With all the challenges/problems which the Euro brought for Greece, there were also benefits which are often overlooked. One of the principal benefits was the significant reduction in interest expense. One way to measure the burden of interest expense is to put the latter in relation to the financial resources available to pay interest, i. e. tax and other government revenue. In theory, one could argue that every billion which is saved on interest expense would enable the government to make a billion of investments elsewhere. In reality, this is not the case because the government could do both at the same time when financing the 'other' billion with new debt.
Greece's debt increased dramatically from 2000 (the last year of the Drachma) to 2017, from 141,0 BEUR to 317,4 BEUR (this after a haircut of approximately 100 BEUR). A layman might assume that Greece's interest expense would have increased dramatically, too.
In fact, Greece's interest expense declined from10,2 BEUR in 2000 to 5,6 BEUR in 2017.
In 2000, the last year of the Drachma, interest expense absorbed 32% of tax revenue whereas in 2017, interest expense absorbed only 11% of tax revenue. This was due to a combination of higher tax revenue and lower interest expense.
In 2000, the last year of the Drachma, interest expense absorbed 17% of total government revenue whereas in 2017, interest expense absorbed only 6% of total government revenue. This was due to a combination of higher government revenue and lower interest expense. The statistics are below (in BEUR).
What conclusions can be drawn from the above?
First, had Greece stayed with the Drachma, the interest expense would have remained high because Greece could not have taken advantage of lower Euro interest rates. Secondly, the interest expense would in all likelihood have increased because it is safe to assume that Greece's debt would have also increased. Whether government revenue would have increased substantially under a Drachma regime is anybody's guess. Probably not by much (this statement had to be revised. See the below addendum).
Put differently, interest expense as % of tax revenue, already a staggering 32% in 2000, would in all likelihood have increased. Markets might not have been concerned as long as that percentage increased to 35% or a even a bit more but once that percentage would have hit or crossed the 50% level, there would have been panic in markets. Could interest expense have hit or even exceeded 50% of tax revenue? If debt had continued on a rapid growth path and if tax revenue had remained flat, that could definitely have happened.
My conclusion is that, had Greece stayed with the Drachma, it could not have accumulated as much debt as it did with the Euro. This for the simple reason that markets would have determined long before 2010 that Greece had hit or exceeded its borrowing capacity.
Secondly, the Euro not only brought Greece lower market rates but also two additional advantages: Greece could avoid a sovereign default and, following the implementation of the programs, Greece was offered extremely below-market interest rates on the loans from its Euro partners. With a debt load of about 180% of GDP, it is miraculous that the government would only have to allocate 11% of its tax revenue and 6% of its total revenue to interest expense. Those are percentages which one finds in the strongest Euro countries. Countries like Portugal, Spain, Italy or Ireland have to allocate much more of the revenue to interest expense.
ADDENDUM
I have added the years 2008 and 2009 to the chart. The interesting point is that until 2008/09, i. e. as long as the economy was booming, tax revenue and government revenue in general had increased substantially. For example: revenue from taxes increased from 31,7 BEUR in 2000 to 50,1 BEUR in 2008, and total government revenue increased from 58,6 BEUR in 2000 to 98,4 BEUR in 2008. That seems to be a nice proof that a booming economy increases government revenue (even if it is all financed with debt).
Greece's debt increased dramatically from 2000 (the last year of the Drachma) to 2017, from 141,0 BEUR to 317,4 BEUR (this after a haircut of approximately 100 BEUR). A layman might assume that Greece's interest expense would have increased dramatically, too.
In fact, Greece's interest expense declined from10,2 BEUR in 2000 to 5,6 BEUR in 2017.
In 2000, the last year of the Drachma, interest expense absorbed 32% of tax revenue whereas in 2017, interest expense absorbed only 11% of tax revenue. This was due to a combination of higher tax revenue and lower interest expense.
