Friday, December 23, 2011

Greece: The history behind the collapse

by Georges Prévélakis


December 23, 2011

Historically positioning themselves between an unruly, oriental population and the western powers, since 1981 Greek elites have siphoned off EU funds into a bloated public sector favouring corruption, patronage and social climbing. The threat posed to Europe by the breakdown is less contagion to the centre than a wave of anti-western feeling that could exacerbate geopolitical instabilities in the region.

It all started two years ago, in the autumn of 2009. Having won a convincing victory at the head of the Pan-Hellenic Socialist Movement (PASOK) in the parliamentary elections, the new Greek prime minister, George Papandreou suddenly opened a real Pandora's box. Forced to admit to his electors that he would not be in a position to keep his manifesto promises, he accused his New Democracy opponents and predecessors of having concealed the extent of the deficits and debt. To explain the contradiction between his resounding declaration prior to the election ("There's plenty of money!") and the inevitable austerity policy that would follow, he deliberately exaggerated the position and compared Greece to the Titanic.

His announcement had serious consequences. The markets took fright; the government found that it was unable to finance its deficit or to honour debt repayment dates. Threatened with bankruptcy, the effects of which would destabilize the entire European economy, the European Commission, the ECB and the IMF set up a troika that came to Greece's aid by standing in for it in the markets. In exchange, the Greek government was asked to stabilize the situation by reducing the deficit and undertaking structural reforms. This was in spring 2010.

More than a year later, in summer 2011, there was no mistaking the fact that these measures had failed. Reforms had been carried forward only minimally; the public sector was still acting in a spendthrift fashion, despite cuts in salaries and pensions, whilst the public spending deficit had been only slightly reduced and the ratio of debt to GDP was rising. The Greek government, bogged down in its own contradictions, had taken steps that were too late, utterly inadequate and, very often, counter-productive. The administration, already ineffectual and dysfunctional, was now immobilized by incoherent political reactions. The economy slid into a deep recession that could only partly be accounted for by the absence of state stimulus measures and a shrinkage in the purchasing power of civil servants and pensioners. A series of contradictory statements from the government posed threats to various sections of the population (doctors, lawyers, civil servants, and so on), creating a climate of disunity, panic and insecurity. Everyone involved in economic life did what they could to limit their own exposure. In these circumstances, tax revenues sank despite increases in taxation rates and the introduction of entirely new taxes.

The result is that, at the end of 2011, European authorities are once again wondering what policy to follow. Letting Greece go bankrupt, as the conditions of the aid require, could have serious effects on the politics and economy of Europe. Given the modest scale of the Greek economy, even a provisional rescue package for the country would cost much less than the consequences of its insolvency. But a further bail-out would be likely to upset European taxpayers, with good reason. That is why a third way appears to be on the agenda. This involves linking economic support with more direct intervention in the management of the Greek economy. This is a serious option, but one not without risks. Hence, two years after PASOK's victory, Pandora's box continues to pour forth ills while, true to the myth, Hope remains locked within.

In the West, the Greek tragedy has caused surprise. The illusion of a Greece that was more familiar and predictable than many other European countries has been shattered to reveal a deep-seated failure to understand. The Greek crisis – today economic but tomorrow perhaps political or even a crisis of stability – exposes the weaknesses of the European project.

It would be wrong to read this crisis by focusing only on the institutional and political aspects of the eurozone. Important though these may be, such a reading remains Eurocentric. The European Union of today, unlike the EEC of yesteryear, no longer restricts itself to established boundaries but nurtures the ambition of spreading to the entire continent. In the past, Europe has, of course, fulfilled geo-economic, geopolitical and geo-strategic ambitions; nevertheless, this new objective involves problems that have more to do with cultural geography than with economics or institutions.


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