The Body Economic (15 page)

F
IGURE 4.1
Rapid Economic Recovery in Iceland but Slow Meltdown in Greece
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Iceland's social benefits were safeguarded because its political leaders made democracy a priority, and its people voted for social protection programs, which in turn bolstered a strong society. As then Prime Minister Geir said in 2009, “No responsible government takes risks with the future of its people, even when the banking system itself is at stake.” Rather than pursuing a path of deep fiscal austerity, Iceland supported key social programs that were vital to maintaining public health, including housing assistance, job re-entry programs, and healthcare coverage.
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We would love to be able to claim that the people of Iceland had heeded our advice, but it was they themselves who read the public health data and chose to put in place clear and necessary safeguards to protect health in hard times. God didn't save Iceland, its people did. By contrast, as shown in
Figure 4.1
, one of Iceland's distant European neighbors did not do so well. In the next chapter, we will see what happened to Greece when the European Central Bank (Europe's central bank for the euro) and IMF suspended Greek democracy—imposing radical austerity, with completely different results.

A handsome former Air Force officer in his fifties, Andreas Loverdos was looking for prostitutes—but not for himself.

On the morning of May 1, 2012, Loverdos, a medical doctor and the Greek Minister for Health, joined a squad of officers from the Greek Police Enforcement and Justice Department on the streets of Athens' downtown Omonia neighborhood. Ten days before a very tense Greek general election, Loverdos had decided to take action.

In April 2012, the Greek government had passed a law allowing Loverdos's Health Department to test anyone for sexually transmitted diseases—with or without their consent. The new law came in response to STD reports from hospitals and clinics all over Greece. New cases of HIV infection had jumped 52 percent between January and May 2011 alone. This was an astounding increase. HIV, often thought of as a disease most prevalent in developing countries, had been stable in Greece since the turn of the century. It hadn't risen so drastically in any Western European country in over ten years.
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The news of Greece's HIV epidemic made international headlines, and was taken as a sign that the country was falling behind the rest of Europe. Loverdos was in an awkward position—running for re-election just as the news of Greece's failing public health system drew the world's attention.

When in late 2011 the BBC began describing Greece as the “sick man of Europe,” Loverdos felt compelled to respond. The Greek government had made radical cuts to the public health budget, under pressure from the IMF and European Central Bank. HIV prevention programs were among the first to be axed. So Loverdos called a meeting with his top campaign strategists. The group came up with a plan that has, historically, worked in almost all countries in which sexually-transmitted disease rates have spiked: scapegoat the most vulnerable people.
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Casting himself as the new protector of “unsuspecting family men,” Loverdos appeared on national television pledging to restore morals and virtue to a Greek society that had lost its way in the recession. He vowed to arrest prostitutes, calling them a “menace to society” and an “unsanitary bomb.” His Department of Health fed the Greek media a stream of photos of HIV-positive prostitutes, branding them a “death trap for hundreds of people.”
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As the prostitution sting continued in Athens's seedier neighborhoods, the police also surrounded the elite five-star Hotel Grande Bretagne in Constitution Square, in the heart of Athens close to the Parliament. They were shielding the hotel's guests from the crackdown, and from the rising numbers of homeless people—beggars, drug users, and street children—who had taken up residence in the alcoves of abandoned shops, subway grates, and doorways surrounding the square. Homelessness had jumped by 25 percent between 2009 and 2011, as a spike in foreclosures and a shattered social protection system left people with nowhere to go. Meanwhile, homicides doubled in Greece between 2010 and 2011, with a marked rise in Athens' downtown area surrounding the Hotel Grande Bretagne.

The police were also protecting the Bretagne's guests from the angry protesters camped outside its doors. The hotel was one of the unofficial residences for the “troika,” the foreign technocrats from the European Central Bank, European Commission (the executive body of the European Union), and the IMF, who were locked in heated discussions about Greece's future. In May 2010, as the negotiations about a potential bailout dragged on, protesters gathered in the square. A few turned into a hundred, then a few thousand, starting skirmishes with the Athens police, who met the protesters' calls for democracy with tear gas, police dogs, and riot tanks.

