EconomyJun 02, 2022
A Tale of Two Crises: Greece and Lebanon Compared
- Zafiris Tzannatos
According to the World Bank (2021: Fall), the Lebanese financial crisis is likely to end up among the top three, most-severe crisis episodes that have taken place globally since the 1850s. An assessment of the severity of crises since then in terms of the decline in per capita income, duration of contraction, and years to full recovery, found that only two other countries have done worse than Lebanon, namely Chile in the 1920s and Spain in the 1930s, during its civil war (World Bank 2021: Spring). The timing and nature of the episodes in these two countries cannot provide many insights into the Lebanese case.
A country, which more closely resembles Lebanon and has recently gone through a protracted crisis, is Greece. The 2009-10 Greek economic crisis reduced the country’s GDP by 24 percent, which is still less than half the 58 percent economic contraction in Lebanon (by the end of 2021)—equivalent to a loss of US$30 billion since 2019, when Lebanese GDP was estimated at US$52 billion. Lebanon’s contraction is “the highest in a list of 193 countries” that the World Bank examined. Moreover, in Lebanon, the fallout has taken place “more sharply than all other observed economies globally.” For example, by the beginning of 2022, the Lebanese lira had lost 90 percent of its value against the US dollar, inflation had reached nearly 240 percent, and government revenues have collapsed to less than 7 percent of GDP (only higher than in Somalia and Yemen—both conflict countries).
In Greece and in Lebanon, GDP peaked one year before the crisis hit, suggesting that officials in both countries tend to live by the day, and kick the can down the road for as long as they can. Both countries also appear to be addicted to cooking the official statistics, or releasing them after they are no longer relevant. Public debt in both countries is approaching the 200 percent of GDP mark, though it is still growing in Lebanon, and expected to increase further. In both countries, those responsible have neither been identified nor held accountable, while the question of “Where did the money go?” remains unanswered.
A discussion of the Greek crisis, the measures adopted to confront it, and their relevance for Lebanon would require much more than the length of this article. What follows is a more eclectic analysis of two specific issues: The first is the role the judiciary can play in Lebanon, given the paralysis of the other two branches of government, namely the executive and the legislative. The second is something that neither Greece nor Lebanon can control—the labor market dynamics the crises have created, particularly regarding emigration and the resulting “brain drain.”
It is undeniable there are differences between Lebanon and Greece in a number of areas, which determine both the impact of the crisis in each country and how quickly they can recover. Having adopted the euro, Greece was spared the devaluation of its currency, which would have robbed deposits, created inflation, and wiped out pensions. Greece also enjoys a relatively smooth political process and well-established state institutions, both of which are severely lacking in Lebanon. Though a lot can be said about the shortcomings of the Greek state, essential public services, including electricity, water, health, public transportation, and sanitation are generally available. In Lebanon, such services are rudimentary and intermittent. It is worth noting, however, that the Greek crisis came before the advent of COVID-19, not during it, as in the case of Lebanon.
The cause of the Greek crisis was the explosion of public debt due to excessive borrowing by successive governments, but also encouraged by private lenders (mainly German and French banks) based on a calculation (in fact, speculation) that there cannot be a sovereign default in the euro area. Still, the Greek banking sector was adequately capitalized before the crisis hit, despite the global financial crisis of 2008, and the banks have remained solvent since. In Lebanon, the ballooning public debt was associated with a Ponzi-style scheme orchestrated by the Bank du Liban (BDL, which is Lebanon’s central bank) and the local banking sector. Finally, the first memorandum between Greece and its creditors was singed in less than six months after the onset of the crisis. In the third year of its crisis, Lebanon has still to come up with an initial rescue program.
All in all, the stabilization and recovery in Lebanon will be more painful and will take longer than in Greece (where economic growth turned positive by 2014), and probably any other country in history so far. A telltale indicator is the increase in poverty following the crises in these two countries. The headcount poverty rate in Greece peaked at 22 percent within two years of the crisis, but had increased in Lebanon from 28 percent in 2019 to 55 percent in 2020, and to more than 80 percent by 2021.
Role of the Judiciary
In its latest assessment of Lebanon, the International Monetary Fund (IMF) once again called for comprehensive economic and financial reforms and a broad-based buy-in for a multi-year program with a targeted and time-bound action plan. Among others, such a plan should include fiscal reforms to ensure debt sustainability, restructuring of the financial sector, reforming state-owned enterprises (especially in the energy sector), a credible monetary and exchange rate system, and strengthening governance, anti-corruption, transparency, and accountability.
