Adults in The Room

Even though Greece faced bankruptcy in 2010, they were forced by the European Union to take on more debt.

In 2010, Greece made headlines when it began receiving a series of bailouts from the European Union. But how did it end up in such dire straits? And what was the reasoning behind the bailouts?

You might think the global financial crisis of 2008 was the primary cause. But, in truth, the Greek economy was already quite fragile before that; the banking fiasco was simply the final straw.

Prior to 2008, the Greek economy had been weakened through rampant tax evasion and government corruption. The budget was also a mess. Mismanagement of federal funds had resulted in a great deal of overspending.

Now, poor budgeting was nothing new to Greece. In fact, the country often spent more money than it generated, a problem it would then try to solve by devaluing its currency. But this method only worked when the country was using the drachma as its currency. When Greece adopted the euro, currency devaluation was no longer an option.

Faced with few other options, Greece’s new deficit-reduction plan was to borrow lots of money from Germany and France. Naturally, borrowing money only created debt, sinking Greece further into a financial hole. And this is where the country found itself in 2008 when the financial crisis hit.

Meanwhile, other EU countries had their own problems: the German chancellor, Angela Merkel, and the French president, Francois Hollande, had already used a lot of government funds to bail out their own banks, which in turn had loaned a lot of money to Greece.

With Greece facing bankruptcy, Germany and France worried they might never see those loans repaid, which would further destabilize their own banks.

So how could they keep Greece solvent so that it could repay its loans?

Because the European Central Bank isn’t allowed to loan money to insolvent or bankrupt countries, Germany and France had to find a way to get the money from somewhere else. So Merkel and Hollande decided to lie to Europe’s taxpayers: the two leaders claimed that Greece wasn’t insolvent at all. No, no, it simply needed another loan to get back on its feet. And honest Europeans across the continent ended up footing the bill.

Once again, Greece got a loan to pay off other loans, and the hole deepened.