1 Μαρτίου 2014

The Greek crisis grinds on

Δημοσιεύτηκε στο περιοδικό «Current History» (Μάρτιος 2014)


As a result of the rather arcane ‘rotating system’, Greece will be holding the Presidency of the European Union for the first semester of 2014. As some commentators in Germany and elsewhere have been quick to note, surely there is something incongruous, if not outright absurd, in the spectacle of the most wayward member of Europe’s family of nations setting the agenda (or pretending to), even for such a short time.

As if to prove right the critics, the Greek Presidency got off to an inauspicious start, marked by a series of events ranging from the grotesque to the tragic. Former minister of transport Michalis Liapis was caught driving without a licence and with counterfeit registration plates, by traffic police too young to recognise him. It then transpired that his family home had been refurbished courtesy of Europe’s tax payers, EU ‘structural funds’ earmarked for the upgrading of tourism infrastructure diverted for private use. As the faction he belonged to in the ruling conservative party was no longer influential, the prime minister’s office declined to move a finger to stop the wheels of justice from taking their course, opting instead for a show of respect for judiciary independence and the rule of law. Liapis was given a suspended sentence of 4 years.

With a weakened political elite making a virtue out of its inability to close ranks as in the past, the prosecution of well-known (albeit usually have-been) politicians and businessmen, has become more common. Vasilis Papageorgopoulos, the conservative former mayor of Thessaloniki (Greece’s second largest city), was given life sentence for embezzlement (he is expected to serve at least 15 years). Akis Tsochatzopoulos, the once powerful minister of defence (among other offices), no. 2 of the socialist party during the long reign of its founder Andreas Papandreou, narrowly defeated in his bid to succeed him on his death in 1996, was sentenced to 20 years for money laundering. Lesser figures from politics and business, close to either the conservatives or the socialists (or sometimes both), are also facing trial or have already been convicted.

Superficially, this may look like a rerun of Italy’s Operation Clean Hands in the early 1990s, when judges exploited the weakness of the political elites who had been running the country since the end of World War II, in order mercilessly to prosecute businessmen paying bribes for public contracts, and politicians taking them (at first for the party, subsequently mostly for themselves). In the process, Clean Hands caused the ignominious end of the Prima Repubblica and the dissolution of its political parties.

What came next, the twenty long years of Silvio Berlusconi helping Italian politics reach new depths, should temper Greeks’ enthusiasm for a judicial exit from the country’s woes. After all, notwithstanding the integrity and professionalism of many members of the judiciary (younger than average and quite often female), there is something not quite convincing about Greek judges posing as the country’s saviours. Not always immune to corruption and subservience to their political masters, their current crusade against politicians is suspected to be at least partly motivated by pique. In a recent ruling, the Judicial Pay Court (yes: judges practically set pay for themselves) decided that recent salary cuts (modest, and from a high level), brought about in the context of the government’s austerity policies, were ‘anti-constitutional’. Army officers also had their pay cuts annulled at the Supreme Court on the grounds that they belonged to the ‘core’ public sector – unlike university professors, for example, whose savage salary cuts can now be safely regarded as consistent with the letter and the spirit of the constitution.

Other recent cases illustrate all that is wrong with Greek justice. In a rather idiosyncratic interpretation of freedom of speech, a court in Athens delivered a guilty verdict (with a 10-month suspended sentence) on Philippos Loizos, a 27-year blogger. His crime? A blog that parodied Elder Paisios of Mount Athos, an obscure Greek orthodox monk (roughly the equivalent of Italy’s Padre Pio) who since his death in the mid-1990s has become something of a cult figure, his incoherent prophecies taken to be proof of sainthood by some members of the Church’s flock (but not, so far, the Church itself). What sealed the fate of the young blogger was the disapproval of an ultra-conservative chorus: it was after an indignant speech in Parliament by a MP of the violently far right Golden Dawn that the public prosecutor finally resolved to authorise the Electronic Crime Squad to divert scarce resources from their pursuit of paedophilia websites to the identification of the impertinent offender. Civil rights organisations protested, but were ignored.