The narrative of this Greek tragedy was essentially the opposite of the story of Iceland. At the behest of the troika, Greece's democracy was suspended.
A brutal dose of austerity, unlike any seen in Europe since rationings during World War II, threatened the lives of the poorest and most vulnerable, who were now paying for errors made by the government and banking sectors. As more and more news of public health crises came in, government officials repeatedly met the evidence with open denial, failing to acknowledge, let alone respond to, what was a growing catastrophe.

Greece alas served as an unwitting laboratory for testing how austerity impacts health. The roots of this extreme case of disaster can be traced to a tsunami of financial failures, corruption, tax evasion, and ultimately a lack of democracy. The popular will was not able to express itself in Greece as it had in Iceland.

To understand how Greece got into such a mess, we need to go back at least four decades. At the fall of the country's military junta in 1974, which seized power in 1967, Greece's economy was among the poorest in Europe. After Greece transitioned to democracy, the economy was rebuilt on tourism, shipping, and agriculture. Tourists flocked to white sand beaches on Greek party islands like Mykonos and Santorini, and Greek farmers supplied Europe with cotton, fruit, vegetables, and olive oil. Overall, Greece's economy grew slowly, but steadily, at less than 1.5 percent each year on average in the 1980s and 1990s.

Then, Greece's admission to the European Union in January 2001 set the country on course for an economic boom. EU capital began flooding into Greece, fueling a construction bonanza. Over the next five years, European Structural Funds provided $24 billion for infrastructure projects. The Greek government matched the EU funds with heavy borrowing, supporting large-scale construction projects such as new ports for shipping and sport facilities to host the 2004 Olympics in Athens. The government even built a large museum in order to reclaim the Parthenon Marbles, which had been snatched by an English aristocrat and installed in the British Museum. The Greek museum was one of the biggest cultural projects in Europe, at a cost of $200 million.
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Thanks to a combination of EU funds, foreign investments, and low tax and interest rates, by the mid-2000s Greece's economy was red hot. In February 2006, George Alogoskoufis, Greece's minister of finance, said, “We are in a position to achieve an economic miracle.” That June, the Greek economy hit a peak of 7.6 percent GDP growth. (Portugal and Spain, the other EU countries that had started in similar economic positions to Greece, continued growing at less than 2 percent per year.
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Beneath the surface, however, the economy was in trouble. The Greek government was running 5 percent deficits each year to maintain infrastructure projects, which could only be sustained because of its high growth rate. Part of the problem was excess spending, but deficits were also rising because the government had cut corporate tax rates from 40 percent in 2000 to 25 percent in 2007 in an effort to attract companies to set up business in Greece. The bottom line was that Greece had enacted the opposite of sound macroeconomic policy: spending too much in good times rather than saving money in case of future needs. This dangerous economic pattern of development would soon have devastating effects on the health of Greece's people.

When US banks started to melt down in 2008, Greece's financial sector was caught in the ensuing storm. Unlike Iceland, Greek citizens experienced not one, but a series of financial earthquakes. The first was a “demand shock,” or loss of demand for Greek goods and services, as well as less construction. Then came a “real numbers shock” in which Greece's economic data were revealed to have been fabricated. Finally an “austerity crisis” hit the country: the shock from the measures that the IMF and European Central Bank imposed on Greece in return for financial bailouts—despite data (and plenty of evidence, even from within the IMF) that such measures were neither necessary nor smart for helping economic recovery or preventing a public health disaster.