At the more micro level, Lebanese businesses are facing tremendous difficulties related to private transactions based on pre-crisis contracts. Employers, from industrialists to small shopkeepers, have rent agreements that carry on unless they operate from premises that they own. The same applies to rented accommodations or purchases agreed to before the crisis, for which final payments are still pending. For owner-occupied properties that were enabled through borrowing based on pre-crisis conditions, the amount of outstanding debt is likely to disproportionally favor either the lender (if agreed in dollars) or the borrower (if in local currency exchanged in the parallel market). Thus, the asymmetric effects of the radically changed financial conditions have serious implications for the continuation of private sector activities, and therefore the level of employment and household incomes.
Though far from ideal, nowhere does the judicial system in Greece reach the Lebanese levels of paralysis, if the investigation into the Beirut port explosion is any indication. In Greece, the courts mitigated some of the effects of the crisis on ordinary producers and citizens by invoking Article 388 of the Civil Law. The article prescribes that, if the circumstances under which a bilateral contract change for extraordinary reasons that could not have been foreseen, the courts, if asked, may reduce the amounts due or even terminate the contract in full. Also, there is a more general provision in another article derived from Roman law that renders the principle of “promises must be kept” inapplicable if there has been a fundamental change of circumstances.
The decisions by the Greek courts managed to somewhat cushion the brutal impact of the crisis on employers and households, ranging from forcibly reducing rents to writing off private debts, if their repayment was no longer feasible.
As the old saying goes, when citizens face economic calamity or dysfunctional political regimes, they can choose “voice versus exit”: If their voices are not heard, they vote with their feet. Professionals, such as doctors, nurses, engineers, academics and entrepreneurs are the first to leave their countries. As in Greece, emigration is becoming an “increasingly desperate option” in Lebanon.
More than 124,000 Greeks left the country within three years of the crisis (2013), when the unemployment rate reached nearly 30 percent (for 15-24 year olds, it went up to 60 percent). By 2016, Greek emigration reached a total of 400,000 to 500,000. In 2019, it was estimated that, among those who left, 26 percent held bachelor degrees and 69 percent had a master’s or a Ph.D.
With the Lebanese unemployment rate now exceeding that of Greece after its crisis, emigration from Lebanon has accelerated. Though there are no official statistics about the scale of the exodus, the number of Lebanese who left the country in 2021 was four times higher than in 2020—an estimated total of 230,000 over two years. Another estimate brings the total up to 500,000 since the beginning of the crisis in 2019. Up to 20 percent of Lebanese doctors have already left or are planning to leave, aggravating the situation after 1,000 medical health professionals emigrated in the aftermath of the Port of Beirut blast in 2020. At the American University of Beirut, 12 percent of physicians and professors have already left, and an additional 40 percent of its faculty may leave within the year.
In a 2021 Gallup poll, 63 percent of Lebanese expressed their desire to move to another country permanently, a figure that is more than three times higher than in 2016 (19 percent), higher even than in Syria (54 percent) and Palestine (58 percent). The proportion of young Lebanese aged 18-24 who said they wanted to emigrate was close to 80 percent.
The GDP decline in Lebanon so far is already on such a scale that it may be difficult for it to recover to its pre-crisis level in less than 35 years. It may even take longer, given that the two branches of government, the executive and the legislative, are largely dormant, if not counterproductive, by perpetuating what the World Bank has dubbed as a “deliberate depression.” To this day, there does not seem to be any willingness by the Lebanese authorities to bridge the ten-fold gap between the official and parallel market value of the lira. While populism and polarization in Greece have reached unacceptable levels for a high-income, well-governed country, one has to try hard to find the degree of sectarian politics and internal antagonisms in any other upper middle-income group of countries, of which Lebanon was a member until the crisis.
Regarding contracts in Lebanon, several laws were recently promulgated, extending the time limit of contractual and legal obligations since October 1999. However, the extension did not include any change to either the value or the content of the contracts. While the reference to the Greek case was more from the perspective of protecting the debtors, it is more likely that in Lebanon many debtors have been unduly advantaged by the fact that they settled their debts at the official, rather than the actual, currency rate. Either way, the prolongation of having two parallel currency markets in Lebanon leads to vastly unequal distributional effects on the different socioeconomic groups. It also creates uncertainly at what rate contracts will be enforced in the future, thereby restricting credit and limiting economic activity.
