Greece: Anatomy of a financial crisis

When the former prime minister of Greece, George Papandreou, asked Richard Parker to serve as special economic adviser in 2009, Parker couldn’t refuse. A friend of the Papandreou family since the early 1970s, the Harvard Kennedy School economist didn’t hesitate when asked to help. What he didn’t know was that his acceptance would give him a front-row seat to the debt-crisis drama that ousted his friend from his position and continues to unfold in the euro zone.

Richard Parker recently discussed the Greek debt crisis in particular and the euro zone’s response.

Q: Did anyone see this crisis coming?

A: Not really. The enormous Greek fiscal deficit was not expected. The country, and many others in the euro zone and elsewhere including the United States, France, and Germany, had been running deficits for years. Greece had used its deficits fairly well from 1995 to 2005 growing at a rate of about 4.5 percent per year, which put it at the upper end of European economies. Because of this rapid economic growth, however, the debt stayed at roughly 100 percent of GDP. But because of the meltdown of Wall Street in 2008 and 2009, Greece suddenly found itself in an extremely vulnerable position as one of the smallest economies in the euro zone.