This show of exemplary harshness in dealing with innocent fun contrasted unfavourably with the treatment of Christodoulos Xiros, a plurihomicide serving a life sentence (he was actually given 6 life sentences plus 25 years in jail) for his part in 33 terrorist attacks including 6 murders. In spite of all this, Xiros had been allowed out on short leave by two judges on seven occasions – until January 6th 2014, when he broke parole and went missing altogether. A few days later he posted a homemade film, in which he rambled about the armed struggle and threatened spectacular actions. Since then, security around EU officials and member state ministers visiting Athens for Presidency meetings has been tightened even further.

One of the ministerial meetings concerns immigration. Greece is calling for the revision of Dublin II Treaty provisions under which third-country nationals entering the EU illegally must apply for asylum in the country of entry, to which they will be returned if arrested elsewhere in the EU. Such provisions are seen as unfair to those member states (i.e. Greece but also Italy) with extended coastlines, through which the overwhelming majority of undocumented migrants are smuggled into Europe. In an unintended manifestation of the incapacity or unwillingness of the Greek Coast Guard to patrol borders effectively and humanely, 12 persons (including women and children) lost their lives on January 22nd 2014, when they fell overboard a boat they had shared with another 16 refugees fleeing Syria and Afghanistan. The Coast Guard, accused by survivors to have done nothing to avert the loss of life, and suspected by the UN refugee agency to operate a ‘pushback’ policy, received the immediate backing of merchant marine minister Miltiadis Varvitsiotis, who failed to call for an inquiry until urged to do so by European home affairs commissioner Cecilia Malmstrom.

All this less than a month into Greece’s semester as President of the EU: quite a change from the usually somnolent European affairs. Some fear (or hope) that further excitement is in store before the semester is over. The May 2014 European Parliament election, and the local and regional elections with which they are scheduled to coincide, risk turning to a rout for the government, backed by the conservatives and the socialists, i.e. the two political parties which ruled the country, sometimes (as now) in coalition, more often in competition to each other, since the restoration of democracy in 1974. The major beneficiaries, aided by a widely predicted low turnout, itself a sure sign of pervasive disenchantment, are expected to be the radical left SYRIZA and the neo-Nazi Golden Dawn.

Far right militants have been known to assault foreign migrants – or worse, as in the case of Shehzad Luqman, a 27-year-old Pakistani stabbed to death by two Golden Dawn supporters in January 2013. But what tipped the balance and finally spurred public authorities into action was the murder of a Greek, the hip-hop musician Pavlos Fyssas killed in September last year by a Golden Dawn gang. Prime Minister Antonis Samaras let it be known that he personally ‘asked’ the public prosecutor to arrest almost the entire party leadership on charges of organising a criminal group. (A few months earlier, the Prime Minister had unsuccessfully tried to reassure his European counterparts with the probably unintended pun that ‘racism is incompatible with the Greek DNA’.) As a result, the leader of Golden Dawn Nikos Michaloliakos, his deputy Christos Pappas, four other MPs and 14 party supporters have all remained in custody since October 2013.

As The Economist magazine rightly remarked, ‘the arrest of both leaders of an elected party is unprecedented for a member of the European Union’. As a matter of fact, many Greek liberals are also uncomfortable. Meanwhile, prosecutors have produced evidence of the party’s Führerprinzip structure, linking military-type operations carried out by local members to the leadership. Remarkably, all this does not seem to have made much of a dent to the party’s performance in opinion polls, and may have even reinforced its credentials as an ‘anti-systemic’ force, unfairly persecuted by the ‘Establishment’.

In a grim development, on November 1st 2013 a hitherto unknown ‘urban guerrilla’ group calling itself Militant Popular Revolutionary Forces carried out the ‘political execution’ of two Golden Dawn members (22-year old Manolis Kapelonis and 26-year old Giorgos Fountoulis) in cold blood, in revenge for the murder of Pavlos Fyssas.

‘Things fall apart / the centre cannot hold / mere anarchy is loosed upon the world’?