Preventing further “brain drain” in Lebanon will remain elusive unless future economic growth and therefore employment opportunities are generated by a revamped non-rentier private sector. The findings of the 2021 UN country profile report on “Arab Business Legislative Frameworks” are not encouraging, as they gave Lebanon the lowest scores among peer countries. It concluded that Lebanon:
- relies on “an archaic Commercial Code … has no competition law,” and that “a draft competition law has been pending for over a decade”
- "does not have a standardized anti-corruption law; a draft law is currently pending”
- “has yet to form an official anti-corruption body that is independent”
- “restricts foreign direct investment in the fields of “the media, banking, telecommunications, energy, real estate, and public utilities sectors, to name a few.”
The composition of emigrants from Greece after the economic crisis clearly shows that practically all those who left (95 percent) were educated at the tertiary level, with the vast majority of them (73 percent) having graduate qualifications. Their decision to emigrate was the result of having to choose between “no work at home” and “any work,” even when this means being employed abroad in jobs that are not commensurate with their education and skills. There is no reason to expect that the situation in Lebanon will be any different—in fact, it may well turn out to be worse than in Greece.
The Lebanese crisis has aggravated the pre-existing public-private divide in the education sector, which has largely failed to serve less privileged children. The crisis has already led to a contraction in school enrolment, as the financial strain on families has increased since 2019. All in all, in addition to Lebanon losing its accumulated human capital—arguably the country’s most important “export commodity”—the combination of bleak economic prospects and the state of the education system may result in huge losses in productivity over time. In fact, it has already been estimated that in 20 years productivity will be less than half of its potential.
The recovery in Lebanon is not just an economic matter, but requires building (not re-building) the state. Even if the optimal policy measures are identified, the question remains whether they will be implemented and in a consistent way over many decades. In this respect, Greece has been lucky in that it has adopted—though not always effectively putting into practice—legislation, legal acts, court decisions, and the institutions of the European Union. Granted Lebanon is located in a challenging neighborhood, however, this does not absolve its politicians of their responsibility to serve the nation rather than their own interests.
 Such reductions were smaller in Argentina (2001: 21 percent), Iceland (2007: 10 percent), Ireland (2008: 14 percent) and Cyprus (2012: 10 percent). Other countries that have lost one-fifth or more of their GDP in the past few decades are the Philippines (1981), Peru (1983), Venezuela (1994), and Uruguay (2002).
 The pandemic has added to the challenges Lebanon faces. Even other Arab countries that do not have economic problems on Lebanon’s scale are still experiencing lower levels of economic activity, employment, and household incomes post Covid-19. It is also worth factoring in additional burdens that Lebanon has recently faced, like the Beirut port blast and the large presence of Syrian refugees.
 Using the EU definition of the poverty line set at below 60 percent of a country’s median income.
 Using the UN multidimensional poverty rate.
 Greek Civil Law Article 388 states: “If the circumstances in which, in view of good faith and business ethics, the parties concluded a bilateral contract, then changed, for reasons that were extraordinary and could not be foreseen, and from this change the debtor's provision has become excessively burdensome, the court may at its discretion at the request of the debtor reduce it to the appropriate extent and decide to terminate the contract in full or in the part that has not yet been executed.”
 When the conditions stated in Article 388 are not met, there is still the possibility to recourse to the provisions of Article 288, which represents a special application of the principle of good faith and originates from the classic principle clausula rebus sic stantibus (“things thus standing”) that allows for a contract to become inapplicable because of a fundamental change of circumstances. The principle counters the general rule of pacta sunt servanda (“promises must be kept”). This principle exists in all legal systems derived from Roman law, having first been invoked in Ancient Greece. It was implicitly invoked by Lyciscus in 211 BC, in a failed attempt to convince the Spartans not to ally with the Romans against the Macedonians.
 Graduate unemployment rates in Greece had reached 30 percent by 2013 and, though they have since been reduced to 20 percent among 20-35 year olds, they are four times higher than the average rate in the EU (5 percent). The Greek youth unemployment rate (at more than 40 percent in 2019) is three times higher than that in the European Union (14 percent). In fact, Greek youth unemployment is second only to South Africa among the 38 OECD countries.
 Assuming that (a) the economy will grow at a constant rate of 3 percent annually; (b) there will be no other crises in the meantime; (c) employment will not fall further, for example, from additional emigration; and (d) productivity will not be adversely affected by the “brain drain.”Zafiris Tzannatos is currently a Senior Fellow at LCPS and an Independent Consultant for Development Strategy and Social Policy based in Jordan. He has previously been a Professor and Chair of the Economics Department at the American University in Beirut, as well as manager at the World Bank and advisor to the International Labor Organization. He has published 15 books and monographs, and more than 200 reports and papers in the areas of development strategy, labor economics, education, gender, and child labor.