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Foreword Sipping a lemonade on a perfect summer evening, near the Acropolis in Athens in 2005, I was thinking about how beautiful and lucky a country Greece was. Greece’s growth performance over the post–World War II period had been one of the best in the world, and per capita income had reached US$21,700 at market prices in 2005, making it a high-income country. More recently, the ratio of Greek to German per capita income had gone from 52 percent in 1995 to 64 percent by 2005. Greece had become a full member of the European Union and of the euro zone. The terrible period of right-wing military dictatorship and violence in the late 1960s and early 1970s was long gone, and democracy was functioning, in a somewhat populist and chaotic but perfectly peaceful way. There were no internal ethnic or regional conflicts, so prevalent elsewhere in the Mediterranean and Balkan regions. Thanks to the work of George Papandreou and Ismail Cem when they had been foreign ministers of Greece and Turkey, respectively, relations between the two neighbors had greatly improved, particularly since a special Greek rescue team was dispatched to Turkey by Greece immediately after a devastating earthquake in Turkey in 1999. It is amazing what such a gesture—and it saved Turkish lives—can do to promote peace and goodwill. Turkey reciprocated at the time of a smaller earthquake in Greece, some months later. Tensions in the neighborhood had decreased. Greece was an influential member of the European Union and of NATO and, at the same time, had good relations with Russia, the Arab world, and Israel, as well as countries further afield. The adoption of the euro had gone well, growth had accelerated further, sovereign interest ix 00-2577-0 fm.indd 9 4/30/14 1:48 PM x Foreword rates had fallen to almost German levels, and, at the time, IMF and European Commission economic reports were, on the whole, upbeat, as noted by the authors of this book. Nobody foresaw the crisis that hit in 2008–09. Yes, there had been worries and warnings about the budget deficit, appearing to be in the 6 percent to 10 percent of GDP range in the precrisis years. The current account deficit was even higher, well above 10 percent of GDP already in 2006 and close to 15 percent of GDP by 2007. But many argued, as they did about Spain, that current account deficits in a monetary union are not relevant or meaningful magnitudes. After all, who worries about the current account deficit of Missouri or the surplus of Texas? Some today use a similar argument to claim that the German current account surplus of close to 7 percent of GDP is irrelevant. The budget deficit was considered more worrisome. But in 2008, Greece’s stock of public debt was below Italy’s as a percent of GDP. Even at the end of 2009, after the government acknowledged that some of the public finance statistics had been false, the ratio of public debt to GDP was not much higher that of Italy. So why this devastating crisis? And, more important, how to rebuild strong momentum toward growth and prosperity for the future of Greece? These are the key questions asked by Theodore Pelagidis and Michael Mitsopoulos in this book. The research was a major part of our work on Europe in the Global Economy and Development program of the Brookings Institution and was generously supported by the Stavros Niarchos Foundation. Cooperation with ESADE in Spain and the Bosch Foundation in Germany allowed key pan-European workshops to take place. In this foreword, I do not want to summarize the book, nor do I want to endorse or contest the various arguments or conclusions put forward with conviction and skill by the authors. Some of these arguments very usefully summarize existing analysis; others, however, are quite new. What is clear is that the Greek crisis was the result of multiple causes coming together with most destructive consequences. The world financial crisis triggered by Wall Street in 2008 meant that risk appetite collapsed on a global scale: economic indicators that seemed mildly concerning but manageable became much greater sources of alarm everywhere. The fierce political competition between New Democracy and PASOK that characterized the first decade of the new century had resulted in a degree of populism, particularly when it came to budget policies and employment in the public sector, policies that had...


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