government. On Twitter, he is @S_R_Larson
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The Story of a Macroeconomic Massacre
The Greek tragedy, a sophisticated theatrical tradition from the ancient world, has maintained its influence over performing arts into the modern day. Sadly, in recent years this great Hellenic heritage has been overshadowed by another, far more sinister Greek tragedy.
In a few short years, from 2009 to 2014, the Greek economy imploded. One quarter of all economic activity in Greece vanished. Household earnings, consumer spending, jobs, investments, industrial production, trade… all of it was crippled in a way that normally does not happen to a country in peacetime.
The loss of one quarter of the nation’s economy was directly attributable to a decade’s worth of austerity policies. Today, when Greece is in dire need to rebuild its military, the policies that caused the economic implosion come back to haunt the lawmakers in Athens.
A region plagued by tensions
Tensions are rising in the Eastern Mediterranean. When Israel and the nations on the Arab Peninsula signed the Abraham Accords, things looked different; today, being a stone’s throw from Ukraine does not inspire comfort. The Greeks also face rising tensions with an increasingly aggressive Turkey.
In response, the Greek Parliament has approved a plan for what Al-Jazeera calls “the country’s biggest naval modernisation in 20 years.” The plan includes French-built warships and U.S. military technology. Greece is also beefing up its air force with new French Rafale jet fighters.
As icing on the conflict cake, Turkey has meddled in the plans for a natural-gas pipeline from Israel to Greece and other European countries. In an apparent move to appease President Erdogan, the Biden administration has cancelled U.S. financial support for the EastMed Pipeline project.
The Biden administration, which falsely tried to claim no such commitment existed, has been heavily criticized by members of Congress for its pull-out of the project. It is not difficult to see how this has affected relations between Greece and Turkey, especially since President Biden appears to have acted out of abject fear of displeasing the Turkish president.
One can only hope that the Biden administration’s desire for comfortable relations with Ankara have not led to heightened tensions in the Eastern Mediterranean. Nevertheless, given the level of conflict and tensions in the region, it is perfectly reasonable of Athens to want to modernize its military.
There is also another reason for this, independent of the present geo-strategic situation. The plans for a stronger, more modern Hellenic navy and air force come on the heels of years of decline in the nation’s defense budget. The appropriations for 2019, €3.6 billion, were the lowest since at least 2003. While the 2020 budget was €600 million better, Greece is still a far cry from the €6-8 billion they spent annually on their military in 2007-10.
From 2009, the height of the defense budget, to 2013 the Hellenic armed forces lost half their funding.
There is a sinister story behind this fiscal butchering of the Greek military. It is a story that serves as a precipitous lesson for other countries—including but not limited to the United States. The lesson it teaches us is one of how a country afforded itself a large, socialist welfare state, larger and more costly than a modern, industrialized nation could afford, which then brought that very country to its knees.
The Greek economy implodes
This modern Greek tragedy is not a play. It is a real economic collapse the likes of which Europe has not seen since the Weimar Republic. In its wake, Greece lost not only its future, but very likely its ability to effectively fund its military.
As mentioned, the story begins in the last century, the heydays of socialist welfare-state expansion. Leading politicians in Greece wanted nothing less than what other European countries had. Inspired in no small part by the Swedish socialist transformation in the 1940s and 1950s, the Greeks began expanding their government in the 1960s. As Dan Mitchell reports for Center for Freedom and Prosperity, they continued for the next two decades until economic redistribution dominated the Greek government’s outlays.
According to Eurostat, by the turn of the millennium, total spending by the Greek government exceeded 45% of gross domestic product, GDP, and by 2008 that share topped 50%.*
When the Great Recession started in late 2008, Greece followed the world into a deep slump. Consequently, tax collections tanked: from 2008 to 2014 total government revenue fell by 15.2%.
During this period, GDP declined by a catastrophic 25%.
The only reason why tax revenue did not decline as much as the economy did, is a series of economically destructive tax increases. In response to a huge budget deficit, the Greek government raised taxes on everything in the economy that still showed signs of life. The result was one of the largest, most rapid increases in a country’s tax burden:
It does not take a degree in economics to understand just how destructive these tax increases were—especially in the middle of a deep recession. The figure below reports GDP in Greece, in current prices; the black line marks GDP for 2021. This is the image of a man-made disaster; today, the Greeks live with an economy that is just a hair bigger than it was in 2003:
Crippling tax hikes
This modern Greek, man-made tragedy emerged from an ideological will to create a large, burdensome structure for economic redistribution. As the welfare state matured, it not only imposed an impossible cost on the economy in the form of taxes, but it also mandated a redesign of large sectors in the image of its socialist architecture.
