Who is really at fault for the Greek crisis - the borrowers or the lenders?

Greece's public sector is bloated and marred by corruption, and many analysts say the country cooked its books to hide the real amount of debt from the rest of Europe. Photo / AP

Many blame Greeks for their country's crisis, but we should also look further north, writes Ana Swanson.

Stop me if you've heard this one. The Greeks, Italians, Spaniards and Irish walk into a bar, where the French and Germans are the bartenders. It's happy hour, and the Germans and the French are serving half-price drinks. Although everyone quickly drinks too much, the bartenders keep on serving. Eventually, the inebriated customers head home and get into all kinds of trouble - fights, car accidents, some broken windows.

So who's to blame? Clearly, the Greeks shouldn't have drunk so much. However, the French and Germans also shouldn't have served the Greeks when they were clearly drunk - especially if the French and Germans mind having broken glass in their neighbourhood.

Unfortunately, this isn't much of a joke. After an extended binge, Greece is now mired in financial crisis and is dragging the European economy down with it. In the last few days, Greece has defaulted on an important payment to the IMF and shuttered its banks to prevent huge flows of money from leaving the country. Tomorrow, the country is slated to hold a referendum on whether to approve tough austerity measures demanded by Europe - a decision that could determine whether Greece will stay in the eurozone.

Some of the reasons for the crisis are obvious. Greece has a lot of well-recognised economic problems: Its public sector is bloated and marred by corruption, and many analysts say the country cooked its books to hide the real amount of debt from the rest of Europe.

There are also many well-documented problems stemming from the design of the eurozone itself - that the countries share a common currency even though they have different tax-and-spending policies. So that means that even though Greek workers aren't as economically competitive as Germans, Greece can't lower the value of its currency to make its products cheaper abroad and stimulate exports.

The same holds true for inflation, where Greece might benefit from a higher inflation rate that would make debt in today's prices become cheaper, while Germany has a historic unease with any policy that might stimulate inflation.

There are some other ideas about the deeper origins of the Greek crisis that you may be less familiar with.

Once the Greeks joined the euro in 2002, they could borrow at very cheap rates given they were now borrowing under the continent's implicit guarantee, and they dramatically over-borrowed.

"But given that there was high growth, no one was really worried about it," says Matthias Matthijs, a professor at Johns Hopkins University and co-editor of the new book The Future of the Euro, who relayed the bar metaphor.

Between 1998 and 2007, Greece's annual economic growth per person was 3.8 per cent - the second fastest rate in Europe.

But there were weaknesses within. The booming economy in Greece and other countries such as Ireland and Spain caused prices to rise, and the countries gave generous pay rises to their workers, which made their exports more expensive. That made the countries less competitive, but since they were growing so fast, it didn't matter too much.

Then the financial crisis hit. As economic growth slowed, these countries' competitive weaknesses and unsustainable debt loads suddenly became glaringly obvious.

"It's when the tide goes out that you see who's swimming naked," Matthijs says.

He says there is a lesser known narrative he finds more compelling. Basically, he says, it helps to explain why the bartenders kept on serving.

In the mid-1990s, even before it came into existence, markets made a huge bet that the euro would be a reality.

Specifically, investors, many in northern Europe, bet that interest rates in northern and southern Europe would converge. At the time, interest rates in southern Europe were much higher than in northern Europe, simply because people thought investing in countries like Greece was much riskier than investing in countries like Germany.

In anticipation of the eurozone, investors put lots of money in the cheap, high-yielding bonds of southern Europe.

That helped to drive down yields and fuelled borrowing and an economic boom in southern countries.

Ultimately, investors were right - Greek interest rates on 10-year bonds fell from around 20 per cent in the early 1990s to only 3 per cent in 2002.

"They made a lot of money in the north betting against higher interest rates there. That fuelled the boom, before the euro came, that overheated these economies."

As economies overheated, it's not a surprise that their competitiveness suffered, says Matthijs.

In short, many in the north pushed for a financial regime that didn't fit the Greek economy, because they personally stood to benefit. Many rightly blame the Greeks for its current crisis, but some of the blame belongs farther north as well, he argues.

Matthijs compares the situation to the United States subprime crisis. Who was really at fault for the housing crisis in the US: The subprime borrowers who bought houses they couldn't afford, or the predatory lenders who encouraged them to take them out?

"The Germans don't like that comparison. But they were greedy. They wanted the higher yielding bonds there, they wanted to invest there," he says of southern Europe.