Figure 5: Public Debt

Does “What Happens in Vegas Really Stay in Vegas?” You all have seen the commercial about Las Vegas: “What happens in Vegas stays in Vegas.” Unfortunately, what happened in Greece did not stay in Greece.

The current international hot topic is the downfall of the Greek economy. In this age of globalization, interconnectedness among the economies has meant that repercussions of financial and economic events are no longer confined to the original country. Indeed, the entire European Union and the rest of the global economy have felt the economic tremors and political crises that this event has created.

To prevent this domino effect, Germany and France have stepped up to the plate to rescue the Greek economy. Many now agree that Greece and its creditors should have resolved this issue much earlier before it became a major global challenge.

The question that must be asked is why the creditor parties kept on extending loans to Greece when it became apparent that the national debt was growing at an alarming pace?

While everything is clearer in retrospect, if one monitored the fundamental indicators such as spending and consumption, the warning bells should have been ringing much earlier.

Consumer Expenditures: Figure 1 presents households expenditures for Greece and several other comparison countries over the last 10 year period. As can be seen, spending per household started to grow rapidly from 2001. Greek expenditure per household, in fact, surpassed that of Germany in 2002 and that of France in 2005. Three years later in 2008, it even exceeded the household expenditures in the U.K. It is remarkable that Greek households could outspend their peers in other wealthier and more advanced economies in the European Union.

While consumer spending was increasing, other vital economic indicators were moving in the reverse direction. In a most remarkable fashion, competitiveness of the Greek economy declined in a steady fashion. In fact, while Greece stood as the 36th most competitive economy in the world in 2001, it fell to 90th place in 2011 (please see Figure 2 showing the Competitive Index).

In Figures 3 through 5, we present several other vital economic indicators.

Unemployment Rate: In Figure 3, the unemployment rate in Greece began to swell after 2008.

Foreign Debt: In Figure 4, we note that the Greek national debt exceeded all other comparison countries on a per capita base.

Public Debt: In Figure 5, public debt per capita similarly exceeded those of Germany, France, U.K., and Poland.

The question everyone has been asking is: how such a consumption pattern persisted for so long when the economy was showing fundamental weaknesses?

There are at least three lessons that can be drawn from this bitter case. First, irresponsible spending will surely produce a hefty cost for any economy. Second, since most economies are interconnected through investment and trade, the economic woes in a country will certainly spill over to others. Third, clearly, the lending parties and international monitoring agencies failed in a big way by not acting on the telltale signs of brewing trouble. The result: a bitter pill to swallow for all major economies for a long period of time.

Dr. Ilke Kardes is a research associate in GSU-CIBER, Robinson College of Business, Georgia State University.