Debt and Social Contracts

The financial struggles of Greece have been in the news off and on since 2010. The country is headed for what appears to be its third “bailout.” For the average citizen, it has been a struggle. In some cases, life or death. Medical supplies, such as insulin and cancer fighting drugs have been in short supply. Capital controls have been in effect with depositors at banks allowed to withdraw only 60 euros per day to meet their needs. Keep in mind that is 60 euros per depositor account, — not per person. Since Greece’s original bailout, which constitutes a loan, their economic condition has actually worsened. Gross Domestic Product (GDP), the total amount of goods and services created, is falling. GDP stood at 299 billion USD in 2010 and fell to 242 billion USD in 2013. Debt to GDP is anticipated to be 180% for 2015. In 2010, the ratio was 143%. The country has hit the debt wall and finds itself in a debt spiral. How did the country, and its citizens arrive at this place?

It is insightful to read quotes from average Greek citizens on the ground regarding the referendum to accept or reject the terms of a third “bailout” as laid out by the creditors. The following are two quotes posted in The UK Telegraph, July 4, 2015, “Greece crisis live: Germany suggests Greece could exit Eurozone temporarily”.


“I’m a student in one of the most known Greek universities. I will vote YES. Without a doubt. I know many people around my age (early 20s) who will vote yes as well.

The bailout program is not ideal, there are taxes and cuts. But it’s the least bad option for everyone who wants Greece to recover and to become a proper Western-world country. We’re not one right now.

The No vote is the step into the unknown. Despite the Government claiming otherwise, if the No wins, we’re going back to national currency. The inflation will be enormous, many multinational companies may leave Greece, finding a job would be completely impossible and there will be probably restriction on free movement of Greeks in the EU, so finding a job abroad would be equally difficult.

The ones that support No are mainly communists, public sector workers or people who think they have nothing to lose (they don’t get that they have much to lose).

Last but not least, a YES vote is a vote for democracy. The government consists of many left-wing politicians who are admirers of the USSR. They want to ban private broadcasters and leave only a public one, like in Communist states.

They don’t like freedom of speech, they threaten journalists who oppose them. And with Greece with a weakened economy, probably outside the EU and with only Venezuela as an ally, we’re sliding towards a totalitarian state. And totalitarian governments do not come into power when a country is prosperous with a high quality of life. They rise when the people are poor and they are willing to trust anyone who gives them food.”


“I vote for yes and I totally agree with Nikos. There’s something you can’t understand unless you live in Greece. In this country we have communism not capitalism, but still everyone blames capitalism.

Everyone lives from the state. Even the private sector lives from the state in many ways, for example by not paying taxes and not getting punished for that.

I was in the Greek university for many years (diploma + MSc) and I experienced the terrorism of the leftists every single day. Supporting a different opinion is a reason for them to use physical and psychological violence against you. The universities are occupied by student/wannabe politicians (PM Tsipras was one of them) for several months per year. I won’t continue, because I may say things that will sound unreal to you and lose credibility.

One last thing: Not wanting reforms goes against the human nature of desiring the development. I believe my nation needs a different education and this has to start from school, where kids should learn how to be good people, not how to be good communists.”

The comments of these students are pregnant with practical observations. The highlighted sections in bold print were done to emphasize the salient points. Most notably the comment by Loannis, “In this country we have communism not capitalism, but still everyone blames capitalism.” It is ironic that the Greek Finance Minister initially chosen to negotiate on behalf of the Greeks, Yanis Varoufakis, regards himself as a Marxist. (Reference: And where was Yanis Varoufakis prior to his appointment as Greek Finance Minister? He was a professor at the Lyndon B. Johnson School of Public Affairs at the University of Texas in Austin. It might be interesting to learn the rationale for hiring a self-proclaimed socialist/communist to teach economics at an American University, — but I digress.

In the comments, it is apparent that through a democratic process, Greece has disintegrated into a socialist democracy. Politicians have won office by promising their constituents benefits to be paid through taxation and deficit spending. The point is made by Loannis that, “even the private sector lives from the state in many ways.” The bills have come due, and promises are going to be broken, — either through enforced austerity by creditors, or a chaotic default. The average citizen is over burdened with taxation and a government saturated with debt. VAT taxes on food alone are going to 23% on processed food, and 13% on raw food products. (Reference: Social contracts that politicians have made to government workers and pension recipients will be renegotiated or abolished. The Greeks are part of a broken monetary system in the Euro, but it is their insatiable demand for benefits paid by debt that spelled their economic doom. Austerity will only bring further economic contraction, and will eventually end in bankruptcy. Even the International Monetary Fund recognizes that another bailout is unrealistic.

Bottom line, politicians — who made promises the country could not afford — were elected by a citizenry demanding benefits the treasury could not afford — spent money they did not have until they could not borrow anymore. The social contracts made by politicians to their constituents are going to be broken, — with social unrest to follow. Greece is only the canary in the coal mine. Most of the western industrialized world is quickly headed in the same direction, including the United States. The demand for money is infinite, but a debt based monetary system is not the answer. Fiscal deficits and trade deficits go hand in hand. In the next article, we will review what some experts have to say about trade imbalances that exist in today’s world, and why they have come about.