Since the creation of the European Union in 1992 and the subsequent launch of the euro, Greece’s economic relationship with the rest of Europe has been a turbulent one. Greece’s chronic fiscal mismanagement and resulting debt crisis has repeatedly threatened the stability of the eurozone.
The ruling military junta, which seized power from Greece’s democratically elected government in 1967, collapses. The Turkish invasion of northern Cyprus three days prior has undermined the Greek government and created divisions in the military establishment. The military calls on exiled former Prime Minister Constantine Karamanlis to return to Greece and lead the transition back to democratic rule.
The twelve member states of the European Economic Community sign the Treaty of Maastricht, which establishes the EU. In addition to a shared foreign policy and judicial cooperation, the treaty also launches the Economic and Monetary Union (EMU), paving the way for the introduction of the euro. The EMU lays out fiscal convergence criteria for EU countries that plan to adopt the single currency.
The euro is introduced as an accounting currency in eleven EU countries. (Euro banknotes and coins begin circulating three years later.) Greece, however, is unable to adopt the euro because it fails to meet the fiscal criteria—inflation below 1.5 percent, a budget deficit below 3 percent, and a debt-to-GDP ratio below 60 percent—outlined by Maastricht.
Greece belatedly adopts the euro currency. However, the country misrepresents its finances to join the eurozone, with a budget deficit well over 3 percent and a debt level above 100 percent of GDP. It is subsequently made public that U.S. investment bank Goldman Sachs helped Greece conceal part of its debt in 2001 through complex credit-swap transactions.
Greece hosts the 2004 summer Olympic Games, which costs the state in excess of 9 billion euros ($11.6 billion). The resultant public borrowing contributes to a rising deficit (6.1 percent) and debt-to-GDP ratio (110.6 percent) for 2004. Greece’s unsustainable finances prompt the European Commission to place the country under fiscal monitoring in 2005.
The U.S. subprime mortgage market collapses after the housing bubble burst the year prior. The U.S. crisis ultimately triggers a global banking crisis and credit crunch that lasts through 2009, felling global financial behemoth Lehman Brothers and prompting government bailouts of banks in the United States and Europe. As borrowing costs rise and financing dries up, Greece is unable to service its mounting debt.
Pasok (Socialist) leader George Papandreou wins national elections, becoming prime minister. Within weeks, Papandreou reveals that Greece’s budget deficit will exceed 12 percent of GDP, nearly double the original estimates. The figure is later revised upward to 15.4 percent. Greece’s borrowing costs spike as credit-rating agencies downgrade the country’s sovereign debt to junk status in early 2010.
To avoid default, the International Monetary Fund and EU agree to provide Greece with 110 billion euros ($146 billion) in loans over three years. Germany provides the largest sum, about 22 billion euros, of the EU’s 80 billion euro portion. In exchange, Prime Minister Papandreou commits to austerity measures, including 30 billion euros in spending cuts and tax increases.
The European Central Bank (ECB) launches its unprecedented Securities Market Program. The program allows the ECB to purchase government bonds of struggling sovereigns, like Greece, on the secondary market in order to boost market confidence and prevent further sovereign debt contagion throughout the eurozone. Finance ministers also agree on rescue measures worth 750 billion euros, or nearly $1 trillion, for struggling eurozone economies.
Amid public anger over austerity, Prime Minister Papandreou calls for a national referendum on a second bailout agreement under negotiation. However, Papandreou calls off the referendum after the center-right opposition agrees to back the revamped EU-IMF deal. Papandreou is forced to step down, and economist Lucas Papademos is appointed to head a unity government tasked with implementing further austerity and structural reforms.
Finance ministers approve a second EU-IMF bailout for Greece, worth 130 billion euros ($172 billion). The deal includes a 53.5 percent debt write-down—or “haircut”—for private Greek bondholders. In exchange, Greece must reduce its debt-to-GDP ratio from 160 percent to 120.5 percent by 2020. Greece and its private creditors complete the debt restructuring on March 9, the largest such restructuring in history.
In a step toward European fiscal integration, twenty-five EU member states—all but the UK and the Czech Republic—sign a Fiscal Compact treaty mandating stricter budget discipline throughout the union. The agreement includes a balanced budget rule requiring governments to keep deficits below 0.5 percent of GDP and an undefined “automatic correction mechanism” for countries that miss the target.
In a rebuke of the mainstream New Democracy (conservative) and Pasok (socialist) parties, a majority of Greeks vote for fringe parties opposed to the EU-IMF bailout program and further austerity. New elections are called for June, in which the center-right triumphs with 30 percent of the vote, allowing Antonis Samaras to form a coalition. Samaras signals Greece’s continued commitment to the bailout plan.