The demand shock in Greece came after the US mortgage-backed securities crisis. Between May 2008 and May 2009, the Athens Stock Exchange fell by 60 percent. While less directly exposed than Iceland's largest banks to shady international investment transactions, Greece's economy was indirectly at risk because it was on the receiving end of the risky investments. As Europe's investors lost their fortunes, lavish trips to Greek islands stopped, imports of Greece's fruits and vegetables declined, and construction projects came to a halt, leaving cranes dangling in mid-air. While Europe's and North America's bankers were bailed out, these bailouts did little to shore up the ripple effects on the Greek economy. The average Greek house hold income fell by 0.2 percent in 2008 and another 3.3 percent in 2009, in what began Greece's slow descent into an abyss of financial despair.
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This initial tremor was then followed by a financial earthquake, the real numbers shock, in which it was revealed that Greece's economy was far weaker than the government had claimed. In the years before the crisis, the European
Union's statistical agency, EuroStat, had flagged a number of concerns with Greek economic reports. One audit by the European Commission's accountants, for example, found that Greek authorities had wrongly classified certain debts as being outside the government budget. A group of German auditors also used a computer algorithm to detect what looked like fraud: it suggested that someone in the Greek government had cooked the books and had typed in a bunch of inflated numbers to add up to a better budget result.
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Investors had seen the signs of financial fragility and a bubble forming, but had ignored the warning signs—that is, until the crisis opened Greece's economy to global scrutiny. In early 2010, Greece's real financial situation was revealed to be a great deal worse than even the EU auditors had thought. Reporters discovered that Greek leaders had paid the investment bank Goldman Sachs hundreds of millions of dollars in fees to arrange transactions that helped hide the country's real level of borrowing from the EU throughout the past decade. The country's debt data had been manipulated to look good enough for the nation to enter the Eurozone; Goldman Sachs had done such a good job of covering up the fraud that the data passed a detailed financial review by European Union auditors. In reality, Greece's debt levels had grown from 105 percent in 2007 to 143 percent of GDP in 2010.
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In early 2010, when news broke of Greece's real economic situation, panic ensued. Credit ratings agencies downgraded Greece's bonds to “junk” status in April 2010. This frightened investors who might have otherwise sensed a business opportunity in Greece and could have helped the economy recover. The interest rates on Greek government bonds began to spiral out of control as investors, having no idea what the real situation was, feared investing in the country. Greek interest rates jumped from 2 percent in 2009 to 10 percent in 2010, making government debt even more costly to repay.
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This real numbers shock was followed by even more suffering in Greece than the demand shock. Greece's GDP sank further, falling by 3.4 percent in 2010. The super-rich had stashed funds in offshore bank accounts; it was ordinary people who paid the price. Unemployment rates rose from 7 percent in May 2008 to 17 percent in May 2011. Among young people seeking their first jobs after high school or college, unemployment rose from 19 percent to 40 percent. A generation of newly educated people was starting adult life out of work.
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Now Greek society stood at the brink of collapse. With uncertainty ham-stringing the country's ability to pay back debts, and its currency tied to the
rest of Europe, the Greek government had few options to pay for basic needs like garbage collection and fire stations. It was forced to turn to the IMF for help. In May 2010, the IMF offered loans with the usual strings attached: privatize state-owned companies and infrastructure and cut social protection programs. If the Greek government agreed, the IMF and European Central Bank would provide 110 billion euros in loans as part of a three-year bailout plan that would go toward paying off Greek debt. Greece's creditors—including the French and German banks that had helped fuel Greece's construction bubble—took a so-called haircut, agreeing to write off half of their debts and to lower interest rates on their loans to the country.
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Whether to accept this IMF package was a matter for public debate, but Greece's leaders felt there was no alternative. At first, Prime Minister George Papandreou, who headed the major party, PASOK, the Panhellenic Socialist Movement, tried to convince fellow Greeks that this would be the only way forward. In May 2010 amid the negotiations, he portrayed the decision as black or white, between “collapse and salvation.” No one else was willing to lend money to Greece. But he recognized the pain the IMF bailout would bring. On approving the IMF's plan, he said: “With our decision today our citizens will have to make great sacrifices.”
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