The Greek Crisis Explained

06/22/2015 05:21 am ET | Updated Jun 22, 2016

Analyzing the ongoing drama, tragedy or comedy about Greece, five observations stand out as the crucial ones among the smokes obscuring what actually is happening on the stage.

The first one is that Greece has done extremely well out of its EU-membership.

Greece joined the EU in 1980 with a Gross Domestic Product (GDP) per capita approximately 53 percent of Germany's. In 2008 before the financial crisis struck the ratio had risen to approx. 66 percent to fall somewhat below 50 percent in 2014. This comparison does not flatter Greece, but recall that we compare to Germany where many countries would have done worse. From 1980 to 2014 the annual real average growth rate of GDP per capita was a little bit above 1 percent - respectable albeit not fantastic.

Since 1980 Greece has received EU funds under various programs to the tune of Euro 200 bn equivalent to 100 percent of its GDP in 2013. For that year total net spending in Greece financed via the EU spending (Regional Fund, Social fund and similar funds) was just above 3 percent of GDP.

Note that this transfer of funds does not include financial assistance since the outbreak of the financial crisis, but covers investment and support for economic activities such as infrastructure. It is by any yardstick a colossal effort to help a country in the name of European solidarity. A similar effort is planned for 2014- 2020 under the auspices of EU's structural funds.

The second one is that Greece has for decades deliberately pursued an unsustainable economy with perennial overspending compared to revenue hidden by diligent efforts to cook the books helped by some private global financial institutions; this deception of its allies, partner, and creditors was unmasked by the financial crisis.

Sovereign debt as share of GDP has continued to go up and is currently about 175 percent of GDP. Diagnosing the economy it is not difficult to understand why Greece has never managed to build a productive base for the economy. The service sector (mainly shipping and tourism) accounts for 80 percent of GDP with manufacturing coming in second with 16 percent and agriculture third with 4 percent. An employment base has never been created despite the country moving into the rank of modernized and developed nations. To compensate for this gap employment has been offered in the public sector gobbling up more and more people contributing less and less to the economy.

This became a vicious circle as expenditure cuts inevitably hit the public sector, which meant public employees being fired. They constituted a large share of the electorate and resisted vociferously such cuts exercising considerable political leverage.

The Greek economy became designed around a model requiring borrowing at an annual rate of up to 10 percent of GDP - otherwise it would collapse. It worked for a while, but sooner or later creditors grasped the hole they dug for themselves and stopped lending.

The third one is that the main problem is not about the debt level, but turning the Greek economy into a viable and sustainable economy able to function without constant blood transfusion.

Nobody expects Greece to repay its debt. It has for a long time been incorporated in behavior and financial planning that this would be absurd. It is therefore a misunderstanding when the crisis is sometimes represented as creditors forcing Greece into impossible austerity. It is not at all about that.

It is about getting Greece to change its economic model from the existing one dependent on heavy borrowing year after year to a model where revenues and expenditures broadly speaking match each other. If such guarantees cannot be obtained and so far the Greek government has not conceded - indeed chosen a boisterous rejection - it makes no sense to enter into an agreement with Greece. It would only throw good money after bad money as Greece would continue to ask for loans, maybe even feel it had the right to do so.

Unless Greece is willing to restructure its economy implementing policy objectives and instruments used by the majority of the EU member countries why should the Eurozone bail it out? What is the virtue of having a member that consistently and continually refuse to bring its economy into a shape similar to the one that the rest of the club is running. Ireland, Portugal, Spain, and Italy have all gone through painful reforms and been rewarded with a much improved economic situation and a promising outlook for the future. What are the arguments for not asking Greece to do the same?

The fourth one discloses precisely this point by bringing in geopolitics classifying Greece as a special case. Greece could bank on a geopolitical premium; its creditors were the same group of countries interested in access to Greek military facilities.

The geopolitical situation in the Eastern Mediterranean has changed over the last one to two years and fundamentally so to the disadvantage of Greece.

Greece's traditional rival in the region and in the Balkans is Turkey; its EU membership was used to put obstacles in the way of the endeavors to move Turkey closer to the EU even dangling the prospect of full membership as a reward for reforms. When Prime Minister Erdogan turned Turkey away from its Western orientation preferring to look towards the Middle East and Central Asia plus enhancing the Muslim profile, Greece' status as an undisputed Western ally even attracting Israeli interests got more mileage. As was seen in the military planning for the second Iraq war and a decade later with Syria and ISIS, Turkey was still a NATO member, but its reliability not any longer the same.

