They may be enduring an economic hardship unknown in advanced economies in modern times and be limited to withdrawing €60 a day from their banks, but nothing was going to deter the OXI (NO) voters from having their party in Athens’ Syntagma Square after the Greek referendum. With over 61 per cent of the vote, they gave strong support to their government’s refusal to subscribe to loan conditions it had accepted the previous week. This detail was lost, though, in a crowd that rejoiced that a small, economically depressed country had rejected the diktat of its European partners and regained its dignity. Antonis Samaras, the last Prime Minister and head of the conservative New Democracy party resigned. Such was the mood of the moment.
A more nuanced reality, however, soon began to emerge. While Prime Minister Tsipras insisted that the vote had given him greater strength to negotiate with Greece’s creditors, Deputy German Chancellor Sigmar Gabriel accused him of taking down the last bridges on which Greece and its partners could have forged a compromise. The following morning, Finance Minister Yanis Varoufakis, who had accused his partners of terrorism, resigned, tweeting that he wore their loathing with pride. He acknowledged that his departure was, in effect, to help build goodwill for Alexis Tsipras to re-engage in negotiations with creditors.
However these negotiations go, it is clear that the No camp’s rejection of austerity conditions is incompatible with opinion poll findings that most Greeks want to stay in the Euro. If Greece and its creditors do reach any kind of agreement, new money and debt relief will only be traded for a rigorous commitment to reforms, including many that are anathema to Syriza. For now, the focus will be on the solvency of Greek banks, the actions of the European Central Bank, and the Greek government, and how, if at all, it can pay its bills and loan repayments. No one really wants Greece to leave the euro but its continued membership hangs by a thread. How on earth did it come to this?
To understand why Greece has become Europe’s fault line, we have to delve much deeper than the often self-serving discussion propagated by several eminent US and UK economists and intellectuals, for whom the crisis is attributable to the crass behaviour of Greece’s creditors (euro area countries, the ECB and the IMF). They have certainly exacerbated Greece’s economic crisis, but it is foolhardy not to acknowledge Syriza’s culpability, or the important lessons we can learn from Greece’s history and geography. To help us, we are fortunate to have a guide and scribe.
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Geo-politics and politics
In his new book, Modern Greece: What Everyone Needs to Know, Stathis Kalyvas, Professor of Political Science and Director of the Programme on Order, Conflict and Violence at Yale, offers penetrating insights into many of the structural features and characteristics of the Greek state that have coloured the behaviour of its governments and people to this day. His book invites us to take a front row seat to observe the geo-politics of Europe that work, up to a point, to keep Greece in the euro area, and the politics in Europe that are driving Greece out of it.Kalyvas explores the roots of Greek nationalism, the creation of the state in 1832, and the evolution of dysfunctional institutions in a country that has been the ward of foreign powers for longer than it has been self-governing. Geo-political concerns of long ago resonate today. We are reminded, for example, of Greece as central to the struggle for regional power between the UK and Russia in the 19th century. Similarly, our attention is drawn to the early Cold War “proxy war” that emerged while Greece was under occupation during the Second World War. In these and other experiences, Kalyvas says Greece developed a structural love-hate relationship with the west, based on shared admiration but also mutual resentment.
Shared admiration ruled the roost after the war as Greece bound its future to Europe and vice versa, even though many Europeans retained reservations about the country’s capacity for change and reform. Greece’s admission to the European Economic Community in 1981, a few years before the Berlin Wall fell, was an expression of democratic solidarity to support a country that, itself, had only relatively recently ended military rule. Yet the European Commission had recorded skepticism at the time about Greece’s relative economic backwardness and political frailties.
Twenty years later, European officials were uncertain about admitting Greece to the euro-system but the spirit of integration was in the air. Greece became a member at a time when Germany was distracted by the economic aftermath of unification, and both Germany and France were sidetracked by their own breach of the so-called Stability and Growth Pact. Twelve years later, in 2013, when Angela Merkel, campaigning for re-election, criticised former Chancellor Schroeder for “allowing” Greece into the euro, she was surely preaching to the converted, but also reflecting on what she regards as a dysfunctional inheritance.
Now facing the prospect of a possible Greek exit from the euro, European leaders again stress the importance of Greek membership for integration and solidarity but also harbour reservations about Syriza’s commitment to play by the rules of membership and to deliver on the reforms that are the quid pro quo for financial assistance. Some countries, such as Spain, Italy and Portugal worry about the political consequences for themselves if what they regard as Syriza’s bad behaviour is rewarded.