In 2000, the last year of the Drachma, interest expense absorbed 17% of total government revenue whereas in 2017, interest expense absorbed only 6% of total government revenue. This was due to a combination of higher government revenue and lower interest expense. The statistics are below (in BEUR).
| Interest Expense vs. Government Revenue | |||
| 2000 | 2017 | ||
| Taxes on income, property, etc. | 13,2 | 18,1 | |
| Taxes on production, imports, etc. | 18,5 | 30,8 | |
| -------- | -------- | ||
| Total revenue from taxes | 31,7 | 48,9 | |
| Social contributions | 17,0 | 26,0 | |
| Capital transfers, etc. | 9,9 | 11,8 | |
| -------- | -------- | ||
| Total non-tax revenue | 26,9 | 37,8 | |
| Total government revenue | 58,6 | 86,7 | |
| Total debt | 141,0 | 317,4 | |
| Interest expense | 10,2 | 5,6 | |
| Interest expense as % of tax revenue | 32% | 11% | |
| Interest expense as % of total revenue | 17% | 6% | |
What conclusions can be drawn from the above?
First, had Greece stayed with the Drachma, the interest expense would have remained high because Greece could not have taken advantage of lower Euro interest rates. Secondly, the interest expense would in all likelihood have increased because it is safe to assume that Greece's debt would have also increased. Whether government revenue would have increased substantially under a Drachma regime is anybody's guess. Probably not by much (this statement had to be revised. See the below addendum).
Put differently, interest expense as % of tax revenue, already a staggering 32% in 2000, would in all likelihood have increased. Markets might not have been concerned as long as that percentage increased to 35% or a even a bit more but once that percentage would have hit or crossed the 50% level, there would have been panic in markets. Could interest expense have hit or even exceeded 50% of tax revenue? If debt had continued on a rapid growth path and if tax revenue had remained flat, that could definitely have happened.
My conclusion is that, had Greece stayed with the Drachma, it could not have accumulated as much debt as it did with the Euro. This for the simple reason that markets would have determined long before 2010 that Greece had hit or exceeded its borrowing capacity.
Secondly, the Euro not only brought Greece lower market rates but also two additional advantages: Greece could avoid a sovereign default and, following the implementation of the programs, Greece was offered extremely below-market interest rates on the loans from its Euro partners. With a debt load of about 180% of GDP, it is miraculous that the government would only have to allocate 11% of its tax revenue and 6% of its total revenue to interest expense. Those are percentages which one finds in the strongest Euro countries. Countries like Portugal, Spain, Italy or Ireland have to allocate much more of the revenue to interest expense.
ADDENDUM
I have added the years 2008 and 2009 to the chart. The interesting point is that until 2008/09, i. e. as long as the economy was booming, tax revenue and government revenue in general had increased substantially. For example: revenue from taxes increased from 31,7 BEUR in 2000 to 50,1 BEUR in 2008, and total government revenue increased from 58,6 BEUR in 2000 to 98,4 BEUR in 2008. That seems to be a nice proof that a booming economy increases government revenue (even if it is all financed with debt).
| Interest Expense vs. Government Revenue | |||||
| 2000 | 2008 | 2009 | 2017 | ||
| Taxes on income, property, etc. | 13,2 | 19,7 | 20,3 | 18,1 | |
| Taxes on production, imports, etc. | 18,5 | 30,4 | 27,8 | 30,8 | |
| -------- | -------- | -------- | -------- | ||
| Total revenue from taxes | 31,7 | 50,1 | 48,1 | 48,9 | |
| Social contributions | 17,0 | 30,6 | 29,3 | 26,0 | |
| Capital transfers, etc. | 9,9 | 17,7 | 15,1 | 11,8 | |
| -------- | -------- | -------- | -------- | ||
| Total non-tax revenue | 26,9 | 48,3 | 44,4 | 37,8 | |
| Total government revenue | 58,6 | 98,4 | 92,5 | 86,7 | |
| Total debt | 141,0 | 264,8 | 301,0 | 317,4 | |
| Interest expense | 10,2 | 11,7 | 12,0 | 5,6 | |
| Interest expense as % of tax revenue | 32% | 23% | 25% | 11% | |
| Interest expense as % of total revenue | 17% | 12% | 13% | 6% | |