Health care, education, economic security, retirement benefits… they were all provided not by the private sector, but by government. As a result, those sectors were removed from the free-market economy, and resources were allocated based on central economic planning. This planning introduced inefficiencies and waste on a broad scale; in combination with high taxes, the planning of up to half the economy had its inevitable end point: fiscal insolvency.
Greek governments over the 20 years preceding the Great Recession kept feeding the welfare state with tax revenue. When taxes became intolerable, they did not cut spending. They ran deficits which inevitably became permanent. (Hello, Washington?) These deficits accumulated into a sizable government debt, which by the time the Great Recession emerged in late 2008, exceeded 109% of GDP.
The deficit that year reached an alarming 10.2% of GDP. The following year, 2009, a fiscal chasm opened up in Athens. The deficit exceeded 15% of GDP while the debt ran past 126%.
At this point, the sovereign-debt market began expressing doubts about Greek credit worthiness. In October of 2009, the interest rate on a 10-year Greek treasury security stood at 4.5%, a normal level at the time. Four months later, in February 2010, it had increased past 6%.
Then the genie got out of the bottle. By July 2010, lenders demanded more than 10% to buy Greek debt; a year later the rate exceeded 16%.
By February 2012, the Greek government had to pay a bone-crushing 29% in annual interest on its 10-year security, to motivate anyone to buy it.
It was in response to its collapsing credit status that the parliament in Athens drastically raised taxes. They also made big spending cuts. From 2009 to 2014, total outlays on unemployment benefits were cut by 43.5%—at a time when unemployment was skyrocketing. Health care spending dropped by almost 46%, the budget for disability benefits was cut by 18% and general family benefits by 15%.
Housing benefits, mostly for the elderly, were cut by 99%.
Outside the welfare state, defense spending took a hard beating. As mentioned, half the military budget vanished in four short years.
The goal of this crippling austerity policy was to close the government’s budget gap. This policy, reinforced by demands (and loan promises) from the European Union, the European Central Bank and the International Monetary Fund, remained in place even as the Greek people suffered economic and social hardship at levels unheard of in Western Europe since the Weimar years.
Perennial stagnation
Closing the budget gap was, in turn, imperative if the Greek government was to save anything of its welfare state. Yet doing so meant sending the nation off into perennial economic stagnation. Instead of reforming away an economic structure that was bringing the Greek economy to its knees, the political leadership decided to cripple the economy and save what they could of their programs for economic redistribution.
By 2016, they managed to balance their budget, but by that time they had raised taxes and turned so much of the economy into a wasteland that no real recovery took place. In 2016-2019, the period between the balancing of the budget and the 2020 artificial economic shutdown, average GDP growth in Greece was 1% per year (adjusted for inflation).
This growth rate is, of course, better than the -4.2% annual average from 2009 through 2015. However, as I explain in Industrial Poverty, a real growth rate of 1% per year does not even maintain a nation’s overall standard of living. Plainly speaking, even as the austerity era is over, Greece is slowly bleeding itself into perennial poverty.
The country is also losing its future. From 2013 through 2019, Greece lost 28,800 young workers aged 18-25. This is equal to 2.6% of the youth workforce, but it is also a net number, i.e., it likely conceals the fact that young Greeks with a college degree leave the country while being replaced with immigrants with little or no education.
The young Greek workforce declined by 77,000 from 2013 to 2019. During the same period of time, the number who had a job actually increased from 132,000 to 154,000. At the same time, this group’s unemployment declined from its height at almost 60%. In 2019, i.e., excluding the effects of the artificial economic shutdown, 37.4% of the young workforce in Greece were involuntarily unemployed.
This amounts to a reduction in unemployment by 99,000, which is 4.5 times more than the increase in employment over the same period of time. Where did the excess number go? Emigration.
Now that the Greek Parliament is eager to beef up the nation’s defense, it faces a serious problem: the economy that is supposed to fund a larger military is so weak it can barely keep its population at a standard of living from 20 years ago.
The migration patterns compound this problem. When young professionals with a college degree leave the country and are replaced with workers whose skills may not even match the workforce average, the demographic of the country shifts from tax-paying productivity to increased consumption of welfare-state benefits.
Over time, this shift perpetuates the fiscal problems that caused the austerity-driven destruction of one quarter of the Greek economy. Therefore, if the government in Greece wants to improve its ability to defend itself, its first order of business must be to drastically reform the very structure of its economy. The parliament must dare to part with economic redistribution as the overarching purpose of government; they must chart a course to lower taxes, less regulations, and economic growth by the traditional means that made Europe rich: free-market capitalism.
The choice is simple: socialism or national defense. There is no compromise.
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