A twitter discussion took off after a Remainer asked about the claim that a Brexiteer had said the EU had forced austerity on Spain and Greece. So what really happened?
by Ethar Alali
As always with Leavers, that’s not even half the story & it’s different for each country. The Greek economy is small, only $20bn higher than Scotland & has been over-sensitive to economic effects for decades. Way before they joined EU.
See the blip at about 2001? That’s when Greece adopted the Euro. What you then saw was a sharp rise in Greek GDP, almost tripling it. Great! Boom time for them (as it was for almost all small economies) but Greece was wracked with mismanagement.
With that rate of growth, they didn’t (& couldn’t) stress test that. Like UK orgs that grow too fast, including modern startups and scaleups, it’s unprepared for complex effects at scale. It meant when financial crisis hit, there was no parachute in Greece. So EU became the emergency parachute to catch that falling baby. Because as you can see from the graph, after the peak, Greek GDP was tanking & badly! They couldn’t sustain themselves. So 2 things could happen:
- Sanction Greece, then jettison it to protect the single currency (ie let it fail)
- Bail it & enforce fiscal austerity as conditions, to ensure they limit spending and crucially, stop raiding citizens’ bank accounts to keep it afloat.
Up until EU action, Greek tank meant people lost 47%- 75% of their savings as Greek Gov raid bank accounts. Banks failed 1 after other. It’s still happening today, even with bailout & Leavers will use that as evidence of EU not working “its a black hole” but again, do so knowing nowt.
It’s a tiny economy. $190bn! (not even pounds, dollars). UK wastes more than that every year & then some. Plus, bailout is a loan package & bond purchase. If/when the Greek economy rises, so does bond prices. Thus, the EU makes money, if not, compared to $18 trillion of GDP, $190bn is chump change. Even $500bn is relative chump change. After all, the UK has been supporting Scotland for centuries. The crisis decked the Euro? It’s certainly not the lowest it’s been. It was worse in ’86 & 2000.
So the worst global financial crisis in living memory was not even Euro’s worst event. For it, it was almost a non-issue. but of course, it wasn’t pout of the woods. The EU had to protect economies making up the currency Union. Hence placing conditions on the bailout, as you would do on any contract.
So that was Greece. Spain is of course, a different country with a different domestic policy & thus affected differently inside the country.
Again GDP shows same initial blip on Euro adoption and then growth, but look at post financial crash period. That saw-tooth. Mini boom & busts as the economy attempts to get it’s footing back.
Which is a product of domestic policy & spending, not all EU, bar all member state commitment to reduce deficits & thus, exposure.
The real problem is that, unlike Greece, Spain is a BIG economy & one that depends very highly on housing debt, unlike Greece. Sound familiar? Yes, that’s also us! The United Kingdom. That level debt exposure is extremely sensitive to credit crunches (it happened on mortgage backed securities after all) especially when the level of reserves to bail itself out is low.
So when crunch hit, it hit Spain & UK hard too. The main difference was we had reserves, including from previous eras in our other economic cash cow, financial services. So we paid from reserves. The greatest amount per head of population anywhere in the world. Twice the USA’s value! Spain simply couldn’t!
The Spanish government literally sold everything they had! Their foreign exchange reserves gave them just $27bn or so.
While their gold reserves were about half ours to start with & they sold close to $8.1bn of it. Totaling €35bn simply wasn’t enough. Over time, the UK paid £1.6tn to keep itself afloat overall. £35bn is nowt [nothing].
As laborious as this has been to read, this is all necessary detail to understand the dynamics. EU have every right to impose austerity as a bail out condition to stem losses. It’s their trusteeship, since all member states voted on the conditions, including the UK. It’s fiscal prudence.