European ambivalence is also fed by the possibly disastrous economic consequences for Greece if it does leave the euro. It would be isolated, a financial pariah, and have to go without market, and financial support. If it also had to leave the EU, it would be cut adrift from the single market. Printing its own currency to support and recapitalise its banks, inflation would probably surge. Lacking a modern manufacturing sector, it would derive few economic benefits from a large devaluation except in tourism.
In short, Greece could simply become another failed Balkan state. It is no surprise that Germany, other European countries and the United States fret about such an outcome for a NATO member, strategically positioned between the Russian and European spheres of influence, and the first eurozone port of call for migrants arriving from the Syria and the surrounding region. It is easy to see why geo-political concerns might drive Merkel and her peers to sustain Greece in the euro system, but evidently, not at any price.
Greek paradox
Kalyvas argues that Greece is a paradox. On the one hand, it is seen as the proverbial cradle of civilisation, spreading ideas of state-building and democracy. Since statehood, it has pursued, not always successfully, ideas of modernity and European identity. Yet after many difficult decades, and with the arrival of Marshall Aid funds after the war, Greek economic growth surged to 7% per annum between the mid-1950s and the end of the 1970s. Consider also that a 2012 World Bank report noted that Greece was one of an elite group of 13 among 101 middle income countries in 1960 that successfully escaped the so-called middle income trap to become a high income country. Its income per head in current US dollars rose from $5,000 to $23,490 in 2008.Yet as Professor Kalyvas notes, Greece’s economic and social progress has been punctuated consistently by crises that have often ended up as disasters, sometimes of epic proportions. The current “disaster” is but the latest episode in a litany of booms and busts. By way of illustration, Greece’s income per head dropped to $20,120 in 2012, and by the end of 2015, it will have fallen to below $18,000. Kalyvas says Greece has had a recurring tendency to succumb to debt crises when it failed to repay loans, and endured bad economic and social consequences. Since becoming an independent nation, Kalyvas notes Greece has spent half the time in a state of default and or debt restructuring.
What is it about Greece’s historical-economic narrative that things end up this way?
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The clue is governance. Professor Kalyvas traces some roots here back to Greece’s emergence from an economically backward, agrarian corner of the Ottoman Empire into an aspiring modern state. Specifically, he notes the considerable challenge of trying to graft liberal and democratic institutions and practices on to such a society. Put another way, public administration, the structural backbone of the modern state, is in Greece’s case unfinished, and in some respects even un-started, business.
Governance, public administration, capture
With this in mind, it becomes clearer why creditors have moaned that Greek governments often lacked the capacity to implement reforms properly or, in some cases, at all. In Syriza’s case, the problem of lack of capacity has been accentuated by lack of willingness. This year, both sides argued a lot about debt relief, primary surpluses, VAT rates and pension arrangements. But many of their disputes were bridged or narrowed significantly. What irks Europe most about Syriza is the latter’s inaction with regard to initiatives to overhaul governance. In other words, to improve the capacity to implement reforms by addressing dysfunctional institutions such as administrative capacity, a weak tax system, over-regulation and protection, corruption and the rule of law, and the privileges of oligarchies, professional associations and other vested interests.Reflecting these flaws, Greece has tended historically to protect domestic sectors, nationalise weak or failing firms, rely on credit creation as a substitute for productivity growth, and use political patronage to expand growth in the public sector. The PASOK government (1981-89), for example, is argued to have created dysfunctional public administration, civil service and wage-setting institutions that were associated particularly with corruption, mismanagement, maladministration, and disregard of the rule of law.
Even in subsequent years, entrepreneurship and industry were left behind. Greece has not developed a vibrant, successful export sector, other than in tourism and a few agricultural products. Unlike, say Poland, the Czech Republic, Turkey, and much of Asia, including comparable per capita income countries such as Vietnam and Bangladesh, it hasn’t got a viable manufacturing sector. The World Bank’s annual Doing Business survey (2015) still ranked Greece at 61 of 189 countries around the world, with positions close to the bottom in the registration of property, and contract enforcement.
Weak public administration doesn’t only have economic consequences, but it also renders countries vulnerable to capture by protected and other vested interests, which sustain political inequality. In Greece’s case, these comprise professional elites, an army of self-employed accounting for over a third of the workforce, and the trades union in nationalised and semi-public enterprises, for example in power generation and rail transportation.