The elections in Turkey two weeks ago do not signify a U-turn, but signals that the Turkish population sets limits for this policy. Its foreign policy can be expected to become more balanced - so Turkey is back in the game as a rival to Greece in the eyes of the West.

A couple of years ago the Muslim Brotherhood ruled Egypt. Not any longer. Now President el-Sisi has put the country back as a Western ally demonstrated by the purchase of 24 French Rafale fighters.

Nor is Greece the main or sole partner for the EU or the West in the Balkan area. In July 2013 Croatia joined the EU and bilateral relations between the United States and Croatia are very strong. The former Yugoslav Republic of Macedonia, Montenegro, Serbia and Turkey are candidate countries for EU accession. Negotiations with Turkey may be in the well box, but they are alive with the three others in realty offering a geopolitical alternative if Greece turns into a recalcitrant partner or leaves the EU and maybe also NATO. Bulgaria to the north and northeast is also member of both the EU and NATO.

Greece is not any longer the indispensable ally in the Balkans and the Eastern Mediterranean. It is still an ally as long as it wishes to be so, but the price its allies are willing to pay to keep it in the clubs has fallen and dramatically so. This turn of events has not been registered by the Greek government.

Without being anchored in the EU and NATO Greece would find itself in a traditionally hostile environment. None of the countries to the north are friendly. One of them - former Yugoslav Republic of Macedonia - is regarded by Greece as some mind of illegitimate state by using Macedonia in its name.

There are rumours that the Greek government explores improved relations with Russia. True or false, Russia's finances are not in a state where that country is capable of bailing Greece out and if it did find the money the political price for Greece would be exorbitant. China is sometimes mentioned as a candidate for stepping in, but why should China take on such a financial burden to achieve exactly what?

Greece may also gamble on the Eurozone's fear of contagion putting the art of extortion on the table. But this is an illusion. Since2010 the Eurozone economy has turned around from contraction to growth - the growth forecast for 2015 is 1.5 percent, work to set up a banking union is well under way, and measures constituting bulwarks have been put in place. The little stroke can fell great oakes was a proverb that ominously sounded in the corridors 4-5 year ago; not any longer.

The fifth one is that this story will not end with a bang or fast solution, but rumble on for several years irrespective of the outcome over the next six weeks when a number of deadlines for repayment of debts come up. It is agonizing to observe that Greece is coming perilously close to look like a failed state. When the EU offered membership after the end of military dictatorship 1967-74 the aim was precisely to avoid that. Sadly enough Greek politicians have devoted most of their energy to enrich themselves and their followers. Syriza's victory provided a chance to break this mold, remove privileges, patron-client relationships, tax evasion in a grand scale, plus the influence of 'clans' and Greek style oligarchs. Unfortunately Syriza did not do that, but saw it as 'our turn'.

Logic and reason tells that Greece ultimately will accept the terms set by the creditors. The Greek government may not be willing to do so now, but realities will steer politics and decision making. In view of many comments it sounds strange that this may be Greece' last chance to turn itself into a modern and developed nation with a competitive economy not dependent on borrowing, but this is the truth. Without the Eurozone Greece would have depreciated its currency (Dracma) for a couple of years later to depreciate anew and by so doing impoverishing itself. This is the itinerary chosen by Argentina about 75 years ago turning it from one of the richest countries in the world into a country that has defaulted on its national debt eight times.

In short: Greece will stay in the Euro and in the EU, but it will never again be a genuine member speaking with the authority, conviction and strength radiating ambitions, policies, and policy instruments analogous with other member nations.

The Greek government may not see this, but an optimistic note - a cautious one at that - can be struck reading that a large majority of the population want to stay in the Euro and urge the government to seek a compromise with creditors. Maybe the Syriza political party forming the government flirts with being alone, administering a falling GDP, and surrounded by unfriendly neighbors, but the people seems to have got it right: It will be very, very cold out there.

Joergen Oerstroem Moeller
Visiting Senior Research Fellow, Institute of Southeast Asian Studies, Singapore.
Adjunct Professor Singapore Management University & Copenhagen Business School.
Honorary Alumnus, University of Copenhagen.