Surviving the Greek Financial Crisis
Despite the recent friction, I believe the eurozone is stronger after putting down the Greek rebellion.
- (opens in new tab)
- (opens in new tab)
- (opens in new tab)
- Newsletter sign up Newsletter

The Greek crisis may have disappeared from the headlines, but the bitter taste of the recent confrontation between Greece and the rest of Europe will last for some time.
In taking a hard line against Greek demands that more debt be forgiven, the European Union noted that Portugal, Spain and Ireland met the reform and payment deadlines set forth in their earlier debt crisis agreements. In response, the Greeks stated that they had already suffered a 25% drop in gross domestic product over the past five years, far greater than the decline experienced by any other European economy. Furthermore, the Greeks reminded the Germans that despite Germany’s brutal occupation of their homeland during World War II, the Allies forgave 50% of Germany’s debt in 1953—implying that Greece should be granted similar debt forgiveness.
But a closer look reveals the weaknesses in Greece’s arguments. After Greece adopted the euro in 2001, a flood of cheap capital sparked a huge economic boom. Land and housing prices increased, profits rose smartly, and the labor market tightened. Workers were able to demand sharply higher wages, and businesses flush with funds granted those demands. At the same time, the government increased the benefits in an already overly generous pension system. From 2000 to 2007, Greek GDP expanded by nearly 58%, far more than that of any other European country.

Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
When the financial crisis struck, lenders pulled back and the good times quickly ended. As Warren Buffett has observed, when the tide goes out, you find out who has been swimming naked. By 2009, Greece was exposed without even a fig leaf. Wages were far too high to be competitive, and the country’s debt, barely serviceable in good times, could not be refinanced at the higher interest rates lenders demanded.
Greece’s economy contracted much more than that of any other European country. But Greece’s claim that it suffered more must be viewed in comparison with the preceding boom. Despite the huge economic contraction, Greek GDP is more than 25% higher than in 2001, a better performance than Spain, Portugal or Italy.
Why couldn’t the Europeans forgive some of Greece’s debt, as the Allies did for Germany after World War II? They already have! The agreements negotiated over the past several years to extend loan maturity and sharply lower the interest rates that the Greeks had originally agreed to pay are equivalent to writing off about half of the Greek debt.
Fatal mistake. Prime Minister Alexis Tsipras made the fatal mistake of thinking he could bully Greece’s creditors into accepting his demands and still stay in the eurozone. But without extensive cash advances from the European Central Bank, Greece was forced to close its banks. Those hastily arranged closures have caused severe economic hardships and will hamper any economic recovery. Who will put money in Greek banks knowing that they could close again? The Greeks cannot rebuild trust in their financial institutions without extensive guarantees by the ECB, which will be granted only after a painful restructuring of Greece’s financial system.
Despite the recent friction, I believe the eurozone is stronger after putting down the Greek rebellion. Even with the ECB’s massive program of buying bonds to bring down interest rates, the euro has emerged from the Greek crisis with considerable strength.
Sound finance and fiscal responsibility do pay off in the long run. It’s not a coincidence that Germany is the richest country in the European Union. Greece will eventually pull out of its slump. But its current hardships are of its own making, not those of European hard-liners.
-
-
Cheapest Pizza Near Me? 10 Most Affordable Cities for a Pizza Pie
Residents of these U.S. cities and towns really luck out when it comes to finding the "cheapest pizza near me."
By Dan Burrows • Published
-
Controversial Capital Gains Tax Upheld in Washington
The state’s historic long term capital gains tax is projected to bring in $1 billion over the next two years.
By Kelley R. Taylor • Published
-
Kiplinger's Retail Outlook: Consumers Are Still Resilient
Economic Forecasts Kiplinger's Retail Outlook: Sales this year are likely to be mostly stable, even as the economy slows.
By David Payne • Last updated
-
Kiplinger Energy Outlook: Cheaper Prices at the Pump on the Way
Economic Forecasts Kiplinger Energy Outlook: Cheaper prices at the pump are on the way. Turmoil in the financial markets is hitting oil prices, which means cheaper fill-ups.
By Jim Patterson • Last updated
-
Kiplinger’s Interest Rates Outlook: Rates Likely to Rise Again After Banking Crisis is Over
Economic Forecasts Kiplinger’s Interest Rates Outlook: Rates Likely to Rise Again After Banking Crisis is Over
By David Payne • Last updated
-
Kiplinger's GDP Outlook: The Economy is Slowing, But Not Quickly
Economic Forecasts The economy is slowing, but not quickly. There may be a recession in the second half of 2023, but it could be delayed.
By David Payne • Last updated
-
Where the Midterm Election Races Stand Today
Economic Forecasts In a tight race, these state elections may make the difference when midterm results are announced in November.
By Sean Lengell • Published
-
PODCAST: Is a Recession Coming?
Smart Buying With a lot of recession talk out there, we might just talk ourselves into one. We take that risk with Jim Patterson of The Kiplinger Letter. Also, dollar stores: deal or no deal?
By David Muhlbaum • Published
-
Semiconductor Stocks: A Smart Bet for the Long Haul
Becoming an Investor Stocks in this growing industry will stay in demand long after supply-chain snarls are unraveled.
By Andrew Tanzer • Published
-
A Dynamic Duo for Yield in 2022
Investing for Income Investors should maintain core positions in both REITs and utilities, with regular contributions to both.
By Jeffrey R. Kosnett • Published