It’s the summer of 2004 and Greece is at the centre of the world. Their national football team has just defeated hosts Portugal in the final of the European Championship to complete one of the most remarkable sporting underdog stories. In just a month, the Summer Olympics will be returning to the birthplace of the ancient Games – Athens – after a period of 108 years. The Games will turn out to be a huge success, attracting 24 million tourists and enhancing the cultural appeal of Greece to the world.

Half a decade later, however, Greece was in tatters. 

The Mediterranean nation was hit hard by the Global Financial Crisis and was on the brink of economic collapse. Unemployment and poverty swept the nation as the budget deficit ballooned to 15% of GDP. In fact, unlike other European countries, Greece failed to recover from the effects of the recession and became the international poster-child for economic mismanagement during the 2010s.

In recent years, however, Greece has managed to revive its previously tanking economy at a time when its neighbours have suffered from economic stagnation as a result of the pandemic and regional political instability. So what exactly has caused Greece’s economic turn-around?

Greece’s Global Economic Importance

It would be rather easy to dismiss Greece (a country smaller than Arkansas with a population the size of Bangalore) as a relatively insignificant economic player on the world stage. However, the notion that Greece plays a trivial role within the global political and economic landscape is misguided. World trade, a key characteristic of the global interconnected economy, is overwhelmingly handled by ships from Greece (17.7% of the global merchant fleet). Almost a quarter of all global freight capacity is based in Greece. The peninsula is also at the centre of tensions between the most powerful military alliance in history (NATO), and geographically located in the middle of the two biggest wars of this decade (Russia/Ukraine and Israel/Palestine). 

Pre-2008

The Greek economy was one of the fastest growing prior to the 2008 Global Financial Crisis. Indeed, the Greek economy was the fastest growing in Europe from 2001-04 and GDP per capita tripled between 2000 and 2008 while unemployment gradually decreased from 11.3% to 7.6% during the same period. However, this growth masked key structural issues deeply rooted within Greece’s financial system. The government borrowed large sums of money while running a colossal budget deficit. It is worth noting that this is not unusual for a developing economy where output is rapidly expanding. In Greece’s case, though, instead of investing in infrastructure, most of the debt that was taken on was instead being put into the development of the property sector (which has little to no potential for producing further output) for foreign investors to speculate on. Between 2000 and 2008, net inflows of foreign direct investment accounted for as much as 2% of all GDP (i.e. 2% of total national output was being sold to foreign investors annually). Hence, the Greek construction boom of the noughties had little impact on average Greek citizens. 

In 1999, the EU introduced the euro with the goal of eventually rendering it as the sole currency used in the Eurozone. In order to adopt the euro, member states had to meet strict criteria including having a debt-to-GDP ratio of less than 60% (which Greece at the time did not). Greece did indeed manage to adopt the new currency in 2001 but only after severely fudging their financial records. Nevertheless, the adoption of the euro helped develop sectors such as tourism and manufacturing. This is because the drachma (former currency) was an infamously unstable currency which made planning long-term business deals or tourism planning difficult. As such, the switch to the euro made borrowing capital for Greek firms from other European countries far easier. 

2008-18 Economic Collapse

The Global Financial Crisis (GFC) rocked Greece’s financial systems as the recession exacerbated the nation’s already dire debt situation. The GFC meant that Greece could not acquire additional funds to pay off its previous creditors. This, coupled with the fact that it had been proven that the government had falsified its financial records on numerous accounts, led to the S&P handing Greece the world’s lowest credit rating. Financial fudging, which in turn led to this low credit rating, resulted in Greece being cut out from capital and public markets. On the verge of becoming the first EU country to default, Greece was bailed out by the IMF and the EU through substantial monetary packages in order to get this over-leverage issue under control. Between 2010 and 2013, the IMF and the EU gave Greece €110 billion and €80 billion respectively. 

While their Mediterranean neighbours, Turkey and Italy, returned to pre-GFC output levels by 2011, Greece experienced substantial GDP contraction every year between 2008 and 2016 resulting in GDP per capita being slashed in half over this period. Tourism, one of Greece’s largest sectors, remained fairly stagnant during the 2010s despite the general growth of tourism worldwide. Moreover, the recession in Greece also resulted in lower taxation revenues collected by the government, which acutely aggravated the nation’s budget deficit. Due to the massive government deficit already in place before the GFC and the inability to take on more debt due to credit concerns, the Greek government was unable to inject stimulus packages into the economy like most other EU countries had done in the wake of the crisis. On the contrary, Greece implemented austerity measures in order to reduce the deficit which were met by severe backlash from Greek citizens, which ultimately led to a period of political turmoil and further economic instability. This is best illustrated by the fact that eight prime ministers served between October 2009 and September 2015. The constant change in leadership meant that key economic reform legislation could not be passed and the unemployment rate fluctuated around 25% throughout this period. The collapse of the Greek economy also led to a “brain drain”, in which highly-skilled workers moved to other countries with more robust political and economic systems in search of greater job security and general opportunities. 

Economic Resurgence

In the 2019 general election, the Greek electorate decisively removed the radical leftist incumbent, Alexis Tsipras, and elected Kyriakos Mitsotakis, who ran on a pro-austerity platform. While the spread of the COVID-19 pandemic should have shattered Greece’s fragile political and economic institutions, the Greek economy was relatively unaffected by the virus. This was largely due to the government’s measured response to the pandemic which has since been globally lauded and emulated. Less than 5000 Greeks died from the virus in 2020; in comparison, Portugal, which has a smaller population, recorded more than 7000 deaths from the virus in the same year. Ironically, lower interest rates stemming from the effects of the pandemic actually helped Greece pay off their debts. 

The newly elected Conservative government cut taxes and pursued ambitious budget reforms (e.g. reducing leverage) which has substantially reduced the budget deficit (2.4% of GDP). This is largely because unlike other European countries, the Greek government did not have to inject much capital into the economy for stimulation purposes; since the pandemic had been handled so well, economic activity remained strong throughout the early 2020s and thus the government could afford to be more fiscally conservative. The government has also privatised previously state-owned assets in order to fuel private sector competition and spur economic growth. Unemployment, while still high at 9.6%, is the lowest it has been in over a decade. The bailout measures taken by the IMF and the EU coupled with a series of debt write downs by private banks and conservative government budgeting has helped manage the national debt burden. After 12 years, the S&P raised Greece’s credit rating to investment grade in 2023 which will enable Greek firms to more easily finance business projects. Furthermore, the real value of the Greek stock market rose by 43% in 2023 – more than any other country – making the Greek market a highly attractive one for foreign investors. The ruling Conservative government won re-election in a landslide victory in June 2023, demonstrating the Greek electorate’s approval of Mitsotakis’ economic reforms since taking office. 

While Greece may not have yet returned to the level of economic prosperity it enjoyed prior to the 2008 recession, economic development finally appears stable, unlike the unsustainable property-driven boom of the noughties. If Greece does manage to regain stable growth, it will serve as a great template for other countries suffering from prolonged economic difficulty.