Is this a return to the street fighting of Weimar Republiκ and Spain’s Segunda República?

Not as bad as that, hopefully – but clearly too close for comfort.

How did Greece get into this mess?


A large part (but not all) of the explanation for the Greece’s troubles certainly lies with the fallout from the recession and the austerity. The size of the economy in 2013 had contracted by over 23% in real terms relative to 2007. The loss in output, amounting to a dramatic fall in living standards, was far greater than in other southern European economies hit by the crisis (Italy: nearly -9%; Spain: almost -6%; Portugal: -7%) or Ireland (-7%) over the same period. So deep and drawn out a recession has few precedents in economic history (with the exception of the Great Depression in the United States, where GDP fell by almost 30% between 1929 and 1933).

The standard account of the country’s debt crisis begins in the end of 2009, when the incoming socialist government announced that earlier fiscal data had been misreported. Revised estimates for 2009 raised the budget deficit from 3.7% to 15.6% of GDP, and the public debt from 99.6% to 129.4% of GDP. Coming as the European economy smarted from the impact of the world financial crisis, and coinciding with sluggish growth everywhere, the news revived speculation about the future of the Eurozone, and shattered the credibility of Greece’s claim to remain part of it. Soon the cost of borrowing began to climb to prohibitive levels. It was about then that the Greek crisis started to assume unanticipated dimensions.

In response to market pressure, the government announced a first round of austerity in March 2010. This cost the government a great deal in terms of popularity, but failed to placate the markets. In April 2010, the rating agency Standard & Poor downgraded Greece’s credit rating to below investment grade (i.e. junk status). Spreads on 10-year government bonds (that is, interest rate differentials from German government bonds) began to rise sharply, reaching 1,000 basis points (i.e. 10 percentage points), compared to 200 basis points three months before. At that point, Greece effectively lost access to the international financial markets, and a sovereign debt crisis threatened to mutate into a solvency crisis.

After a considerable amount of vacillation, the ‘no-bailout’ clause of the Maastricht Treaty was unceremoniously set aside, clearing the way for a massive €110 billion loan from the European Commission, the European Central Bank and the International Monetary Fund (the ‘Troika’) in May 2010. The loan was designed to cover Greece’s borrowing requirements for three years, following which the country was assumed to return to the markets. In return for the loan, the government was forced to sign a ‘Memorandum of Economic and Financial Policies’. The Memorandum committed the government to sweeping spending cuts and steep tax increases, aimed to reduce the country’s public deficit below 3% of GDP by 2014. The provisions of the loan and the austerity programme have been revised several times since. The latest revision (Mid-term Fiscal Strategy Framework of 2013-2016) specified structural fiscal savings to the tune of €13.5 billion (7.15% of GDP) in 2013-2014. As a result, the government hopes to return a primary budget surplus (i.e. before interest payments) in 2014, with the economy registering zero growth (which, although unimpressive, would be a relief after six long years in recession).

The ‘Greek Programme’ eventually calmed international markets, but at the price of strong domestic reaction. Civil unrest reached a paroxysm on May 5th 2010, in the context of a huge and largely peaceful demonstration, when three employees lost their lives as extremists set fire to a high-street bank in Athens. The tragedy cast further doubt on the country’s future, and lengthened the odds that the bailout package might prove effective. It also prompted Paul Krugman to comment in a New York Times post (rather ominously titled ‘Greek End Game’) dated May 5th 2010: ‘If Greece were a highly cohesive society with collective wage-setting, a sort of Aegean Austria, it might be possible to [confront the crisis] via a collectively agreed reduction in wages across the board – an ‘internal devaluation’. But as today’s grim events show, it isn’t.’