Greece has less than 200,000 doctors, lawyers and engineers and about 600,000 public sector employees, but they have organisation and impact. The number of the latter has fallen from about one million four years ago, but they retain a strong influence of all aspects of labour relations. Regarding the former, many professional associations self-regulate, and have acquired special tax, pension and legal privileges. Tax evasion and under-reporting of income is rife. According to Oxford law Professor Pavlos Eleftheriadis, in the 2010 legislature, 221 of the 300 seats were occupied by doctors, lawyers, educators, engineers and finance professionals.
Ironically, Syriza articulated a made-to-measure analysis and diagnosis of governance problems in its 2014 Thessaloniki programme, which sought to end "decades of misrule", and transform Greece’s political system and institutions. It argued quite coherently that this was essential to break the vicious circle between political and economic inequality.
Yet, since being voted into office, it has offered little and done less to live up to this transformation. It is telling that Europe’s final loan conditions before the referendum laid considerable emphasis on governance enhancement, spanning measures to strengthen transparency, price competition, privatisation, and the rule of law, and to attack corruption, fraud and tax evasion. Alexis Tsipras rejected these and other conditions, and lumped them together, accusing his counterparts of blackmail. But without addressing these crucial matters, Greece cannot hope to succeed inside or outside the eurozone.
Will Greece break the eurozone?
In the aftermath of the referendum, we must hope for two things. First, that Greek banks can be re-opened and kept functional. Second, that both sides pull back from the brink and the bluster of the last few weeks and re-engage, trading a new Greek commitment to reform and accept loan terms for a new creditors’ commitment to debt relief and trust. If these things don’t happen, Greece will face the prospect, perhaps soon, of leaving the euro system with all that entails.If that happens, the most immediate challenge for the eurozone will be to manage possible contagion to other southern European countries in the periphery of Europe via bank runs and capital flight. The euro system is stronger than during the 2012 crisis. It has a €500bn rescue fund in the European Stability Mechanism. The ECB has just started a €1 trillion Quantitative Easing programme. It also has the authority to implement so-called Outright Monetary Transactions, introduced in 2012 but not used, under which it may buy an individual sovereign state’s bonds under conditions. The banking system is still not functioning as it should or as stable as it might be, but banks have been recapitalised to an extent, and some steps towards improved banking supervision and resolution have been taken under the auspices of a (weak) banking union.
One of the most important differences with three years ago is that many countries that were vulnerable to contagion, notably Spain, are not today considered to be in a comparable position. No one has cause to suspect the commitment of Spain, Italy or Portugal to the euro area, as is the case with Greece. While losing Greece is likely to lead to some financial turbulence, including a fall in the euro and in financial asset values, and higher bond yields in southern Europe, most people doubt that financial markets would melt down as they did after the Lehamn shock in 2008-09, or in the euro crisis of 2012.
Nevertheless, the loss of Greece would be a significant moment. The irrevocable commitment to the single currency would prove to be shallower than assumed. The euro might then be perceived not so much as the enduring currency arrangement of a monetary union, but as a regime of fixed, but breakable, exchange rates. In other words, even if contagion were contained now, a future crisis might again threaten someone else’s currency. If a crisis were to erupt in Spain, where elections are due later this year, or in Italy where there is a feisty anti-Europe political rump, or even France under a future President Le Pen, the eurozone’s defences might yet be found wanting, and its commitment to integration may no longer pass muster with either European citizens or financial markets.
To guard against this, whether Greece stays in the euro for the time being or not, European leaders need to persuade disaffected populations of two things. First, that they will pay attention to cyclical economic growth prospects. Second, that that their best interests are served by strengthening the economic, financial and banking institutions, including new debt work-out and shared liability mechanisms, that underpin monetary union. The latter will be a tough sell. But it is also important because for the first time since the 1950s, the cause of European integration is being up-ended. The main challenge for member states as a result of the Greek crisis is now to prevent disintegration.
Against this backdrop, Britain's planned in/out EU referendum, most likely in 2016, seems rather parochial. It is anything but. The consequences for Europe of losing Greece from the euro area and Britain from the EU would spell the end of the post-1945 European economic dream. We shall soon see if the act, or prospect, of losing Greece might focus European minds in negotiations with David Cameron to try and deliver a message that resonates positively for British voters but this is for another day.
