In Greece, the money flowed freely, until it didn’t

ATHENS — The torrent of money that flooded into Greece when it joined the euro zone paid for roads, boosted wages and helped Constantine Choutlas build a major construction company. But all that cash did not build a competitive economy.

When the rest of the world discovered that and the money drained away, so did Choutlas’s business.

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Some of the things that contributed to Greece's economic crisis.

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“You could see it wouldn’t last. The country was just borrowing money,” said Choutlas, whose Proodeftiki Technical grew into a major firm after building the athletes’ village for the 2004 Olympics. Now it has been scaled back from 1,000 employees to a mere handful.

“Nobody, nobody, nobody said let’s take a look at where we are going,” he said, jabbing a finger in the air for emphasis.

The crisis in Greece has been characterized in many ways: as an example of government profligacy and mismanagement; as a case study in bad economic policy or corruption; or, by apologists, simply as fallout from troubles rooted in the United States.

Less appreciated is what bankers, analysts and officials acknowledge was a massive market failure — the collective inability or unwillingness of investors, regulators, European officials and Greek politicians to acknowledge what was happening in the country and arrest it in real time.

That failure has pushed Greece into a five-year recession and put the entire euro zone — and in a sense the global economy — at risk. After a two-year diplomatic slog, European officials have failed to restore confidence that the currency union will not crack apart. The risks instead have widened, with Spain and Italy, the region’s third- and fourth-largest economies, under the same sort of pressure that pushed Greece into an international bailout. Government borrowing costs are on the rise. Recession has taken hold. Money is flowing out.

Greeks will vote Sunday in an election that could determine their nation’s continued membership in the euro zone and whether it follows through on the terms of an international bailout meant to keep the country afloat as it tries to overhaul its economy. The terms of the package are considered harsh, aiming to drive down wages, cut the country’s reliance on international funding and allow it to live more within its means. Cast as a choice between growth and austerity, however, the bailout is in many ways trying to rewind the excesses that euro-zone bankers and regulators themselves helped fuel.

What happened

The first decade of the euro zone, a union built on the theory that member economies would converge around common levels of productivity, living standards and financial balance, instead proved it susceptible to the same flawed assumptions that drove the U.S. housing bubble — that smart investors would recognize and guard against undue risks and that regulators would step in as needed.

“Prevailing market theory was that certain countries at the start of ‘convergence’ can and should attract capital inflows to finance it,” said Platon Monokrousos, head of financial markets research at Eurobank EFG in Athens. But instead of financing factories, infrastructure and reforms that would boost future growth, the money was channeled into “consumption and investment in broadly unproductive areas,” Monokrousos said, facts evident in Greece’s steady wage increases through the 2000s, expansion of the government labor force and overspending on the Olympics.