As subsequent developments showed, that was the shape of things to come. The bailout package had thrown a lifeline to a practically bankrupt economy, but effectively removed power over economic policy away from democratically elected domestic actors, handing it over to external ones, widely seen as distant, inscrutable, and largely unaccountable. This provoked a nationalist backlash across the political spectrum, and transformed Greek politics almost overnight. Political rhetoric became virulent, often inflammatory. A new political cleavage emerged (those in favour vs. those opposed to the bailout package), recasting with a vengeance older divisions (pro-Europe vs. anti-western), and partly eclipsing more traditional demarcation lines (Left vs. Right). Populist formations on the radical Left and the far Right – including the criminal, avowedly neo-Nazi Golden Dawn – flourished.

In economic terms, austerity was introduced when the Greek economy was in recession, and made it deeper still. As the demand for goods and services fell, many businesses went bankrupt, others relocated, while most of those staying afloat resorted to pay arrears and/or layoffs. As a result, joblessness rose steeply: in October 2008 the seasonally adjusted unemployment rate stood at 7.5% of the labour force; five years later it had reached 27.8%.

In February 2012, the EC-ECB-IMF Troika persuaded a visibly reluctant government to try ‘internal devaluation’. The strategy’s main feature was a drastic cut in the minimum wage by 22% in nominal terms (32% for workers aged below 25), as a bid to boost competitiveness, revive the economy and reverse unemployment trends. Two years later, it seems doubtful that ‘internal devaluation’ works as intended. While the trade deficit did improve, on closer inspection this was brought about by declining demand rather than via a ‘supply-side’ effect. Imports fell sharply, while exports actually grew less than before. Unemployment continued to rise, even though arguably at a slower rate.

Crucially, the cut in minimum wages had repercussions across the earnings distribution. On the whole, average real wages lost more ground since 2009 than they had gained in the decade before that, and were 9% lower in 2013 than they had been in 2000. In the ‘informal sector’ (construction, agriculture, tourism, personal services), where employers are subject to few legal or other constraints except those implicit in the free play of unregulated market forces, earnings declined further. Rising taxes implied losses were even more pronounced in net terms.

Whether austerity policies, rather than simply being a response to structural weaknesses, actually aggravated the current recession, is a matter of heated debate among economists. Clearly, international agencies had seriously underestimated the size of the ‘fiscal multiplier’, that is the depth of recession associated with austerity. As a recent study by leading IMF economists Olivier Blanchard and Daniel Leigh conceded, early forecasts assumed a fiscal multiplier of about 0.5 (i.e. that reducing the budget deficit by $10 would lead to a drop in GDP of $5), while the actual effect turned out to have been around 1.5 (i.e. a deficit reduction of $10 has led to a drop in output of $15) or more. Larger fiscal multipliers seem to be present in the early phases of a recession, and in countries where the size of fiscal consolidation is large. This is a fair description of Greece in 2010, when the government’s fiscal consolidation effort was most successful: indeed, at about 5% of GDP, ‘no other OECD country has achieved such a fiscal improvement in a single year over the past three decades’, as the Organisation for Economic Co-operation and Development itself put it.

On the whole, there can be little doubt that austerity policies and the wider recession are closely connected. On the one hand, austerity policies causes aggregate demand to fall and therefore leads firms catering for the domestic market to reduce output, cut salaries and lay off personnel. On the other hand, the recession weakens the capacity of austerity policies to reduce the deficit (because of lower tax receipts and higher spending on social benefits), and feeds pressure for the adoption of harsher measures.

Clearly, however, domestic factors were crucial to the Greek crisis. It is worth remembering that for several years before its outbreak Greece had enjoyed a boom: real growth rates averaged 4.1% in 2000–07, compared to 2.5% in the EU27 as a whole. Nevertheless, behind the façade of prosperity based on strong consumer demand boosted by cheap credit, lay a largely uncompetitive economy. The steady deterioration of the current account (mostly exports minus imports of goods and services), its chronic deficit reaching 14.9% of GDP in 2008, was the clearest sign that the economy was in bad shape. The poor performance of Greek firms in export markets preceded the crisis and made the recession inevitable, at least to some extent. Furthermore, as mentioned before, the size of the Greek budget deficit, revealed to be 15.6% of GDP in 2009, against the 3% target stipulated in the Stability and Growth Pact (and the earlier assurance by the conservative government that it would not exceed 3.7% of GDP), made fiscal consolidation and hence austerity largely inescapable.


