The Political Origins of the Greek Crisis: Domestic Failures and the EU Factor

The Political Origins of the Greek Crisis Domestic Failures and the EU Factor

DIMITRIS TSAROUHAS

Insight Turkey, Vol. 14, No.2, 2012, pp. 83-98

The 2008 financial crisis led to a rapid downturn of global output. The collapse of Lehman Brothers set in motion dormant forces in the lightly regulated financial sector and led to a series of bank mergers, nationalizations and takeovers in the US, the UK and elsewhere. The failure of subprime mortgages was followed by pressure on the official banking sector, and governments felt compelled to intervene so as to rescue the banking system from a dangerous and unpredictable collapse. For a while, the neoliberal orthodoxy of the preceding 30 years came under fire.

This time, it was not only die-hard socialists who fired at the banks and their profit-motivated “greed.” As the crisis moved further into to the real economy, civil society took up the case of income inequality and launched the “99 percent” campaign, highlighting how the economic spoils of the present economic system are distributed so unevenly as to threaten the stability and reproduction of the capitalist system.

In no other country have the last few years been more traumatic and at the same time more revealing that in Greece. An EU member since 1981 and one of the world’s thirty richest countries until recently, the Hellenic Republic has hit the world’s headlines in an unprecedented manner. The main reason is the fact that Greece became the weakest link in the Eurozone chain, with both debt and deficit levels at record highs and a record of fiscal imprudence that makes it susceptible to collapse. That would have been of little importance to the world’s media and markets had Greece not been a Eurozone member; the fact that it is makes its possible default an event of severe consequences for the Eurozone as a whole, and thus for the global economy.

In May 2010 and after it had become obvious that the country would be unable to keep on borrowing in the open markets on punitive interest rates, Greece received a €130 billion rescue package from the IMF and the EU. The goal was to bring down public debt levels and consolidate public finances. The program’s failure became apparent by late 2011 and a new agreement for a second loan worth €110 billion was reached in February 2012. By early March, a bond swap deal between Greece and its creditors was successfully concluded, wiping out more than €100 billion of Greek debt.1 Meanwhile, the country’s social, political and economic system came under severe pressure as EU-IMF conditionality imposed drastic cuts on public expenditure, tax rises and flexible labor laws to facilitate ‘fire-and-hire’ policies, all in the name of enhancing the country’s competitiveness.

In this paper I will advance two main arguments: first, the origins of the Greek crisis are primarily political rather than economic and rooted in the delay, postponement and half-hearted implementation of public policy reforms that precede the crisis. Second, although Greece set itself up for failure, its downward spiral was exacerbated by the Eurozone’s inadequacy to act swiftly and early, to diagnose the problem correctly and to combine a policy mix consisting of budgetary consolidation and policy reform led to a disastrous situation by early 2012. Following the successful bond swap deal and signs that the EU is now willing to combine fiscal consolidation with pro-growth policies, the next few months will be crucial in determining whether the Greek economy will be able to recover, however modestly, in the next few years.

In what follows, I will first describe the Greek malaise by use of basic data and some facts so as to place the subsequent analysis into context. I will then outline the root causes of why past reform failures have now come to bear their bitter fruit on the Greek population. To illustrate the argument I will use the case of successive failures to reform the pension system, as this policy area is broadly representative of the problem. In the next section, I will link the Greek malaise to the EU handling of the crisis since 2009, and the conclusion will summarize the main arguments.

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