Prior to its entry into the Eurozone, the Bank of Greece (Greece's central bank), was an independent central banking authority that could unilaterally raise inflation to provide the government with additional capital when necessary. When Greece entered the Euro-area in 2000, the powers of the Bank of Greece had to be changed to fall in line with EU regulations, meaning that the central bank lost its ability to regulate the money supply or set its own interest rates and the government could only raise or lower taxes in tandem with the EU's guidelines for income, VAT and corporate rates.
Despite the new restrictions on its central bank, Greece gained increased borrowing potential because of the nature of the Eurozone. Before the debt crisis, investors presumed the Euro-area as safe for investment since Eurobonds were thought to be the sum of debt obligations of the currency union as a whole, and were backed by the European Central Bank, whose working capital consisted of funds from seventeen different economies. Thus Greece, as a member state, could borrow more because it was issuing bonds that took advantage of market perceptions of the Euro-area as a whole, instead of its economy on its own.
Looking at data provided by Eurostat, the EU's financial data collection authority, the level of government borrowing and spending increased dramatically between 2000 and 2009, indicating that Greece capitalized on its newfound borrowing potential.
Remember, governments and central banks increasing their leverage isn't a problem, provided the government invests the money in pursuits that can increase its revenues through taxation. The data show a great level of inconsistency between the government's annual revenues and the amount of debt and liabilities it incurred over the same period. Revenues and asset values peaked in 2007-2008, but spending and debt increased well into 2009, and continued to outpace revenues into 2010.
What Were They Building In There?
By and large, the second failure of the Greek government was its mismanagement of the funds it was borrowing. It did not invest in new projects that would generate economic growth and neglected curbing existing inefficiencies in its revenue stream.
Greece's economy rests primarily in the services sector, with merchant shipping, telecommunications and tourism accounting for the majority of its economic activity. Greece's spending trends between 1996 and 2010 indicate the majority of the government's expenditure was in benefit assistance programs, the interest on its debts, and the compensation of its employees, all of which have little ROI. From a macroeconomic standpoint, increased public sector spending doesn't automatically have a negative impact on the economy, because discretionary items such as infrastructure and education tend to have positive long-term impacts on economic growth. On the other hand, benefit assistance programs provide funding either through disbursement of funds to a recipient, or though subsidizing (either in part or entirely) the cost of a particular good or service. In most cases the government ROI is poor, because the quantity of taxable outputs from subisidizing a service like healthcare or providing unemployment benefits is very low. Excessive spending in these areas is negative economically unless the government increases its revenues elsewhere.