While it is difficult to see how, given the poor state of the national economy and public finances, austerity could have been avoided in May 2010, the policy content of the ‘Greek programme’ remained open for negotiation, both externally (with the Troika of donors) and internally (with political and social actors at home).

Just how open is debatable. International financial assistance including debt relief to Greece, as to the other ‘Programme Countries’ (Portugal, Romania, Cyprus), was made conditional upon satisfactory progress on a detailed set of fiscal cuts and policy reforms, formalised in successive Memoranda of Understanding signed between the national government and the EC-ECB-IMF Troika. Ireland, Latvia and Hungary have exited similar programmes and are now subject to ‘post-programme surveillance’. The pressure of external constraints (the vincolo esterno) is also unmistakeable in Spain and Italy, even though a softer form of conditionality prevails there.

But while the standard account of detailed public policy measures being dictated to elected governments by unelected officials representing international organisations often contains more than an element of truth, some leeway – more successfully exploited in Ireland and Portugal – was, and to some extent still is, available.

Reducing the deficit, while at the same time protecting the most vulnerable and sharing equitably the burden of fiscal consolidation, was never going to be easy. But a responsible government, working together with a constructive opposition, should have been able to manage it. This has not happened so far. The responsibility largely lies with domestic actors: two key ingredients of a successful strategy of dealing equitably with the crisis (fighting tax evasion, and strengthening the social safety net) were urged by the Troika from the start, yet four years later little progress had been made on either front.

In this context, the experience of economic failure, near bankruptcy, deep and protracted recession, sudden fall in living standards, and bitter political conflict, has dangerously raised the temperature of public debate and turned Greece into a laboratory of political research.

The social impact of the Greek crisis has been considerable. The real income of 45% of the population in 2013 was below the 2009 poverty line. For some, poverty was extreme: the proportion of population unable to purchase a basic basket of goods had reached 14% in 2013 (from 2% in 2009). Those affected included the 1,200 malnourished children (2% of the school population in central Athens) who had meals delivered to them daily by municipal agencies. On the whole, because of gaps in the social safety net, only one jobless worker in ten had access to unemployment benefit. As long-term unemployment is set to remain high in the foreseeable future, the plight of children in jobless households, unsupported by social benefits, and ineligible for medical insurance (except for emergency care), has become Greece’s new social question.

In general, policy responses to the social effects of the crisis were misguided, inadequate or both. Tax evasion remained pervasive. Welfare reform did produce some improvements, but most cuts were indiscriminate, causing hardship and disrupting health and social services. Labour market reform was guided by the belief that lowering workers’ compensation and weakening labour market institutions was the key to restoring competitiveness. Reform of public administration was badly needed, but was conflated to a simple reduction in numbers of public employees. The sustained effort that is necessary to modernize the Greek state is still nowhere to be seen.

Current forecasts, including the most optimistic, predict a late, slow recovery with anaemic growth and persistently high unemployment. The policy challenges lying ahead seem more intractable than ever: how to set the economy on the path to sustainable growth, how to attract foreign investment, how to create high-skilled high-wage jobs, how to tax income and wealth fairly and efficiently, how to reform welfare in order to promote employment and provide effective social protection, how to tempt back the thousands of talented Greeks who have left the country to pursue more satisfactory careers abroad.


In the meantime, economic misery and a social emergency, coupled with a pervasive sense of impotence and loss of control, make for an explosive cocktail. In particular, the loss of national sovereignty implicit in the terms of the bailout package is widely experienced as humiliating, and has fed a nationalist-populist backlash. The failure of public institutions to rise to the occasion by preventing the economic crisis from mutating into social disaster has bred disillusionment with parliamentary democracy and brought the far Right and extreme Left into the political mainstream. The combination of both has poisoned domestic politics.