ECB President Mario Draghi announces an open-ended program to buy the government bonds of struggling eurozone states on the secondary market. The policy shift, coming weeks after Draghi’s vow to “do whatever it takes to preserve the euro,” is aimed at calming volatile markets, and the ECB’s strong show of commitment succeeds in bringing down borrowing costs for indebted periphery countries.
Eurozone finance ministers and the IMF agree to a revised aid deal for Greece, including lower interest rates on Greek bailout loans and a debt-buyback program. The new plan allows Greece to cut its debt-to-GDP ratio to 124 percent by 2020, rather than 120 percent, while committing it to bringing its debt levels “substantially below” 110 percent by 2022.
Greece’s Parliament approves unpopular new austerity measures, agreed to as a condition of the ongoing EU-IMF bailout. The legislation include layoffs of some twenty-five thousand public servants, as well as wage cuts, tax reforms, and other budget cuts. The approval opens the way for a new tranche of bailout funds worth nearly 7 billion euros ($9 billion), while labor unions call a general strike in protest.
Greece returns to international financial markets with its first issue of Eurobonds in four years. Despite an early morning bomb blast, the government raises 3 billion euros in five year bonds, with an initial yield of under 5 percent—a low rate seen as a mark of a return to economic normalcy. In another sign of renewed investor confidence, the offer raises 1 billion euros more than expected.
Faced with deflation and economic stagnation in the eurozone, the ECB announces a 1.1 trillion euro (more than $1.2 trillion) program of quantitative easing (QE) to spur inflation and growth. Under the program, the ECB will purchase 60 billion euros in financial assets, including sovereign government bonds, each month. Under ECB rules, however, Greek bonds are not eligible.
The left-wing, anti-austerity Syriza party wins a resounding victory in snap elections, breaking more than forty years of two-party rule. Incoming Prime Minister Alexis Tsipras says he will push for a renegotiation of bailout terms, debt cancellation, and renewed public sector spending—setting up a showdown with international creditors that threatens Greek default and potential exit from the monetary union.
The Greek government misses its 1.6 billion euro ($1.7 billion) payment to the IMF when its bailout expires on June 30, making it the first developed country to effectively default to the Fund. Negotiations between the Syriza leadership and its official creditors fell apart days before, when Prime Minister Tsipras proposed a referendum on the EU proposals. To stem capital flight, Tsipras had previously announced emergency capital controls, limiting bank withdrawals to 60 euros ($67) per day and calling a bank holiday after the ECB capped its support.
Prime Minister Tsipras bends to European creditors and presses parliament to approve new austerity measures, despite a July 5 referendum in which Greeks overwhelmingly rejected these terms. The agreement comes after a weekend of talks in which a Greek eurozone exit was only narrowly averted and opens the way to a possible third bailout program worth up to 86 billion euros ($94 billion). The ECB resumes some support for Greek banks, but the compromise splits the ruling Syriza party and sets the stage for new elections in the coming months.
The Greek parliament adopts a suite of economic reforms as part of a new rescue package from the EU, the country’s third since 2010. In exchange for the 86 billion euro bailout, which is to be distributed through 2018, EU creditors require Greece to implement tax reforms, cut public spending, privatize state assets, and reform labor laws, among other measures. While the IMF participated in the previous bailouts, the organization refuses to contribute additional funds until the creditors provide Greece “significant debt relief.”
Tensions over Greece’s third bailout grow as the IMF warns that the country’s debt is unsustainable and that budget cuts EU creditors demand of Athens will hamper Greece’s ability to grow. To forestall a crisis that could put the 86 billion euro program in jeopardy, EU representatives agree to more lenient budget targets, but they decline to consider any debt relief. Meanwhile, Prime Minister Tsipras agrees to implement deeper tax and pension reforms even as he faces domestic pressure over a weakening economy and rising poverty.
Greece receives its final loan from European creditors, completing a bailout program begun in 2015, the country’s third since 2010. In total, Greece now owes the EU and IMF roughly 290 billion euros ($330 billion), part of a public debt that has climbed to 180 percent of GDP. To finance this debt, Athens commits to running a budget surplus through 2060, accepts continued EU financial supervision, and imposes additional austerity measures. EU officials hail the bailout as a success, pointing to Greece’s return to growth. Unemployment, too, has fallen, though, at 20 percent, it remains the EU’s highest. The IMF, however, maintains that the Greek economy, which has shrunk by 25 percent since the beginning of the crisis, will likely require further debt relief.