Indeed, the upheavals of recent years have changed Greece’s political landscape beyond recognition. Established parties have lost authority and votes, while new ones have risen from the political margins to prominence. The rise of populist forces on Left and Right, and the emergence of violent extremism in the shape of the neo-Nazi Golden Dawn, undermine democratic institutions and raise troubling questions about the future of Greece as an open society and a stable democracy.

The polarization of domestic politics between those (tacitly) accepting the need for a bailout package and those (vociferously) rejecting it has helped divert attention from fundamental questions, such as the actual content of the reforms needed for Greece to exit the current crisis. While the populists in opposition explicitly shun reforms in favour of radical change or a return to the previous situation (sometimes both), the moderates in government often retreat to a default stance of older traditions of patronage, clientelism and corruption (albeit in the drastically altered context of harsh fiscal constraints). On the whole, the constituency for reform has turned out to be weak, as a result of which reforms have stalled.

Resistance to externally-imposed modernization, and attachment to old patterns of thought and action (and the material interests associated with them), even when these are proving to be counter-productive, is hardly new, nor is it confined to Greece. They are also present in other ‘Programme Countries’, albeit to a lesser extent; they were seen in earlier attempts to rescue and reform Latin America via conditionality; and they were identified as key obstacles to change by the former New Dealers involved in the Economic Cooperation Administration Mission to Greece under the Marshall Plan in the aftermath of World War II. (The rapid change in mood among American administrators in Greece from enthusiasm and boundless self-confidence to gloom and resigned cynicism is well documented in ‘Overseers in despair: American advisors in Greece, 1947-1953’, the splendid book (in Greek) of economic historian Michalis Psalidopoulos, currently on sabbatical leave at Tufts Fletcher School.)

Is there a way out?


For some, the way out for Greece is a government headed by the radical left SYRIZA, which will finally put an end to the austerity by immediately rescinding the bailout agreement and by renegotiating Greece’s debt with EU partners. The party seems to believe that Europe is poised for a left turn, paving the way for a Keynesian dash for growth. Leaving aside the question of how realistic such an assessment may be, the recipe provides no solution to the economy’s underlying weaknesses (which led to the crisis in the first place). Still, the notion that it is possible to combine a North American-type pattern of consumption with a (nearly) Middle-Eastern model of production has proved persuasive so far, and is doing wonders for the party’s popularity.

The trouble with demagogic populism is that it is prone to disappointing its own supporters, getting them ready to turn for comfort to the next bunch of populist demagogues even more extreme than the first one. In this case, the next bunch waiting at the wings is pretty wild: the neo-Nazis of Golden Dawn.

Even if the threat of a resurgent far Right were somehow to be dealt with effectively, Greek politics would still face polarisation between the anti-western radicalism of SYRIZA and the conservative nationalism of Prime Minister Samaras. In this context, the social liberals and centre-left progressives wishing their country to be more ‘European’, in the sense of striving for the uniquely European combination of (in Ralf Dahrendorf’s words) economic prosperity, political liberty and social cohesion, have reason to feel marginalised.

To some extent, the decline and fragmentation of the ‘middle ground’ into a number of ineffectual, mutually hostile small parties (now including the once mighty socialists) is the cost of their failure to articulate a coherent strategy for renewal and reform: steering Greece away from the corruption and clientelism of the last four decades, while reaffirming their commitment to the robust democratic values and steady European orientation that marked the post-1974 Republic.

Not all is lost, however. As the 2010 local elections demonstrated, civil society candidates seen as progressive, competent and honest are capable of winning even when the political parties who back them are unpopular. Giorgos Kaminis (formerly the national Ombudsman) and Yiannis Boutaris (a successful wine maker) are running for re-election in May 2014 as Mayors of Athens and Thessaloniki respectively. Their win would be a triumph of hope over adversity – and a sure sign that the liberal centre and moderate left can be more resilient than they appear, when united under a suitable candidate.

Can such a coalition be created at national level? The answer is still unclear. But a recent manifesto signed by 58 intellectuals calling for the scattered and demoralised centre left to renew and unite has changed the terms of the political debate. It remains to be seen whether it can also change the course of events.